UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2020
OR
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANYCOMPANY
(Exact name of registrant as specified in its charter)
|
| | | |
Delaware | | 41-0129150 |
(State or other jurisdiction of incorporation or organization) | | (I. R. S. Employer Identification No.) |
| | | |
77 West Wacker Drive, Suite 4600 | | |
Chicago, | Illinois | | 60601 |
(Address of principal executive offices) | 60601
| (Zip Code) |
| |
(312) 634-8100
|
(Registrant’s telephone number, including area code) |
(312) 634-8100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | ADM | NYSE |
1.000% Notes due 2025 | | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| |
Large accelerated filer x
| Accelerated filer o
| | |
Non-accelerated filer o Large Accelerated Filer | Smaller reporting company o ☒ | Accelerated Filer | ☐ | Emerging Growth Company | ☐ |
Non-accelerated Filer | Emerging growth company o ☐ | Smaller Reporting Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 559,250,312555,496,210 shares
(OctoberApril 30, 2017)2020)
SAFE HARBOR STATEMENT
This Form 10-Q contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995 that is subject to risks and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking information. Risks and uncertainties that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019, as may be updated in our subsequent Quarterly Reports on Form 10-Q. To the extent permitted under applicable law, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events.
PART I - FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
Archer-Daniels-Midland Company
Consolidated Statements of Earnings
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 |
| (In millions, except per share amounts) | (In millions, except per share amounts) |
| | | | | | | | | | |
Revenues | $ | 14,827 |
| | $ | 15,832 |
| | $ | 44,758 |
| | $ | 45,845 |
| $ | 14,970 |
| | $ | 15,304 |
|
Cost of products sold | 14,015 |
| | 14,742 |
| | 42,191 |
| | 43,237 |
| 14,019 |
| | 14,376 |
|
Gross Profit | 812 |
| | 1,090 |
| | 2,567 |
| | 2,608 |
| 951 |
| | 928 |
|
| | | | | | | | | | |
Selling, general, and administrative expenses | 478 |
| | 546 |
| | 1,530 |
| | 1,525 |
| 664 |
| | 659 |
|
Asset impairment, exit, and restructuring costs | 107 |
| | 11 |
| | 140 |
| | 36 |
| 41 |
| | 11 |
|
Interest expense | 79 |
| | 78 |
| | 246 |
| | 213 |
| 83 |
| | 101 |
|
Equity in (earnings) losses of unconsolidated affiliates | (46 | ) | | 2 |
| | (327 | ) | | (153 | ) | (140 | ) | | (101 | ) |
Interest income | (27 | ) | | (23 | ) | | (75 | ) | | (68 | ) | (40 | ) | | (49 | ) |
Other (income) expense – net | (4 | ) | | (4 | ) | | (13 | ) | | (138 | ) | (32 | ) | | (8 | ) |
Earnings Before Income Taxes | 225 |
| | 480 |
| | 1,066 |
| | 1,193 |
| 375 |
| | 315 |
|
| | | | | | | | | | |
Income taxes | 30 |
| | 136 |
| | 256 |
| | 331 |
| |
Income tax (benefit) expense | | (16 | ) | | 81 |
|
Net Earnings Including Noncontrolling Interests | 195 |
| | 344 |
| | 810 |
| | 862 |
| 391 |
| | 234 |
|
| | | | | | | | | | |
Less: Net earnings attributable to noncontrolling interests | 3 |
| | 3 |
| | 3 |
| | 7 |
| — |
| | 1 |
|
| | | | | | | | | | |
Net Earnings Attributable to Controlling Interests | $ | 192 |
| | $ | 341 |
| | $ | 807 |
| | $ | 855 |
| $ | 391 |
| | $ | 233 |
|
| | | | | | | | | | |
Average number of shares outstanding – basic | 566 |
| | 586 |
| | 571 |
| | 591 |
| 563 |
| | 565 |
|
| | | | | | | | | | |
Average number of shares outstanding – diluted | 569 |
| | 589 |
| | 574 |
| | 593 |
| 564 |
| | 566 |
|
| | | | | | | | | | |
Basic earnings per common share | $ | 0.34 |
| | $ | 0.58 |
| | $ | 1.41 |
| | $ | 1.45 |
| $ | 0.69 |
| | $ | 0.41 |
|
| | | | | | | | | | |
Diluted earnings per common share | $ | 0.34 |
| | $ | 0.58 |
| | $ | 1.41 |
| | $ | 1.44 |
| $ | 0.69 |
| | $ | 0.41 |
|
| | | | | | | | | | |
Dividends per common share | $ | 0.32 |
| | $ | 0.30 |
| | $ | 0.96 |
| | $ | 0.90 |
| $ | 0.36 |
| | $ | 0.35 |
|
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 |
| (In millions) | (In millions) |
| | | | | | | | | | |
Net earnings including noncontrolling interests | $ | 195 |
| | $ | 344 |
| | $ | 810 |
| | $ | 862 |
| $ | 391 |
| | $ | 234 |
|
Other comprehensive income (loss): | | | | | | | | | | |
Foreign currency translation adjustment | 245 |
| | (41 | ) | | 628 |
| | (57 | ) | (241 | ) | | (79 | ) |
Tax effect | (40 | ) | | 5 |
| | (4 | ) | | 18 |
| (42 | ) | | (10 | ) |
Net of tax amount | 205 |
| | (36 | ) | | 624 |
| | (39 | ) | (283 | ) | | (89 | ) |
| | | | | | | | | | |
Pension and other postretirement benefit liabilities adjustment | 174 |
| | 11 |
| | 193 |
| | 27 |
| 4 |
| | 7 |
|
Tax effect | (66 | ) | | (4 | ) | | (74 | ) | | (7 | ) | (12 | ) | | 13 |
|
Net of tax amount | 108 |
| | 7 |
| | 119 |
| | 20 |
| (8 | ) | | 20 |
|
| | | | | | | | | | |
Deferred gain (loss) on hedging activities | (26 | ) | | 1 |
| | 12 |
| | (10 | ) | (82 | ) | | (77 | ) |
Tax effect | 6 |
| | 3 |
| | 1 |
| | 3 |
| 14 |
| | 12 |
|
Net of tax amount | (20 | ) | | 4 |
| | 13 |
| | (7 | ) | (68 | ) | | (65 | ) |
| | | | | | | | | | |
Unrealized gain (loss) on investments | 6 |
| | (28 | ) | | 1 |
| | (16 | ) | 6 |
| | (2 | ) |
Tax effect | — |
| | 1 |
| | — |
| | (2 | ) | (2 | ) | | — |
|
Net of tax amount | 6 |
| | (27 | ) | | 1 |
| | (18 | ) | 4 |
| | (2 | ) |
Other comprehensive income (loss) | 299 |
| | (52 | ) | | 757 |
| | (44 | ) | (355 | ) | | (136 | ) |
Comprehensive income (loss) including noncontrolling interests | 494 |
| | 292 |
| | 1,567 |
| | 818 |
| 36 |
| | 98 |
|
| | | | | | | | | | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 4 |
| | 3 |
| | 5 |
| | 7 |
| 4 |
| | 1 |
|
| | | | | | | | | | |
Comprehensive income (loss) attributable to controlling interests | $ | 490 |
| | $ | 289 |
| | $ | 1,562 |
| | $ | 811 |
| $ | 32 |
| | $ | 97 |
|
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Balance Sheets | | (In millions) | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
| (Unaudited) | | | (Unaudited) | | |
Assets | | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | $ | 518 |
| | $ | 619 |
| $ | 4,734 |
| | $ | 852 |
|
Short-term marketable securities | 261 |
| | 296 |
| |
Segregated cash and investments | 5,040 |
| | 5,011 |
| 5,098 |
| | 4,458 |
|
Trade receivables | 1,911 |
| | 1,905 |
| 2,437 |
| | 2,267 |
|
Inventories | 8,326 |
| | 8,831 |
| 8,830 |
| | 9,170 |
|
Other current assets | 3,084 |
| | 4,383 |
| 5,047 |
| | 4,600 |
|
Total Current Assets | 19,140 |
| | 21,045 |
| 26,146 |
| | 21,347 |
|
| | | | | | |
Investments and Other Assets | |
| | |
| |
| | |
|
Investments in and advances to affiliates | 4,972 |
| | 4,497 |
| 5,143 |
| | 5,132 |
|
Long-term marketable securities | 207 |
| | 187 |
| |
Goodwill and other intangible assets | 3,939 |
| | 3,703 |
| 5,194 |
| | 5,476 |
|
Other assets | 755 |
| | 579 |
| 2,029 |
| | 1,936 |
|
Total Investments and Other Assets | 9,873 |
| | 8,966 |
| 12,366 |
| | 12,544 |
|
| | | | | | |
Property, Plant, and Equipment | |
| | |
| |
| | |
|
Land | 467 |
| | 445 |
| |
Land and land improvements | | 585 |
| | 592 |
|
Buildings | 4,974 |
| | 4,679 |
| 5,339 |
| | 5,381 |
|
Machinery and equipment | 17,858 |
| | 17,160 |
| 18,934 |
| | 19,005 |
|
Construction in progress | 1,166 |
| | 1,213 |
| 951 |
| | 1,021 |
|
| 24,465 |
| | 23,497 |
| 25,809 |
| | 25,999 |
|
Accumulated depreciation | (14,509 | ) | | (13,739 | ) | (15,926 | ) | | (15,893 | ) |
Net Property, Plant, and Equipment | 9,956 |
| | 9,758 |
| 9,883 |
| | 10,106 |
|
Total Assets | $ | 38,969 |
| | $ | 39,769 |
| $ | 48,395 |
| | $ | 43,997 |
|
| | | | | | |
Liabilities, Temporary Equity, and Shareholders’ Equity | |
| | |
| |
| | |
|
Current Liabilities | |
| | |
| |
| | |
|
Short-term debt | $ | 728 |
| | $ | 154 |
| $ | 3,382 |
| | $ | 1,202 |
|
Trade payables | 3,449 |
| | 3,606 |
| 3,440 |
| | 3,746 |
|
Payables to brokerage customers | 5,135 |
| | 5,158 |
| 5,778 |
| | 5,022 |
|
Accrued expenses and other payables | 2,548 |
| | 3,982 |
| 4,209 |
| | 3,757 |
|
Current maturities of long-term debt | 13 |
| | 273 |
| 508 |
| | 7 |
|
Total Current Liabilities | 11,873 |
| | 13,173 |
| 17,317 |
| | 13,734 |
|
| | | | | | |
Long-Term Liabilities | |
| | |
| |
| | |
|
Long-term debt | 6,595 |
| | 6,504 |
| 8,613 |
| | 7,672 |
|
Deferred income taxes | 1,754 |
| | 1,669 |
| 1,347 |
| | 1,194 |
|
Other | 1,117 |
| | 1,218 |
| 2,071 |
| | 2,114 |
|
Total Long-Term Liabilities | 9,466 |
| | 9,391 |
| 12,031 |
| | 10,980 |
|
| | | | | | |
Temporary Equity - Redeemable noncontrolling interest | 53 |
| | 24 |
| 71 |
| | 58 |
|
| | | | | | |
Shareholders’ Equity | |
| | |
| |
| | |
|
Common stock | 2,390 |
| | 2,327 |
| 2,690 |
| | 2,655 |
|
Reinvested earnings | 17,023 |
| | 17,444 |
| 19,026 |
| | 18,958 |
|
Accumulated other comprehensive income (loss) | (1,843 | ) | | (2,598 | ) | (2,764 | ) | | (2,405 | ) |
Noncontrolling interests | 7 |
| | 8 |
| 24 |
| | 17 |
|
Total Shareholders’ Equity | 17,577 |
| | 17,181 |
| 18,976 |
| | 19,225 |
|
Total Liabilities, Temporary Equity, and Shareholders’ Equity | $ | 38,969 |
| | $ | 39,769 |
| $ | 48,395 |
| | $ | 43,997 |
|
| | | | | | |
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Cash Flows
(Unaudited)
| | (In millions) | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2017 | | 2016 | 2020 | | 2019 |
Operating Activities | | | | | | |
Net earnings including noncontrolling interests | $ | 810 |
| | $ | 862 |
| $ | 391 |
| | $ | 234 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | |
| | |
| |
| | |
|
Depreciation and amortization | 684 |
| | 678 |
| 245 |
| | 245 |
|
Asset impairment charges | 81 |
| | 28 |
| 44 |
| | 9 |
|
Deferred income taxes | (27 | ) | | 36 |
| 64 |
| | 39 |
|
Equity in earnings of affiliates, net of dividends | (131 | ) | | 25 |
| (115 | ) | | (4 | ) |
Stock compensation expense | 63 |
| | 58 |
| 51 |
| | 43 |
|
Deferred cash flow hedges | 12 |
| | (10 | ) | (82 | ) | | (77 | ) |
Gains on sales of assets and businesses/revaluation | (66 | ) | | (117 | ) | |
Gains on sales of assets and businesses | | — |
| | (15 | ) |
Other – net | 174 |
| | 1 |
| 241 |
| | (8 | ) |
Changes in operating assets and liabilities | |
| | |
| |
| | |
|
Segregated investments | 268 |
| | 46 |
| 17 |
| | 28 |
|
Trade receivables | 106 |
| | (463 | ) | (251 | ) | | 34 |
|
Inventories | 703 |
| | 1,053 |
| 182 |
| | 166 |
|
Deferred consideration in securitized receivables | | (2,045 | ) | | (1,778 | ) |
Other current assets | 1,317 |
| | (415 | ) | (436 | ) | | (495 | ) |
Trade payables | (259 | ) | | (554 | ) | (260 | ) | | (260 | ) |
Payables to brokerage customers | (94 | ) | | 355 |
| 811 |
| | (27 | ) |
Accrued expenses and other payables | (1,486 | ) | | (287 | ) | 488 |
| | (169 | ) |
Total Operating Activities | 2,155 |
| | 1,296 |
| (655 | ) | | (2,035 | ) |
| | | | | | |
Investing Activities | |
| | |
| |
| | |
|
Purchases of property, plant, and equipment | (696 | ) | | (621 | ) | (194 | ) | | (198 | ) |
Proceeds from sales of business and assets | 172 |
| | 104 |
| 7 |
| | 18 |
|
Net assets of businesses acquired | (187 | ) | | (136 | ) | (8 | ) | | (1,876 | ) |
Purchases of marketable securities | (499 | ) | | (1,127 | ) | |
Proceeds from sales of marketable securities | 572 |
| | 1,162 |
| 5 |
| | 50 |
|
Investments in and advances to affiliates | (281 | ) | | (628 | ) | (3 | ) | | (9 | ) |
Investments in retained interest in securitized receivables | | (1,271 | ) | | (1,313 | ) |
Proceeds from retained interest in securitized receivables | | 3,316 |
| | 3,091 |
|
Other – net | (14 | ) | | 15 |
| 1 |
| | (34 | ) |
Total Investing Activities | (933 | ) | | (1,231 | ) | 1,853 |
| | (271 | ) |
| | | | | | |
Financing Activities | |
| | |
| |
| | |
|
Long-term debt borrowings | 509 |
| | 1,036 |
| 1,481 |
| | — |
|
Long-term debt payments | (840 | ) | | (9 | ) | (1 | ) | | (4 | ) |
Net borrowings (payments) under lines of credit agreements | 558 |
| | 107 |
| 2,188 |
| | 1,309 |
|
Share repurchases | (676 | ) | | (754 | ) | (112 | ) | | — |
|
Cash dividends | (544 | ) | | (528 | ) | (203 | ) | | (198 | ) |
Other – net | 4 |
| | 14 |
| (11 | ) | | (42 | ) |
Total Financing Activities | (989 | ) | | (134 | ) | 3,342 |
| | 1,065 |
|
| | | | | | |
Increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents | 233 |
| | (69 | ) | 4,540 |
| | (1,241 | ) |
Cash, cash equivalents, restricted cash, and restricted cash equivalents - beginning of period | 1,561 |
| | 1,796 |
| 2,990 |
| | 3,843 |
|
Cash, cash equivalents, restricted cash, and restricted cash equivalents - end of period | $ | 1,794 |
| | $ | 1,727 |
| $ | 7,530 |
| | $ | 2,602 |
|
| | | | | | |
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the consolidated balance sheets | | | | | | |
| | | | | | |
Cash and cash equivalents | $ | 518 |
| | $ | 701 |
| $ | 4,734 |
| | $ | 926 |
|
Restricted cash and restricted cash equivalents included in segregated cash and investments | 1,276 |
| | 1,026 |
| 2,796 |
| | 1,676 |
|
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 1,794 |
| | $ | 1,727 |
| $ | 7,530 |
| | $ | 2,602 |
|
| | | | | | |
Supplemental Disclosure of Noncash Investing Activity: | | | | |
Retained interest in securitized receivables | | $ | 2,105 |
| | $ | 1,831 |
|
See notes to consolidated financial statements.
Archer-Daniels-Midland-Company
Consolidated StatementStatements of Shareholders’ Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Reinvested Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
| (In millions) |
| | | | | | | | | | | |
Balance, December 31, 2016 | 573 |
| | $ | 2,327 |
| | $ | 17,444 |
| | $ | (2,598 | ) | | $ | 8 |
| | $ | 17,181 |
|
Impact of ASU 2016-16 (see Note 2) | | | | | (7 | ) | | | | | | (7 | ) |
Balance, January 1, 2017 | 573 |
| | $ | 2,327 |
| | $ | 17,437 |
| | $ | (2,598 | ) | | $ | 8 |
| | $ | 17,174 |
|
Comprehensive income | |
| | |
| | |
| | |
| | |
| | |
|
Net earnings | | | |
| | 807 |
| | |
| | 3 |
| | |
|
Other comprehensive income (loss) | |
| | |
| | |
| | 755 |
| | 2 |
| | |
|
Total comprehensive income | |
| | |
| | |
| | |
| | |
| | 1,567 |
|
Cash dividends paid- $0.96 per share | |
| | |
| | (544 | ) | | |
| | |
| | (544 | ) |
Share repurchases | (16 | ) | | | | (676 | ) | | | | | | (676 | ) |
Stock compensation expense | 1 |
| | 63 |
| | |
| | |
| | |
| | 63 |
|
Other | 1 |
| | — |
| | (1 | ) | | — |
| | (6 | ) | | (7 | ) |
Balance, September 30, 2017 | 559 |
| | $ | 2,390 |
| | $ | 17,023 |
| | $ | (1,843 | ) | | $ | 7 |
| | $ | 17,577 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Reinvested Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total Shareholders’ Equity |
(In millions, except per share amounts) | Shares | | Amount | | | | |
| | | | | | | | | | | |
Balance, December 31, 2019 | 557 |
| | $ | 2,655 |
| | $ | 18,958 |
| | $ | (2,405 | ) | | $ | 17 |
| | $ | 19,225 |
|
Impact of ASC 326 (see Note 2) | | | | | (8 | ) | | | | | | (8 | ) |
Balance, January 1, 2020 | 557 |
| | $ | 2,655 |
| | $ | 18,950 |
| | $ | (2,405 | ) | | $ | 17 |
| | $ | 19,217 |
|
Comprehensive income | |
| | |
| | |
| | |
| | |
| | |
|
Net earnings | | | |
| | 391 |
| | |
| | — |
| | |
|
Other comprehensive income (loss) | |
| | |
| | |
| | (359 | ) | | 4 |
| | |
|
Total comprehensive income | |
| | |
| | |
| | |
| | |
| | 36 |
|
Dividends paid - $0.36 per share | |
| | |
| | (203 | ) | | |
| | |
| | (203 | ) |
Share repurchases | (3 | ) | | | | (112 | ) | | | | | | (112 | ) |
Stock compensation expense | 1 |
| | 51 |
| | |
| | |
| | |
| | 51 |
|
Other |
|
| | (16 | ) | | — |
| |
|
| | 3 |
| | (13 | ) |
Balance, March 31, 2020 | 555 |
| | $ | 2,690 |
| | $ | 19,026 |
| | $ | (2,764 | ) | | $ | 24 |
| | $ | 18,976 |
|
| | | | | | | | | | | |
Balance, December 31, 2018 | 559 |
| | $ | 2,560 |
| | $ | 18,527 |
| | $ | (2,106 | ) | | $ | 15 |
| | $ | 18,996 |
|
Comprehensive income | |
| | |
| | |
| | |
| | |
| | |
|
Net earnings | | | |
| | 233 |
| | |
| | 1 |
| | |
|
Other comprehensive income (loss) | |
| | |
| | |
| | (136 | ) | | — |
| | |
|
Total comprehensive income | |
| | |
| | |
| | |
| | |
| | 98 |
|
Dividends paid - $0.35 per share | |
| | |
| | (198 | ) | | |
| | |
| | (198 | ) |
Stock compensation expense | 1 |
| | 43 |
| | |
| | |
| | |
| | 43 |
|
Other | — |
| | (19 | ) | | (9 | ) | | — |
| | (1 | ) | | (29 | ) |
Balance, March 31, 2019 | 560 |
| | $ | 2,584 |
| | $ | 18,553 |
| | $ | (2,242 | ) | | $ | 15 |
| | $ | 18,910 |
|
| | | | | | | | | | | |
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements
(Unaudited)
| |
Note 1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and ninethree months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172020. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company consolidates all entities, including variable interest entities (VIEs), in which it has a controlling financial interest. For VIEs, the Company assesses whether it is the primary beneficiary as defined under the applicable accounting standard. Investments in affiliates, including VIEs through which the Company exercises significant influence but does not control the investee and is not the primary beneficiary of the investee’s activities, are carried at cost plus equity in undistributed earnings since acquisition and are adjusted, where appropriate, for basis differences between the investment balance and the underlying net assets of the investee. The Company’s portion of the results of certain affiliates and results of certain VIEs are included using the most recent available financial statements. In each case, the financial statements are within 93 days of the Company’s year end and are consistent from period to period.
Retirement Benefit ChangesReclassifications
On July 31, 2017,Effective January 1, 2020, the Company announcedstarted reporting its newly created dry mill ethanol subsidiary, Vantage Corn Processors (VCP), as a sub-segment within the Carbohydrate Solutions segment. VCP replaces the Bioproducts sub-segment which included the combined results of the Company’s corn dry and wet mill ethanol operations. The wet mill ethanol operations that all participantswere previously reported in Bioproducts are now included in the Starches and Sweeteners sub-segment. In addition to dry mill ethanol production, VCP will sell/broker ADM’s wet mill ethanol production as the sole marketer of ethanol produced at the Company’s U.S. salaried pension plan and the Supplemental Executive Retirement Plan (SERP) will begin accruing benefits under the cash balance formula effective January 1, 2022. Benefits for participants who were accruing under the final average pay formula will be frozen as of December 31, 2021, including pay and service through that date.
This change, along with other changes in participation associated with divestitures and restructuring, triggered a remeasurement of the salaried pension plan and the SERP resulting in decreases in the fiscal 2017 pension expense, accumulated other comprehensive loss, and underfunded status by $18 million, $182 million, and $164 million, respectively.
Concurrent with this change, the Company also changed the method used to estimate the service and interest cost components of the net periodic pension and postretirement benefit costs for its U.S. plans. The new method uses the spot rate yield curve approach to estimate the service and interest costs. Previously, those costs were determined using a single weighted-average discount rate applied to all future cash outflows.facilities. The change does not affecthave an impact on the measurementtotal results of the Carbohydrate Solutions segment.
Effective July 1, 2019, the Company changed its segment reporting to reflect the creation of the combined Ag Services and Oilseeds segment. The former Origination and Oilseeds businesses were merged into a combined Ag Services and Oilseeds segment which enables the Company to better respond to market changes by integrating the supply and value chains and risk management, while delivering significant simplification and efficiency to the day-to-day business. As part of the Company’s benefit obligationsefforts for a streamlined management structure, the combined segment is led by the former President of Oilseeds expanding his role to President of Ag Services and was accounted for as a change in accounting estimate in accordance with the guidance of ASC Topic 250, Accounting Estimates and Error Corrections, thereby impacting the current and future quarters. The impact of this change on after-tax earnings and diluted earnings per share for the quarter ended September 30, 2017 was immaterial.Oilseeds.
Reclassifications
The Company classified $17 million and $49 million of fees from its U.S. futures commission brokerage business in cost of products sold in the quarter and nine months ended September 30, 2017, respectively. Prior period amounts of $15 millioninformation in Notes 4 and $50 million in the quarter and nine months ended September 30, 2016, respectively, have14 has been reclassified from selling, general, and administrative expenses in the consolidated statement of earnings to conform to the current period segment presentation.
In the quarter ended June 30, 2017, the Company began presenting certain specified items separately from the individual business segments, as further described in Note 14.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 1. | Basis of Presentation (Continued) |
In line with the futures brokerage industry practice, the Company has correctly classified $1.2 billion of segregated cash and cash equivalents as restricted cash and cash equivalents in the statement of cash flows effective September 30, 2017. Prior period amounts have been restated to conform to the current presentation which resulted in an increase of $145 million in total cash provided by operating activities for the nine months ended September 30, 2016 and an increase of $938 million in the ending balance of cash, cash equivalents, restricted cash, and restricted cash equivalents as of September 30, 2016.
Segregated Cash and Investments
The Company segregates certain cash, cash equivalent,equivalents, and investment balances in accordance with regulatory requirements, commodity exchange requirements, and insurance arrangements. These balances represent deposits received from customers of the Company’s registered futures commission merchant and commodity brokerage services, cash margins and securities pledged to commodity exchange clearinghouses, and cash pledged as security under certain insurance arrangements. Segregated cash and investments also include restricted cash collateral for the various insurance programs of the Company’s captive insurance business. To the degree these segregated balances are comprised of cash and cash equivalents, they are considered restricted cash and cash equivalents on the statement of cash flows.
Last-in, First-out (LIFO) Inventories
Interim period LIFO calculations
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 1. | Basis of Presentation (Continued) |
Receivables
The Company records accounts receivable at net realizable value. This value includes an allowance for estimated uncollectible accounts of $112 million and $110 million at March 31, 2020 and December 31, 2019, respectively, to reflect any loss anticipated on the accounts receivable balances including any accrued interest receivables thereon. Portions of this allowance are recorded in trade receivables, other current assets, and other assets. Long-term receivables recorded in other assets were not material to the Company’s overall receivables portfolio.
Effective January 1, 2020, the Company adopted Accounting Standards Codification (ASC) Topic 326, Financial Instruments - Credit Losses (Topic 326), and developed a new methodology for estimating uncollectible accounts. Under this methodology, receivables are pooled according to type, region, credit risk rating, and age. Each pool is assigned an expected loss co-efficient to arrive at a general reserve based on interim period costshistorical write-offs adjusted, as needed, for regional, economic, and management’s estimates of year-end inventory levels. Because the availability and price of agricultural commodity-based LIFO inventories are unpredictableother forward-looking factors. The Company minimizes credit risk due to factors such as weather, government farm programsthe large and policies,diversified nature of its worldwide customer base. ADM manages its exposure to counter-party credit risk through credit analysis and changesapprovals, credit limits, and monitoring procedures.
The Company recorded bad debt expense in global demand, quantitiesselling, general, and administrative expenses of LIFO-based$11 million in the three months ended March 31, 2020. There was 0 bad debt expense recorded in the three months ended March 31, 2019.
Inventory Valuation
Effective January 1, 2020, the Company changed the method of accounting for certain of its agricultural commodity inventories from the last-in, first-out (LIFO) method to market value in the Ag Services and Oilseeds segment. As of December 31, 2019, inventories accounted for using LIFO at interim periods may vary significantly from management’s estimatesthe lower of year-endcost or net realizable value represented approximately 10% of consolidated inventories. The Company believes market value is preferable because it: (i) conforms to the inventory levels.valuation methodology used for the majority of ADM’s agricultural commodity inventories; (ii) enhances the matching of inventory costs with revenues and better reflects the current cost of inventory on the Company’s balance sheet; and (iii) provides better comparability with the Company’s peers.
The Company concluded that the accounting change does not have a material effect on prior periods’ financial statements and elected not to apply the change on a retrospective basis. As a result, the Company recorded a reduction in cost of products sold of $91 million ($69 million after tax, equal to $0.12 per diluted share) for the cumulative effect of the change in the three months ended March 31, 2020 with no impact to the statement of cash flows. The Company does not expect the change to have a material impact on its results for the year ending December 31, 2020.
If the Company had not made the accounting change, the effect of LIFO valuation on ADM’s operating results would have been a reduction in cost of products sold of $44 million ($33 million after tax, equal to $0.06 per diluted share) in the three months ended March 31, 2020 with no impact to the statement of cash flows.
| |
Note 2. | New Accounting Standards |
Effective January 1, 2017,2020, the Company adopted the amended guidance of Topic 326, which is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance replaces the prior “incurred loss” approach with an “expected loss” model and requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company was required to adopt the amended guidance on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company evaluated its current methodology of estimating allowance for doubtful accounts and the risk profile of its receivable portfolio and developed a model that includes the qualitative and forecasting aspects of the “expected loss” model under the amended guidance. The Company finalized its assessment of the impact of the amended guidance and recorded a $8 million cumulative effect adjustment to retained earnings at January 1, 2020. For more information about the Company’s receivables, see Note 1.
Effective January 1, 2020, the Company adopted the amended guidance of ASC Topic 330, Inventory820, Fair Value Measurement, which simplifiesmodifies the measurement of inventory. The amended guidance requires an entity to measure its cost-based inventory at the lower of cost or net realizabledisclosure requirements on fair value where net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 323, Investments - Equity Method and Joint Ventures, which simplifies the transition to the equity method of accounting. The amended guidance eliminates the requirement of an investor to adjust the investment, results of operations, and retained earnings retroactively when an investment qualifies for equity method accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments require the investor add the cost of acquiring the additional interest in the investee to the current basis of the investors’ previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.measurements. The adoption of this amended guidance did not have an impact on the Company’s financial results.
Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 810, Consolidation, which affects reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. The amended guidance changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The Company was required to adopt the amended guidance using a retrospective transition approach to all periods presented. The adoption of this amended guidance did not result in the deconsolidation or consolidation of any of its variable interest entities.
Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 740, Income Taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer, other than inventory, when the transfer occurs. Under the previous accounting rules, entities were prohibited from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amended guidance does not change the accounting for the pre-tax effects of an intra-entity asset transfer or for an intra-entity transfer of inventory. The Company adopted the amended guidance on a modified retrospective approach basis through a $7 million cumulative effect adjustment to retained earnings as of January 1, 2017.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 3. | Pending Accounting Standards |
Effective January 1, 2018,December 31, 2020, the Company will be required to adopt the amended guidance of ASC Subtopic 825-10, Financial Instruments715-20, Compensation - OverallRetirement Benefits - Defined Benefit Plans - General, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Early adoption is intended to improve the recognition and measurement of financial instruments.permitted. The amended guidance requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income and simplify the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The Company does not expect the adoption of this amended guidance to have a significantwill not impact on the Company’s financial results.
Effective January 1, 2018, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will adopt Topic 606 on a modified retrospective basis and will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements including separate quantitative disclosure of revenues within the scope of Topic 606 and revenues excluded from the scope of Topic 606. Many of the Company’s sales contracts are considered derivatives under ASC Topic 815, Derivatives and Hedging, and are therefore excluded from the scope of Topic 606. The Company has established a cross-functional implementation team consisting of representatives from all of its business segments. The Company utilized surveys to validate all of its current revenue recognition streams and identify areas of its business where potential differences could result from applying the requirements of the new standard. The Company also conducted workshops and performed contract reviews to gather more information about the nature, magnitude, and frequency of the underlying transactions that drove the survey responses. Based on the surveys, workshops, and contract reviews, the Company identified potential accounting changes in the areas of control transfer, voyage charter revenue, bill and hold arrangements, and variable consideration. In the fourth quarter of 2017, the Company will complete the final phase of its revenue recognition implementation plan which includes quantification of the areas of accounting change, assessment of the financial impact of the new guidance on its consolidated financial statements, and finalization of its revenue recognition accounting policy and position papers.
Effective January 1, 2018,2021, the Company will be required to adopt the amended guidance of ASC Topic 805, Business Combinations740, Income Taxes (Topic 740),which clarifiessimplifies the definitionaccounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of a business. The amended guidance is intended to help companies and simplify other organizations evaluate whether transactions should be accounted for as acquisitions (disposals)areas of assets or businesses and provides a more robust framework to use in determining when a set of assets and activities is a business.Topic 740. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. No disclosures are required at adoption. The Company plans to adopt the amended guidance on October 1, 2017.
Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 715, Compensation - Retirement Benefits, which requires that an employer report the service cost component in the same line or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of this amended guidance will require expanded disclosures and the reclassification of the other components of net benefit cost from cost of products sold and selling, general, and administrative expenses to other (income) expense - net in the Company’s consolidated statements of earnings but will not impact financial results.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 3. | Pending Accounting Standards (Continued) |
Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 718, Compensation - Stock Compensation (Topic 718), which provides clarity and reduces diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification of the terms and conditions of a share-based payment. The amendments include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued. The Company plans to adopt the amended guidance on October 1, 2017 and does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.
Effective January 1, 2019, the Company will be required to adopt the new guidance of ASC Topic 842, Leases (Topic 842), which will supersede ASC Topic 840, Leases. Topic 842 requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months. The Company expects to adopt Topic 842 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements. The Company has established a cross-functional implementation team consisting of representatives from accounting, legal, procurement, and operations. The Company utilized surveys to centrally gather more information about its existing leases and lease processes and to gather lease contracts. To ensure completeness of the population of lease contracts, the results of the survey were cross-referenced against other available lease information (i.e., year-end disclosures and general ledger). The Company is also working with a vendor to implement a lease management system which will assist in delivering the required accounting changes and disclosures. The next phase of the implementation plan is the abstraction of the relevant lease contract data points which is expected to be completed in the first quarter of 2018. The impact of the new standard will be a significant increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet.permitted. The Company has not yet completed its assessment of the impact of the newamended guidance on the consolidated financial statements but does not expect the adoption of the amendments to have a significant impact on its consolidated statement of earnings.financial results.
Effective January 1, 2019,Through December 31, 2022, the Company will be requiredhas the option to adopt the amended guidance of ASC Topic 815, Derivatives and Hedging848, Reference Rate Reform, which expandsprovides optional expedients and refines hedge accountingexceptions for both non-financialapplying GAAP to contracts, hedging relationships, and financial risk componentsother transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and alignsother transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the recognitionamended guidance do not apply to contract modifications made and presentationhedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the effectsend of the hedging instrument and the hedged item in the financial statements. The amended guidance also simplifies the application of hedge accounting guidance and eases the administrative burden of hedge documentation requirements and assessing hedge effectiveness. Early adoption is permitted in any interim period with the effect of adoption reflected as an adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption.relationship. The Company is considering adoptingplans to adopt the expedients and exceptions provided by the amended guidance on January 1, 2018before the December 31, 2022 expiry date but has not yet completed its assessment of the impact of this amended guidance on the consolidated financial statements.
Revenue Recognition
The Company principally generates revenue from merchandising and transporting agricultural commodities and manufactured products used as ingredients in food, feed, energy, and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product or service to a customer. The majority of the Company’s financial results.
Effective January 1, 2020,contracts with customers have one performance obligation and a contract duration of one year or less. The Company applies the practical expedient in paragraph 10-50-14 of ASC 606, Revenue from Contracts with Customers (“Topic 606”) and does not disclose information about remaining performance obligations that have original expected durations of one year or less. For transportation service contracts, the Company will be required to adoptrecognizes revenue over time as the amendedbarge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. The Company recognized revenue from transportation service contracts of $117 million and $115 million for the three months ended March 31, 2020 and 2019, respectively. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“Topic 326, Financial Instruments - Credit Losses, which is intended610-20”).
Shipping and Handling Costs
Shipping and handling costs related to improve financial reporting by requiring more timely recordingcontracts with customers for the sale of credit losses on loansgoods are accounted for as a fulfillment activity and other financial instruments held by financial institutionsare included in cost of products sold. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
Taxes Collected from Customers and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Remitted to Governmental Authorities
The Company does not expectinclude taxes assessed by governmental authorities that are (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers, in the adoption of this amended guidance to have a significant impact on the Company’s financial results.
Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 350, Goodwill and Other, which simplifies the subsequent measurement of goodwill. The amended guidance removes the second steptransactions prices or as a component of the goodwill impairment testrevenues and requires the applicationcost of a one-step quantitative test where the amount of goodwill impairment is the excess of a reporting unit's carrying amount over its fair value, but not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to adopt the amended guidance on October 1, 2017 and does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.products sold.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 4. | AcquisitionsRevenues (Continued) |
During
Contract Liabilities
Contract liabilities relate to advance payments from customers for goods and services that the nineCompany has yet to provide. Contract liabilities of $512 million and $604 million as of March 31, 2020 and December 31, 2019, respectively, were recorded in accrued expenses and other payables in the consolidated balance sheets. Contract liabilities recognized as revenues for the three months ended September 30, 2017,March 31, 2020 and 2019 were $282 million and $166 million, respectively.
Disaggregation of Revenues
The following tables present revenue disaggregated by timing of recognition and major product lines for the Company acquired Crosswind Industries, Inc., Chamtor SA, a 51% controlling interest in Industries Centers,three months ended March 31, 2020 and an 89% controlling interest in Biopolis SL. The aggregate cash purchase price of these acquisitions of $187 million, net of cash acquired of $7 million, was preliminarily allocated as follows:2019.
|
| | | |
| (In millions) |
Working capital | $ | 16 |
|
Property, plant, and equipment | 111 |
|
Goodwill | 34 |
|
Other intangible assets | 50 |
|
Other long-term assets | 6 |
|
Long-term liabilities | (19 | ) |
Noncontrolling interest | (11 | ) |
Aggregate cash purchase price, net of cash acquired | $ | 187 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Topic 606 Revenue | Topic 815(1) | Total |
| Point in Time | Over Time | Total | Revenue | Revenues |
| (In millions) |
Ag Services and Oilseeds | | | | | |
Ag Services | $ | 851 |
| $ | 117 |
| $ | 968 |
| $ | 5,958 |
| $ | 6,926 |
|
Crushing | 180 |
| — |
| 180 |
| 2,133 |
| 2,313 |
|
Refined Products and Other | 518 |
| — |
| 518 |
| 1,322 |
| 1,840 |
|
Total Ag Services and Oilseeds | 1,549 |
| 117 |
| 1,666 |
| 9,413 |
| 11,079 |
|
Carbohydrate Solutions | | | | | |
Starches and Sweeteners | 1,240 |
| — |
| 1,240 |
| 410 |
| 1,650 |
|
Vantage Corn Processors | 666 |
| — |
| 666 |
| — |
| 666 |
|
Total Carbohydrate Solutions | 1,906 |
| — |
| 1,906 |
| 410 |
| 2,316 |
|
Nutrition | | | | | |
Human Nutrition | 719 |
| — |
| 719 |
| — |
| 719 |
|
Animal Nutrition | 752 |
| — |
| 752 |
| — |
| 752 |
|
Total Nutrition | 1,471 |
| — |
| 1,471 |
| — |
| 1,471 |
|
| | | | | |
Other Business | 104 |
| — |
| 104 |
| — |
| 104 |
|
Total Revenues | $ | 5,030 |
| $ | 117 |
| $ | 5,147 |
| $ | 9,823 |
| $ | 14,970 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 4. | Revenues (Continued) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
| Topic 606 Revenue | Topic 815(1) | Total |
| Point in Time | Over Time | Total | Revenue | Revenues |
| (In millions) |
Ag Services and Oilseeds | | | | | |
Ag Services | $ | 592 |
| $ | 115 |
| $ | 707 |
| $ | 6,670 |
| $ | 7,377 |
|
Crushing | 171 |
| — |
| 171 |
| 2,178 |
| 2,349 |
|
Refined Products and Other | 512 |
| — |
| 512 |
| 1,300 |
| 1,812 |
|
Total Ag Services and Oilseeds | 1,275 |
| 115 |
| 1,390 |
| 10,148 |
| 11,538 |
|
Carbohydrate Solutions | | | | | |
Starches and Sweeteners | 1,175 |
| — |
| 1,175 |
| 423 |
| 1,598 |
|
Vantage Corn Processors | 805 |
| — |
| 805 |
| — |
| 805 |
|
Total Carbohydrate Solutions | 1,980 |
| — |
| 1,980 |
| 423 |
| 2,403 |
|
Nutrition | | | | | |
Human Nutrition | 674 |
| — |
| 674 |
| — |
| 674 |
|
Animal Nutrition | 608 |
| — |
| 608 |
| — |
| 608 |
|
Total Nutrition | 1,282 |
| — |
| 1,282 |
| — |
| 1,282 |
|
| | | | | |
Other Business | 81 |
| — |
| 81 |
| — |
| 81 |
|
Total Revenues | $ | 4,618 |
| $ | 115 |
| $ | 4,733 |
| $ | 10,571 |
| $ | 15,304 |
|
(1) Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.
Ag Services and Oilseeds
The Ag Services and Oilseeds segment generates revenue from the sale of commodities, from service fees for the transportation of goods, and from the sale of products manufactured in its global processing facilities. Revenue is measured based on the consideration specified in the contract and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when a performance obligation is satisfied by transferring control over a product or providing service to a customer. For transportation service contracts, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. The amount of revenue recognized follows the contractually specified price which may include freight or other contractually specified cost components. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Carbohydrate Solutions
The Carbohydrate Solutions segment generates revenue from the sale of products manufactured at the Company’s global corn and wheat milling facilities around the world. Revenue is recognized when control over products is transferred to the customer. Products are shipped to customers from the Company’s various facilities and from its network of storage terminals. The amount of revenue recognized is based on the consideration specified in the contract which could include freight and other costs depending on the specific shipping terms of each contract. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 4. | Revenues (Continued) |
Nutrition
The Nutrition segment sells specialty products including natural flavor ingredients, flavor systems, natural colors, animal nutrition products, and other specialty food and feed ingredients. Revenue is recognized when control over products is transferred to the customer. The amount of revenue recognized follows the contracted price or the mutually agreed price of the product. Freight and shipping are recognized as a component of revenue at the same time control transfers to the customer.
Other Business
Other Business includes the Company’s futures commission business whose primary sources of revenue are commissions and brokerage income generated from executing orders and clearing futures contracts and options on futures contracts on behalf of its customers. Commissions and brokerage revenue are recognized on the date the transaction is executed. Other also includes the Company’s captive insurance business which generates third party revenue through its proportionate share of premiums from third-party reinsurance pools. Reinsurance premiums are recognized on a straight-line basis over the period underlying the policy.
| |
Note 5. | Fair Value Measurements |
The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2017March 31, 2020 and December 31, 20162019.
| | | Fair Value Measurements at September 30, 2017 | Fair Value Measurements at March 31, 2020 |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (In millions) | (In millions) |
| | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | |
Inventories carried at market | $ | — |
| | $ | 3,361 |
| | $ | 1,094 |
| | $ | 4,455 |
| $ | — |
| | $ | 3,642 |
| | $ | 1,938 |
| | $ | 5,580 |
|
Unrealized derivative gains: | | | | | | | | | | | | | | |
Commodity contracts | — |
| | 240 |
| | 120 |
| | 360 |
| — |
| | 482 |
| | 391 |
| | 873 |
|
Foreign currency contracts | — |
| | 81 |
| | — |
| | 81 |
| — |
| | 439 |
| | — |
| | 439 |
|
Interest rate contracts | — |
| | 2 |
| | — |
| | 2 |
| — |
| | 14 |
| | — |
| | 14 |
|
Cash equivalents | 49 |
| | — |
| | — |
| | 49 |
| 3,381 |
| | — |
| | — |
| | 3,381 |
|
Marketable securities | 376 |
| | 92 |
| | — |
| | 468 |
| 2 |
| | — |
| | — |
| | 2 |
|
Segregated investments | 1,827 |
| | — |
| | — |
| | 1,827 |
| 765 |
| | — |
| | — |
| | 765 |
|
Deferred receivables consideration | — |
| | 399 |
| | — |
| | 399 |
| — |
| | 496 |
| | — |
| | 496 |
|
Total Assets | $ | 2,252 |
| | $ | 4,175 |
| | $ | 1,214 |
| | $ | 7,641 |
| $ | 4,148 |
| | $ | 5,073 |
| | $ | 2,329 |
| | $ | 11,550 |
|
| | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | |
Unrealized derivative losses: | | | | | | | | | | | | | | |
Commodity contracts | $ | — |
| | $ | 300 |
| | $ | 145 |
| | $ | 445 |
| $ | — |
| | $ | 480 |
| | $ | 309 |
| | $ | 789 |
|
Foreign currency contracts | — |
| | 119 |
| | — |
| | 119 |
| — |
| | 624 |
| | — |
| | 624 |
|
Interest rate contracts | | — |
| | 56 |
| | — |
| | 56 |
|
Inventory-related payables | — |
| | 493 |
| | 20 |
| | 513 |
| — |
| | 1,151 |
| | 20 |
| | 1,171 |
|
Total Liabilities | $ | — |
| | $ | 912 |
| | $ | 165 |
| | $ | 1,077 |
| $ | — |
| | $ | 2,311 |
| | $ | 329 |
| | $ | 2,640 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2019 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (In millions) |
| | | | | | | |
Assets: | | | | | | | |
Inventories carried at market | $ | — |
| | $ | 3,227 |
| | $ | 1,477 |
| | $ | 4,704 |
|
Unrealized derivative gains: | | | | | | | |
Commodity contracts | — |
| | 277 |
| | 201 |
| | 478 |
|
Foreign currency contracts | — |
| | 138 |
| | — |
| | 138 |
|
Interest rate contracts | — |
| | 3 |
| | — |
| | 3 |
|
Cash equivalents | 505 |
| | — |
| | — |
| | 505 |
|
Marketable securities | 5 |
| | — |
| | — |
| | 5 |
|
Segregated investments | 628 |
| | — |
| | — |
| | 628 |
|
Deferred receivables consideration | — |
| | 446 |
| | — |
| | 446 |
|
Total Assets | $ | 1,138 |
| | $ | 4,091 |
| | $ | 1,678 |
| | $ | 6,907 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Unrealized derivative losses: | | | | | | | |
Commodity contracts | $ | — |
| | $ | 375 |
| | $ | 199 |
| | $ | 574 |
|
Foreign currency contracts | — |
| | 125 |
| | — |
| | 125 |
|
Interest rate contracts | — |
| | 43 |
| | — |
| | 43 |
|
Inventory-related payables | — |
| | 702 |
| | 27 |
| | 729 |
|
Total Liabilities | $ | — |
| | $ | 1,245 |
| | $ | 226 |
| | $ | 1,471 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2016 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (In millions) |
| | | | | | | |
Assets: | | | | | | | |
Inventories carried at market | $ | — |
| | $ | 3,102 |
| | $ | 1,322 |
| | $ | 4,424 |
|
Unrealized derivative gains: | | | | | | | |
Commodity contracts | — |
| | 371 |
| | 140 |
| | 511 |
|
Foreign exchange contracts | — |
| | 102 |
| | — |
| | 102 |
|
Interest rate contracts | — |
| | 11 |
| | — |
| | 11 |
|
Cash equivalents | 286 |
| | — |
| | — |
| | 286 |
|
Marketable securities | 408 |
| | 69 |
| | — |
| | 477 |
|
Segregated investments | 1,613 |
| | — |
| | — |
| | 1,613 |
|
Deferred receivables consideration | — |
| | 540 |
| | — |
| | 540 |
|
Total Assets | $ | 2,307 |
| | $ | 4,195 |
| | $ | 1,462 |
| | $ | 7,964 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Unrealized derivative losses: | | | | | | | |
Commodity contracts | $ | — |
| | $ | 419 |
| | $ | 142 |
| | $ | 561 |
|
Foreign exchange contracts | — |
| | 90 |
| | — |
| | 90 |
|
Inventory-related payables | — |
| | 491 |
| | 30 |
| | 521 |
|
Total Liabilities | $ | — |
| | $ | 1,000 |
| | $ | 172 |
| | $ | 1,172 |
|
Estimated fair values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets.and quality, referred to as basis. Market valuations for the Company’s inventories are adjusted for location and quality (basis) because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. The basis adjustments are generally determined using the inputs from broker or dealer quotations or market transactions in either the listed or over the counter (OTC) markets and are considered observable. In some cases, the basis adjustments are unobservable because they are supported by little to no market activity. When unobservable inputs have a significant impact on the measurement of fair value, the inventory is classified in Level 3. Changes in the fair value of inventories are recognized in the consolidated statementsstatement of earnings as a component of cost of products sold.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, energy, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in these tables. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differencesMarket valuations for the Company’s forward commodity purchase and sale contracts are adjusted for location (basis) because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. The basis adjustments are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets.markets and are considered observable. In some cases, the basis adjustments are unobservable because they are supported by little to no market activity. When observable inputs are available for substantially the full term of the contract, it is classified in Level 2. When unobservable inputs have a significant impact (more than 10%) on the measurement of fair value, the contract is classified in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statementsstatement of earnings as a component of cost of products sold. Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statementsstatement of earnings as a component of revenues, cost of products sold, or other (income) expense - net, depending upon the purpose of the contract. The effective portions of changes in the fair value of derivatives designated as effective cash flow hedges are recognized in the consolidated balance sheetssheet as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.
The Company’s cash equivalents are comprised of money market funds valued using quoted market prices and are classified as Level 1.
The Company’s marketable securities are comprised of equity investments, U.S. Treasury securities, corporate debt securities, and other debt securities. Publicly traded equity investments and U.S. Treasury securities are valued using quoted market prices and are classified in Level 1. Corporate debt and other debt securities are valued using third-party pricing services and substantially all are classified in Level 2. Unrealized changes in the fair value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of AOCI unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.
The Company’s segregated investments are comprised of U.S. Treasury securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.
The Company has deferred consideration under its accounts receivable securitization programs (the “Programs”) which represents notes receivable from the purchasers under the Programs (see Note 16)16 for more information). This amount is reflected in other current assets on the consolidated balance sheet (see Note 8)7 for more information). The Company carries the deferred receivables consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred receivables consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs, which have historically been insignificant.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
The following table presents a reconciliationrollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2017March 31, 2020.
| | | Level 3 Fair Value Asset Measurements at | Level 3 Fair Value Asset Measurements at |
| September 30, 2017 | March 31, 2020 |
| Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets | Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets |
| (In millions) | (In millions) |
| | | | | | | | | | |
Balance, June 30, 2017 | $ | 1,000 |
| | $ | 106 |
| | $ | 1,106 |
| |
Balance, December 31, 2019 | | $ | 1,477 |
| | $ | 201 |
| | $ | 1,678 |
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | 15 |
| | 54 |
| | 69 |
| 187 |
| | 217 |
| | 404 |
|
Purchases | 2,792 |
| | — |
| | 2,792 |
| 3,407 |
| | — |
| | 3,407 |
|
Sales | (2,655 | ) | | — |
| | (2,655 | ) | (3,510 | ) | | — |
| | (3,510 | ) |
Settlements | — |
| | (82 | ) | | (82 | ) | — |
| | (45 | ) | | (45 | ) |
Transfers into Level 3 | 37 |
| | 45 |
| | 82 |
| 441 |
| | 21 |
| | 462 |
|
Transfers out of Level 3 | (95 | ) | | (3 | ) | | (98 | ) | (64 | ) | | (3 | ) | | (67 | ) |
Ending balance, September 30, 2017 | $ | 1,094 |
| | $ | 120 |
| | $ | 1,214 |
| |
Ending balance, March 31, 2020 | | $ | 1,938 |
| | $ | 391 |
| | $ | 2,329 |
|
* Includes increase in unrealized gains of $52381 million relating to Level 3 assets still held at September 30, 2017March 31, 2020.
The following table presents a reconciliationrollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2017March 31, 2020.
| | | Level 3 Fair Value Liability Measurements at | Level 3 Fair Value Liability Measurements at |
| September 30, 2017 | March 31, 2020 |
| Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities | Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities |
| (In millions) | (In millions) |
| | | | | | | | | | |
Balance, June 30, 2017 | $ | 32 |
| | $ | 154 |
| | $ | 186 |
| |
Balance, December 31, 2019 | | $ | 27 |
| | $ | 199 |
| | $ | 226 |
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold* | (9 | ) | | 82 |
| | 73 |
| 3 |
| | 205 |
| | 208 |
|
Purchases | 2 |
| | — |
| | 2 |
| 6 |
| | — |
| | 6 |
|
Sales | (5 | ) | | — |
| | (5 | ) | (16 | ) | | — |
| | (16 | ) |
Settlements | — |
| | (123 | ) | | (123 | ) | — |
| | (122 | ) | | (122 | ) |
Transfers into Level 3 | — |
| | 35 |
| | 35 |
| — |
| | 36 |
| | 36 |
|
Transfers out of Level 3 | — |
| | (3 | ) | | (3 | ) | — |
| | (9 | ) | | (9 | ) |
Ending balance, September 30, 2017 | $ | 20 |
| | $ | 145 |
| | $ | 165 |
| |
Ending balance, March 31, 2020 | | $ | 20 |
| | $ | 309 |
| | $ | 329 |
|
* Includes increase in unrealized losses of $79210 million relating to Level 3 liabilities still held at September 30, 2017March 31, 2020.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
The following table presents a reconciliationrollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2016March 31, 2019.
| | | Level 3 Fair Value Asset Measurements at | Level 3 Fair Value Asset Measurements at |
| September 30, 2016 | March 31, 2019 |
| Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets | Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets |
| (In millions) | (In millions) |
| | | | | | | | | | |
Balance, June 30, 2016 | $ | 1,099 |
| | $ | 153 |
| | $ | 1,252 |
| |
Balance, December 31, 2018 | | $ | 1,515 |
| | $ | 155 |
| | $ | 1,670 |
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | (97 | ) | | 76 |
| | (21 | ) | (27 | ) | | 144 |
| | 117 |
|
Purchases | 2,523 |
| | — |
| | 2,523 |
| 2,689 |
| | — |
| | 2,689 |
|
Sales | (2,529 | ) | | — |
| | (2,529 | ) | (2,824 | ) | | — |
| | (2,824 | ) |
Settlements | — |
| | (85 | ) | | (85 | ) | — |
| | (103 | ) | | (103 | ) |
Transfers into Level 3 | 206 |
| | 66 |
| | 272 |
| 297 |
| | 23 |
| | 320 |
|
Transfers out of Level 3 | (38 | ) | | (6 | ) | | (44 | ) | (139 | ) | | (7 | ) | | (146 | ) |
Ending balance, September 30, 2016 | $ | 1,164 |
| | $ | 204 |
| | $ | 1,368 |
| |
Ending balance, March 31, 2019 | | $ | 1,511 |
| | $ | 212 |
| | $ | 1,723 |
|
* Includes increase in unrealized gains of $22$210 million relating to Level 3 assets still held at September 30, 2016March 31, 2019.
The following table presents a reconciliationrollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2016March 31, 2019.
| | | Level 3 Fair Value Liability Measurements at | Level 3 Fair Value Liability Measurements at |
| September 30, 2016 | March 31, 2019 |
| Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities | Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities |
| (In millions) | (In millions) |
| | | | | | | | | | |
Balance, June 30, 2016 | $ | 12 |
| | $ | 500 |
| | $ | 512 |
| |
Balance, December 31, 2018 | | $ | 18 |
| | $ | 245 |
| | $ | 263 |
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold* | 3 |
| | (1 | ) | | 2 |
| — |
| | 18 |
| | 18 |
|
Purchases | 3 |
| | — |
| | 3 |
| 4 |
| | — |
| | 4 |
|
Sales | (3 | ) | | — |
| | (3 | ) | (6 | ) | | — |
| | (6 | ) |
Settlements | — |
| | (247 | ) | | (247 | ) | — |
| | (99 | ) | | (99 | ) |
Transfers into Level 3 | — |
| | 33 |
| | 33 |
| — |
| | 7 |
| | 7 |
|
Transfers out of Level 3 | — |
| | (167 | ) | | (167 | ) | — |
| | (28 | ) | | (28 | ) |
Ending balance, September 30, 2016 | $ | 15 |
| | $ | 118 |
| | $ | 133 |
| |
Ending balance, March 31, 2019 | | $ | 16 |
| | $ | 143 |
| | $ | 159 |
|
* Includes increase in unrealized losses of $1$20 million relating to Level 3 liabilities still held at September 30, 2016March 31, 2019.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017.
|
| | | | | | | | | | | |
| Level 3 Fair Value Asset Measurements at |
| September 30, 2017 |
| Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets |
| (In millions) |
| | | | | |
Balance, December 31, 2016 | $ | 1,322 |
| | $ | 140 |
| | $ | 1,462 |
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | (55 | ) | | 194 |
| | 139 |
|
Purchases | 8,369 |
| | — |
| | 8,369 |
|
Sales | (8,526 | ) | | — |
| | (8,526 | ) |
Settlements | — |
| | (291 | ) | | (291 | ) |
Transfers into Level 3 | 37 |
| | 111 |
| | 148 |
|
Transfers out of Level 3 | (53 | ) | | (34 | ) | | (87 | ) |
Ending balance, September 30, 2017 | $ | 1,094 |
| | $ | 120 |
| | $ | 1,214 |
|
* Includes increase in unrealized gains of $18 million relating to Level 3 assets still held at September 30, 2017.
The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017.
|
| | | | | | | | | | | |
| Level 3 Fair Value Liability Measurements at |
| September 30, 2017 |
| Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities |
| (In millions) |
| | | | | |
Balance, December 31, 2016 | $ | 30 |
| | $ | 142 |
| | $ | 172 |
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold* | (4 | ) | | 201 |
| | 197 |
|
Purchases | 19 |
| | — |
| | 19 |
|
Sales | (25 | ) | | — |
| | (25 | ) |
Settlements | — |
| | (289 | ) | | (289 | ) |
Transfers into Level 3 | — |
| | 108 |
| | 108 |
|
Transfers out of Level 3 | — |
| | (17 | ) | | (17 | ) |
Ending balance, September 30, 2017 | $ | 20 |
| | $ | 145 |
| | $ | 165 |
|
* Includes increase in unrealized losses of $204 million relating to Level 3 liabilities still held at September 30, 2017.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2016.
|
| | | | | | | | | | | |
| Level 3 Fair Value Asset Measurements at |
| September 30, 2016 |
| Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets |
| (In millions) |
| | | | | |
Balance, December 31, 2015 | $ | 1,004 |
| | $ | 243 |
| | $ | 1,247 |
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | (210 | ) | | 171 |
| | (39 | ) |
Purchases | 7,565 |
| | — |
| | 7,565 |
|
Sales | (7,272 | ) | | — |
| | (7,272 | ) |
Settlements | — |
| | (302 | ) | | (302 | ) |
Transfers into Level 3 | 206 |
| | 132 |
| | 338 |
|
Transfers out of Level 3 | (129 | ) | | (40 | ) | | (169 | ) |
Ending balance, September 30, 2016 | $ | 1,164 |
| | $ | 204 |
| | $ | 1,368 |
|
*Includes increase in unrealized gains of $36 million relating to Level 3 assets still held at September 30, 2016.
The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2016.
|
| | | | | | | | | | | |
| Level 3 Fair Value Liability Measurements at |
| September 30, 2016 |
| Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities |
| (In millions) |
| | | | | |
Balance, December 31, 2015 | $ | 16 |
| | $ | 113 |
| | $ | 129 |
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold* | 5 |
| | 494 |
| | 499 |
|
Purchases | 5 |
| | — |
| | 5 |
|
Sales | (11 | ) | | — |
| | (11 | ) |
Settlements | — |
| | (392 | ) | | (392 | ) |
Transfers into Level 3 | — |
| | 115 |
| | 115 |
|
Transfers out of Level 3 | — |
| | (212 | ) | | (212 | ) |
Ending balance, September 30, 2016 | $ | 15 |
| | $ | 118 |
| | $ | 133 |
|
*Includes increase in unrealized losses of $499 million relating to Level 3 assets still held at September 30, 2016.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
For all periods presented, the Company had no transfers between Level 1 and 2. Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold. Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.
In some cases, the price components that result in differences between exchange-traded prices and local prices for inventories and commodity purchase and sale contracts are observable based upon available quotations for these pricing components, and in some cases, the differences are unobservable. These price components primarily include transportation costs and other adjustments required due to location, quality, or other contract terms. In the table below, these other adjustments are referred to as Basis.basis. The changes in unobservable price components are determined by specific local supply and demand characteristics at each facility and the overall market. Factors such as substitute products, weather, fuel costs, contract terms, and futures prices also impact the movement of these unobservable price components.
The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of September 30, 2017March 31, 2020 and December 31, 20162019. The Company’s Level 3 measurements may include Basisbasis only, transportation cost only, or both price components. As an example, for Level 3 inventories with Basis,basis, the unobservable component as of September 30, 2017March 31, 2020 is a weighted average 16.2%14.9% of the total price for assets and 62.7%11.5% of the total price for liabilities.
|
| | | | | | | | | | | |
| Weighted Average % of Total Price |
| March 31, 2020 | | December 31, 2019 |
Component Type | Assets | | Liabilities | | Assets | | Liabilities |
Inventories and Related Payables | | | | | | | |
Basis | 14.9 | % | | 11.5 | % | | 28.2 | % | | 14.7 | % |
Transportation cost | 14.2 | % | | — | % | | 24.7 | % | | — | % |
| | | | | | | |
Commodity Derivative Contracts | | | | | | | |
Basis | 16.0 | % | | 21.1 | % | | 16.0 | % | | 20.2 | % |
Transportation cost | 11.9 | % | | 8.1 | % | | 9.7 | % | | 3.1 | % |
|
| | | | | | | | | | | |
| Weighted Average % of Total Price |
| September 30, 2017 | | December 31, 2016 |
Component Type | Assets | | Liabilities | | Assets | | Liabilities |
Inventories and Related Payables | | | | | | | |
Basis | 16.2 | % | | 62.7 | % | | 16.5 | % | | 67.1 | % |
Transportation cost | 18.2 | % | | — | % | | 8.3 | % | | — |
|
| | | | | | | |
Commodity Derivative Contracts | | | | | | | |
Basis | 22.3 | % | | 21.3 | % | | 16.9 | % | | 27.0 | % |
Transportation cost | 12.9 | % | | 12.3 | % | | 11.6 | % | | 13.4 | % |
In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, absent other corroborating evidence, the Company considers these price quotes as 100% unobservable and, therefore, the fair value of these items is reported in Level 3.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities |
Derivatives Not Designated as Hedging Instruments
The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodityproduct inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies. The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, are stated at market value and inventories of certain merchandisable agricultural commodities,product inventories, which include amounts acquired under deferred pricing contracts, are stated at market value. Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
The following table sets forth the fair value of derivatives not designated as hedging instruments as of September 30, 2017March 31, 2020 and December 31, 20162019.
| | | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
| Assets | | Liabilities | | Assets | | Liabilities | Assets | | Liabilities | | Assets | | Liabilities |
| (In millions) | (In millions) |
| | | | | | | | | | | | | | |
Foreign Currency Contracts | $ | 81 |
| | $ | 119 |
| | $ | 102 |
| | $ | 90 |
| $ | 340 |
| | $ | 624 |
| | $ | 125 |
| | $ | 120 |
|
Commodity Contracts | 360 |
| | 445 |
| | 511 |
| | 561 |
| 873 |
| | 789 |
| | 478 |
| | 574 |
|
Total | $ | 441 |
| | $ | 564 |
| | $ | 613 |
| | $ | 651 |
| $ | 1,213 |
| | $ | 1,413 |
| | $ | 603 |
| | $ | 694 |
|
The following table setstables set forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2017March 31, 2020 and 20162019.
|
| | | | | | | |
| Three months ended September 30, |
| 2017 | | 2016 |
| (In millions) |
Foreign Currency Contracts | |
| | |
|
Revenues | $ | (8 | ) | | $ | (19 | ) |
Cost of products sold | 52 |
| | 1 |
|
Other income (expense) – net | 52 |
| | (3 | ) |
| | | |
Commodity Contracts | |
| | |
|
Cost of products sold | 34 |
| | 369 |
|
Total gain (loss) recognized in earnings | $ | 130 |
| | $ | 348 |
|
|
| | | | | | | | | | | | | | | |
| | | | | Other expense (income) - net | | |
| | | Cost of products sold | | | |
(In millions) | Revenues | | | | |
Three Months Ended March 31, 2020 | | |
| | | | |
Consolidated Statement of Earnings | $ | 14,970 |
| | $ | 14,019 |
| | $ | (32 | ) | | |
| | | | | | | |
Pre-tax gains (losses) on: | | | | | | | |
Foreign Currency Contracts | $ | 35 |
| | $ | (585 | ) | | $ | 124 |
| | |
Commodity Contracts | — |
| | 622 |
| | 55 |
| | |
Total gain (loss) recognized in earnings | $ | 35 |
| | $ | 37 |
| | $ | 179 |
| | $ | 251 |
|
| | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | |
Consolidated Statement of Earnings | $ | 15,304 |
| | $ | 14,376 |
| | $ | (8 | ) | | |
| | | | | | | |
Pre-tax gains (losses) on: | | | | | | | |
Foreign Currency Contracts | $ | 8 |
| | $ | — |
| | $ | (30 | ) | | |
Commodity Contracts | — |
| | 120 |
| | — |
| | |
Total gain (loss) recognized in earnings | $ | 8 |
| | $ | 120 |
| | $ | (30 | ) | | $ | 98 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
| | | | | | | |
Note 6. | Derivative Instruments and Hedging Activities (Continued) | | | | | | |
|
| | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (In millions) |
Foreign Currency Contracts | |
| | |
|
Revenues | $ | (16 | ) | | $ | (32 | ) |
Cost of products sold | 82 |
| | 263 |
|
Other income (expense) – net | 186 |
| | (108 | ) |
| | | |
Commodity Contracts | |
| | |
|
Cost of products sold | $ | 294 |
| | $ | (266 | ) |
Total gain (loss) recognized in earnings | $ | 546 |
| | $ | (143 | ) |
Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Changes in the market value of inventories of certain merchandisable agricultural commodities,product inventories, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately.immediately as a component of cost of products sold.
Derivatives Designated as Cash Flow, or Fair Value or Net Investment Hedging Strategies
As of September 30, 2017March 31, 2020 and December 31, 20162019, the Company hashad certain derivatives designated as cash flow, and fair value, and net investment hedges.
For derivative instruments that are designated and qualify as fair value hedges, changes in the fair value of the hedging instrument and changes in the fair value of the hedged item are recognized in the consolidated statement of earnings during the period.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
The Company uses interest rate swaps designated as fair value hedges to protect the fair value of $496 million in fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness.debt. At September 30, 2017March 31, 2020 and December 31, 2019, the Company has $2had $8 million and $3 million in other current assets, respectively, representing the fair value of the interest rate swaps and a corresponding increase in the underlying debt for the same amount with no net impact to earnings.
For derivatives instruments that are designated and qualify as net investment hedges, foreign exchange gains and losses related to changes in foreign currency exchange rates are deferred in AOCI until the underlying investment is divested.
The Company uses cross-currency swaps and foreign exchange forwards designated as net investment hedges to protect the Company’s investment in a foreign subsidiary against changes in foreign currency exchange rates. The Company executed USD-fixed to Euro-fixed cross-currency swaps with an aggregate notional amount of $1.2 billion as of March 31, 2020 and December 31, 2019 and foreign exchange forwards with an aggregate notional amount of $282 million as of March 31, 2020.
As of March 31, 2020 and December 31, 2019, the Company had after-tax gains of $75 million and $6 million in AOCI, respectively, related to foreign exchange gains and losses from these net investment hedge transactions. The amount is deferred in AOCI until the underlying investment is divested.
For derivative instruments that are designated and qualify as highly-effective cash flow hedges (i.e., hedging the exposure to variability in expected future cash flow that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) (“AOCI”) and as an operating activity in the statement of cash flows and reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings. Hedge components excluded from the assessment of effectiveness and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period.
The Company uses interest rate swaps designated as cash flow hedges to hedge the forecasted interest payments on certain letters of credit from banks. The terms of the interest rate swaps match the terms of the forecasted interest payments. The deferred gains and losses are recognized in other (income) expense - net over the period in which the related interest payments are paid to the banks.
The Company also uses swap locks designated as cash flow hedges to hedge the changes in the forecasted interest payments due to changes in the benchmark rate leading up to future bond issuance dates. The terms of the swap locks match the terms of the forecasted interest payments. The deferred gains and losses will be recognized in interest expense over the period in which the related interest payments will be paid. During the quarter ended March 31, 2020, the Company executed swap locks maturing on various dates with an aggregate notional amount of $550 million.
As of March 31, 2020 and December 31, 2019, the Company had after-tax losses of $50 million and $43 million in AOCI, respectively, related to the interest rate swaps and the swap locks. The Company expects to recognize this amount in its consolidated statement of earnings during the life of the instruments.
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges. Assuming normal market conditions, theThe changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Once the hedged item is recognized in earnings, the gains/gains and losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable. As of September 30, 2017March 31, 2020 and December 31, 2019, the Company has $12 million ofhad after-tax losses of $50 million and $5 million in AOCI, respectively, related to gains and losses from commodity cash flow hedge transactions.these programs. The Company expects to recognize $12$50 million of thesethe March 31, 2020 after-tax losses in its consolidated statement of earnings during the next 12 months.
The Company uses futures or options contracts to fixhedge the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn. The Company’s corn processing plants currently grind approximately 72 million bushels of corn per month. During the past 12 months, the Company hedged between 19%20% and 62%60% of its monthly anticipated grind. At September 30, 2017March 31, 2020, the Company hashad designated hedges representing between 6%1% and 41%28% of its anticipated monthly grind of corn for the next 12 months.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
The Company, from time to time, also uses futures, options, and swaps to fixhedge the sales price of certain ethanol sales contracts. The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol. During the past 12 months, the Company hedged between 10 million and 6691 million gallons of ethanol sales per month under these programs. At September 30, 2017,March 31, 2020, the Company hashad designated hedges representing between 0 and 1 million gallons of ethanol sales per month over the next 3 months.
The Company uses futures and options contracts to hedge the purchase price of anticipated volumes of soybeans to be purchased and processed in a future month for certain of its U.S. soybean crush facilities. The Company also uses futures or options contracts to hedge the sales prices of anticipated soybean meal and soybean oil sales proportionate to the soybean crushing process at these facilities. During the past 12 months, the Company hedged between 79% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities. At March 31, 2020, the Company had designated hedges representing between 1% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities over the next 12 months.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2017March 31, 2020 and December 31, 20162019.
| | | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
| Assets | | Liabilities | | Assets | | Liabilities | Assets | | Liabilities | | Assets | | Liabilities |
| (In millions) | (In millions) |
Foreign Currency Contracts | | $ | 99 |
| | $ | — |
| | $ | 13 |
| | $ | 5 |
|
Interest Rate Contracts | $ | 2 |
| | $ | — |
| | $ | 11 |
| | $ | — |
| 14 |
| | 56 |
| | 3 |
| | 43 |
|
Total | $ | 2 |
| | $ | — |
| | $ | 11 |
| | $ | — |
| $ | 113 |
| | $ | 56 |
| | $ | 16 |
| | $ | 48 |
|
The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2017March 31, 2020 and 20162019.
| | | | Three months ended | | | Cost of products sold | | Interest expense | | Other expense (income) - net | | |
| Consolidated Statement of Earnings Locations | | September 30, | |
| | 2017 | | 2016 | |
(In millions) | | Revenues | | Cost of products sold | | Interest expense | | Other expense (income) - net | | |
Three Months Ended March 31, 2020 | | | |
|
Consolidated Statement of Earnings | | $ | 14,970 |
| | $ | 14,019 |
| | $ | 83 |
| | $ | (32 | ) | | |
| | | (In millions) | | | | | | | | | |
Effective amounts recognized in earnings | | | | | | | | | | | | | | |
Foreign Currency Contracts | Other income/expense – net | | $ | — |
| | $ | (3 | ) | |
Pre-tax gains (losses) on: | | | | | | | | | | |
Commodity Contracts | | 5 |
| | (24 | ) | | — |
| | — |
| | |
Interest Contracts | Interest expense | | — |
| | (2 | ) | — |
| | — |
| | — |
| | (25 | ) | | |
Total gain (loss) recognized in earnings | | $ | 5 |
| | $ | (24 | ) | | $ | — |
| | $ | (25 | ) | | $ | (44 | ) |
| | | | | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | | | | |
Consolidated Statement of Earnings | | $ | 15,304 |
| | $ | 14,376 |
| | $ | 101 |
| | $ | (8 | ) | | |
| | | | | | | | | | |
Effective amounts recognized in earnings | | | | | | | | | | |
Pre-tax gains (losses) on: | | | | | | | | | | |
Commodity Contracts | Revenues | | — |
| | (9 | ) | $ | (13 | ) | | $ | 5 |
| | $ | — |
| | $ | — |
| | |
| Cost of products sold | | (15 | ) | | (37 | ) | |
Ineffective amount recognized in earnings | | | | | |
Commodity Contracts | Revenues | | — |
| | (1 | ) | |
| Cost of products sold | | (4 | ) | | 1 |
| |
Total amount recognized in earnings | | | $ | (19 | ) | | $ | (51 | ) | |
Total gain (loss) recognized in earnings | | $ | (13 | ) | | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | (8 | ) |
|
| | | | | | | | | |
| | | Nine months ended |
| Consolidated Statement of Earnings Locations | | September 30, |
| | 2017 | | 2016 |
| | | (In millions) |
Effective amounts recognized in earnings | | | | | |
Foreign Currency Contracts | Other income/expense – net | | $ | (2 | ) | | $ | (25 | ) |
Interest Contracts | Interest expense | | — |
| | (2 | ) |
Commodity Contracts | Revenues | | — |
| | (14 | ) |
| Cost of products sold | | (20 | ) | | (61 | ) |
Ineffective amount recognized in earnings | | | | | |
Commodity Contracts | Revenues | | 4 |
| | — |
|
| Cost of products sold | | 5 |
| | 5 |
|
Total amount recognized in earnings | | | $ | (13 | ) | | $ | (97 | ) |
Hedge ineffectiveness for commodity contracts results when the change in the price of the underlying commodity in a specific cash market differs from the change in the price of the derivative financial instrument used to establish the hedging relationship. As an example, if the change in the price of a corn futures contract is strongly correlated to the change in cash price paid for corn, the gain or loss on the derivative instrument is deferred and recognized at the time the corn grind occurs. If the change in price of the derivative does not strongly correlate to the change in the cash price of corn, in the same example, some portion or all of the derivative gains or losses may be required to be recognized in earnings prior to when the corn grind occurs.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
Other Net Investment Hedging Strategies
On June 24, 2015, the Company issued €500 million aggregate principal amount of Floating Rate Notes and €600 million aggregate principal amount of 1.75% Notes (collectively, the “Notes”). The Company has designated €1.1€1.4 billion and €1.7 billion of the Notesits outstanding long-term debt and commercial paper borrowings at March 31, 2020 and December 31, 2019, respectively, as a hedgehedges of its net investment in a foreign subsidiary. As of September 30, 2017,March 31, 2020 and December 31, 2019, the Company has $47had after-tax gains of $55 million of after-tax lossesand $7 million in AOCI, respectively, related to foreign exchange gains and losses from thethese net investment hedge transaction.transactions. The amount is deferred in AOCI until the underlying investment is divested.
| |
Note 7. | Marketable Securities |
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (In millions) |
| | | | | | | |
September 30, 2017 | | | | | | | |
United States government obligations | | | | | | | |
Maturity less than 1 year | $ | 259 |
| | $ | — |
| | $ | — |
| | $ | 259 |
|
Maturity 1 to 5 years | 117 |
| | — |
| | — |
| | 117 |
|
Corporate debt securities | |
| | |
| | |
| | |
|
Maturity less than 1 year | 2 |
| | — |
| | — |
| | 2 |
|
Maturity 1 to 5 years | 90 |
| | — |
| | — |
| | 90 |
|
| $ | 468 |
| | $ | — |
| | $ | — |
| | $ | 468 |
|
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (In millions) |
| | | | | | | |
December 31, 2016 | | | | | | | |
United States government obligations | | | | | | | |
Maturity less than 1 year | $ | 287 |
| | $ | — |
| | $ | — |
| | $ | 287 |
|
Maturity 1 to 5 years | 121 |
| | — |
| | (1 | ) | | 120 |
|
Corporate debt securities | |
| | |
| | |
| | |
|
Maturity less than 1 year | 1 |
| | — |
| | — |
| | 1 |
|
Maturity 1 to 5 years | 66 |
| | — |
| | — |
| | 66 |
|
Other debt securities | |
| | |
| | |
| | |
|
Maturity less than 1 year | 8 |
| | — |
| | — |
| | 8 |
|
Equity securities | |
| | |
| | |
| | |
|
Available-for-sale | 1 |
| | — |
| | — |
| | 1 |
|
| $ | 484 |
| | $ | — |
| | $ | (1 | ) | | $ | 483 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 8.7. Other Current Assets
The following table sets forth the items in other current assets:
|
| | | | | | | |
| March 31, | | December 31, |
| 2020 | | 2019 |
| (In millions) |
Unrealized gains on derivative contracts | $ | 1,326 |
| | $ | 619 |
|
Deferred receivables consideration | 496 |
| | 446 |
|
Customer omnibus receivable | 997 |
| | 1,014 |
|
Financing receivables - net (1) | 458 |
| | 395 |
|
Insurance premiums receivable | 21 |
| | 41 |
|
Prepaid expenses | 302 |
| | 318 |
|
Biodiesel tax credit | 75 |
| | 541 |
|
Tax receivables | 576 |
| | 579 |
|
Non-trade receivables (2) | 401 |
| | 369 |
|
Other current assets | 395 |
| | 278 |
|
| $ | 5,047 |
| | $ | 4,600 |
|
| | | |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
| (In millions) |
| | | |
Unrealized gains on derivative contracts | $ | 443 |
| | $ | 624 |
|
Deferred receivables consideration | 399 |
| | 540 |
|
Customer omnibus receivable | 474 |
| | 521 |
|
Financing receivables - net (1) | 407 |
| | 373 |
|
Insurance premiums receivable | 137 |
| | 648 |
|
Prepaid expenses | 248 |
| | 268 |
|
Tax receivables | 423 |
| | 480 |
|
Non-trade receivables (2) | 374 |
| | 478 |
|
Other current assets | 179 |
| | 451 |
|
| $ | 3,084 |
| | $ | 4,383 |
|
(1) The Company provides financing to certain suppliers, primarily Brazilian farmers, to finance a portion of the suppliers’ production costs. The amounts are reported net of allowances of $6$5 million and $7$3 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. Interest earned on financing receivables of $6 million and $18$8 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $5 million and $17 million for the three and nine months ended September 30, 2016, respectively,2019, is included in interest income in the consolidated statements of earnings.
(2) Non-trade receivables included $75$78 million and $223$81 million of reinsurance recoverables as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 9.8. Accrued Expenses and Other Payables
The following table sets forth the items in accrued expenses and other payables:
|
| | | | | | | |
| March 31, | | December 31, |
| 2020 | | 2019 |
| (In millions) |
Unrealized losses on derivative contracts | $ | 1,469 |
| | $ | 742 |
|
Accrued compensation | 238 |
| | 300 |
|
Income tax payable | 122 |
| | 72 |
|
Other taxes payable | 117 |
| | 120 |
|
Biodiesel tax credit payable | 329 |
| | 332 |
|
Insurance claims payable | 299 |
| | 284 |
|
Contract liability | 512 |
| | 604 |
|
Current maturities - operating leases | 218 |
| | 215 |
|
Other accruals and payables | 905 |
| | 1,088 |
|
| $ | 4,209 |
| | $ | 3,757 |
|
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
| (In millions) |
| | | |
Unrealized losses on derivative contracts | $ | 564 |
| | $ | 651 |
|
Reinsurance premiums payable | 104 |
| | 479 |
|
Insurance claims payables | 260 |
| | 373 |
|
Deferred income | 570 |
| | 1,065 |
|
Other accruals and payable | 1,050 |
| | 1,414 |
|
| $ | 2,548 |
| | $ | 3,982 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 10.9. | Debt and Financing Arrangements |
On September 14, 2017,March 27, 2020, the Company issued $500 million$0.5 billion and $1.0 billion aggregate principal amountamounts of 3.75% notes2.75% Notes due in 2047. Proceeds2025 and 3.25% Notes due in 2030, respectively. Net proceeds before expenses for the 2.75% and 3.25% Notes were $493 million.$492 million and $988 million, respectively.
On September 29, 2017, the Company redeemed $559 million aggregate principal amount of 5.45% notes due onAt March 15, 2018 and incurred an early extinguishment charge of $11 million in the quarter ended September 30, 2017.
At September 30, 2017,31, 2020, the fair value of the Company’s long-term debt exceeded the carrying value by $1.1$1.6 billion,, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).
At September 30, 2017,March 31, 2020, the Company had lines of credit, including the accounts receivable securitization programs described below, totaling $6.9$10.7 billion,, of which $4.8$5.9 billion was unused. Of the Company’s total lines of credit, $4.0$5.0 billion support a supported the combined U.S. and European commercial paper borrowing facility,programs, against which there was $0.6$2.2 billion of commercial paper outstanding at September 30, 2017.March 31, 2020.
The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.71.9 billion in funding resulting from the sale of accounts receivable. Asreceivable, of September 30, 2017, the Company utilized $1.4which $0.5 billion was unused as of its facility under the ProgramsMarch 31, 2020 (see Note 16 for more information onabout the Programs).
The Company’s effective tax rate for the three and nine months ended September 30, 2017March 31, 2020 was 13.3% and 24.0%, respectively,a benefit of 4.3% compared to 28.3% and 27.7%an expense of 25.7% for the three and nine months ended September 30, 2016, respectively.March 31, 2019. The change in the ratesrate was primarily due to the impact of changesU.S. tax credits signed into law in December 2019, including a $73 million discrete tax benefit related to 45G railroad credits recognized in the quarter ended March 31, 2020, which are now reflected in the 2020 projected effective tax rate. The prior quarter rate also included unfavorable discrete tax items including the favorable resolution of an uncertain tax positionprimarily related to a 2014 acquisitionU.S. tax reform transition tax adjustments.
In March 2020, the Coronavirus Aid Relief and return to provisionEconomic Security Act (CARES Act) was signed into law in the current quarter, partially offset by changes inUnited States. The Company does not expect the forecasted geographic mixprovisions of pre-tax earnings and the expiration of U.S.CARES Act to have a material impact on the annual effective tax credits, includingrate for the biodiesel credit, at the end of 2016.year ending December 31, 2020.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 10. Income Taxes (Continued)
The Company is subject to income taxation and routine examination by domestic and foreign tax authoritiesexaminations in many jurisdictions around the world and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential tax owed by the Company in accordance with applicable accounting standards. Resolution of the related tax positions, through negotiationnegotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with the applicable accounting standard. However,and the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period.
The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM(“ADM do Brasil)Brasil”), has received three3 separate tax assessments from the Brazilian Federal Revenue Service(BFRS)(“BFRS”)challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007. AsThese assessments totaled approximately $81 million in tax and $239 million in interest and penalties as of September 30, 2017, these assessments, updatedMarch 31, 2020 (adjusted for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $490 millionrates). The statute of limitations for tax years 2005 and 2008 to 20112008-2011 has expired. The Company does not expect to receive any additional tax assessments.assessments with respect to this issue.
ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculationscalculation of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Income Taxes (Continued)
ADM do Brasil filed an administrative appeal for each of the assessments. TheIn January 2020, the second-level administrative appeal panel found in favor of the BFRS on these assessments and ADM do Brasil filed a second level administrative appeal. The second administrative appeal panel continues to conduct customary procedural activities, including ongoing dialogue withand cancelled the assessments. While it is unclear if the BFRS auditor. If ADM do Brasil continues to be unsuccessful in the administrative appellate process,will appeal, the Company intends to file appealsvigorously defend its position against any appeal which could be made to the administrative panel or to a superior tax chamber. The Company expects to know if the ruling will be appealed during the first half of 2020. Based upon the view of external counsel, it is unlikely that the BFRS will be successful in appealing the Brazilian federal courts.matter. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties.
The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2011.
The Company’s subsidiariessubsidiary in Argentina, haveADM Agro SRL (formerly ADM Argentina SA and Alfred C. Toepfer Argentina SRL), received tax assessments challenging transfer prices used to price grain exports totaling $128for the tax years 1999 through 2011. As of March 31, 2020, these assessments totaled $13 million (inclusive of in tax and $51 million in interest and adjusted(adjusted for variation in currency exchange rates) for the tax years 2004 through 2010.. The Argentine tax authorities have been conductingconducted a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While theThe Company strongly believes that it has complied with all Argentine tax laws, itlaws. To date, the Company has not received assessments for closed years subsequent to 2011. While the statute of limitations has expired for tax years 2012 and 2013, the Company cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2010,2013, and estimates that these potential assessments wouldcould be approximately $213$40 million (as of September 30, 2017in tax and subject to$23 million in interest (adjusted for variation in currency exchange rates)rates as of March 31, 2020). The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2010.2013.
In accordance with the accounting requirements for uncertain tax positions, the Company has not recorded an uncertain tax liability for these assessments because it has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits and because the taxing jurisdictions’ processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company’s consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in financial impacts of up to the entire amount of these assessments.
Archer-Daniels-Midland Company
The
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 10. Income Taxes (Continued)
In 2014, the Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., has received a tax assessment totaling $106 million from the Netherlands tax authority challenging the transfer pricing aspects of a 2009 business reorganization, which involved two of its subsidiary companies in the Netherlands. The Company has appealed theAs of March 31, 2020, this assessment was $89 million in tax and carefully evaluated the underlying transactions and has concluded that the amount of the gain recognized on the reorganization$34 million in interest (adjusted for tax purposes was appropriate. Whilevariation in currency exchange rates). In September 2019, the Company plansreceived an interim decision on its appeal which directed the parties to vigorously defend its position againstwork toward a settlement. As of March 31, 2020, no agreement was reached. On April 23, 2020, the assessment, it has accruedcourt issued an amount it believes wouldunfavorable ruling and directed the parties to explore the possibility of settling, noting that any unresolved valuation questions may be the likely outcome of the litigation. The Company’s defense of the judicial appealassigned to a third party expert to establish a valuation. Subsequent appeals may take an extended period of time and could result in additional financial impacts of up to the entire amount of thisthe assessment. The Company has carefully evaluated the underlying transactions and has concluded that the amount of gain recognized on the reorganization for tax purposes was appropriate. As of March 31, 2020, the Company has accrued its best estimate of what it believes will be the likely outcome of the litigation and will vigorously defend its position against the assessment.
Note 11. Leases
Lessee Accounting
The Company leases certain transportation equipment, plant equipment, office equipment, land, buildings, and storage facilities. Most leases include options to renew, with renewal terms that can extend the lease term from 1 month to 49 years. Certain leases also include index and non-index escalation clauses and options to purchase the leased property. Leases accounted for as finance leases were immaterial at March 31, 2020.
As an accounting policy election, the Company does not apply the recognition requirements of Topic 842 to short-term leases in all of its underlying asset categories. The Company recognizes short-term lease payments in earnings on a straight-line basis over the lease term, and variable lease payments in the period in which the obligation for those payments is incurred.
The following table sets forth the amounts relating to the Company’s total lease cost and other information.
Archer-Daniels-Midland |
| | | | | | |
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| (In millions) |
Lease cost: | | |
Operating lease cost | $ | 72 |
| $ | 73 |
|
Short-term lease cost | 29 |
| 23 |
|
Total lease cost | $ | 101 |
| $ | 96 |
|
| | |
Other information: | | |
Operating lease liability principal payments | $ | 70 |
| $ | 40 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 25 |
| $ | 61 |
|
| | |
| March 31, 2020 | March 31, 2019 |
Weighted-average remaining lease term - operating leases (in years) | 7 |
| 7 |
|
Weighted average discount rate - operating leases | 4.5 | % | 4.6 | % |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Leases (Continued)
Below is a tabular disclosure of the future annual undiscounted cash flows for operating lease liabilities.
|
| | | |
| Undiscounted |
| Cash Flows |
| (In millions) |
Remainder of 2020 | $ | 195 |
|
2021 | 230 |
|
2022 | 199 |
|
2023 | 154 |
|
2024 | 96 |
|
2025 | 55 |
|
Thereafter | 233 |
|
Total | 1,162 |
|
| |
Less interest (1) | (175 | ) |
Lease liability | $ | 987 |
|
(1) Calculated using the implicit rate of the lease, if available, or the incremental borrowing rate that is appropriate for the tenor and geography of the lease.
As of March 31, 2020 and December 31, 2019, the Company had right-of-use assets included in Other assets of $965 million and $971 million, respectively, current lease liabilities included in Accrued expenses and other payables of $218 million and $215 million, respectively, and non-current lease liabilities included in Other long-term liabilities of $769 million and $781 million, respectively, in its consolidated balance sheets.
Note 12. Accumulated Other Comprehensive Income (AOCI)
The following tables set forth the changes in AOCI by component for the three and nine months ended September 30, 2017March 31, 2020 and the reclassifications out of AOCI for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
| Foreign Currency Translation Adjustment | | Deferred Gain (Loss) on Hedging Activities | | Pension Liability Adjustment | | Unrealized Gain (Loss) on Investments | | Total |
| (In millions) |
Balance at December 31, 2019 | $ | (2,152 | ) | | $ | (12 | ) | | $ | (268 | ) | | $ | 27 |
| | $ | (2,405 | ) |
Other comprehensive income (loss) before reclassifications | (245 | ) | | (126 | ) | | 4 |
| | 6 |
| | (361 | ) |
Amounts reclassified from AOCI | — |
| | 44 |
| | — |
| | — |
| | 44 |
|
Tax effect | (42 | ) | | 14 |
| | (12 | ) | | (2 | ) | | (42 | ) |
Net of tax amount | (287 | ) | | (68 | ) | | (8 | ) | | 4 |
| | (359 | ) |
Balance at March 31, 2020 | $ | (2,439 | ) | | $ | (80 | ) | | $ | (276 | ) | | $ | 31 |
| | $ | (2,764 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2017 |
| Foreign Currency Translation Adjustment | | Deferred Gain (Loss) on Hedging Activities | | Pension Liability Adjustment | | Unrealized Gain (Loss) on Investments | | Total |
| (In millions) |
| | | | | | | | | |
Balance at June 30, 2017 | $ | (1,684 | ) | | $ | 39 |
| | $ | (510 | ) | | $ | 14 |
| | $ | (2,141 | ) |
Other comprehensive income (loss) before reclassifications | 244 |
| | (41 | ) | | 160 |
| | 6 |
| | 369 |
|
Amounts reclassified from AOCI | — |
| | 15 |
| | 14 |
| | — |
| | 29 |
|
Tax effect | (40 | ) | | 6 |
| | (66 | ) | | — |
| | (100 | ) |
Net current period other comprehensive income | 204 |
| | (20 | ) | | 108 |
| | 6 |
| | 298 |
|
Balance at September 30, 2017 | $ | (1,480 | ) | | $ | 19 |
| | $ | (402 | ) | | $ | 20 |
| | $ | (1,843 | ) |
| | | | | | | | | |
| Nine months ended September 30, 2017 |
| Foreign Currency Translation Adjustment | | Deferred Gain (Loss) on Hedging Activities | | Pension Liability Adjustment | | Unrealized Gain (Loss) on Investments | | Total |
| (In millions) |
| | | | | | | | | |
Balance at December 31, 2016 | $ | (2,102 | ) | | $ | 6 |
| | $ | (521 | ) | | $ | 19 |
| | $ | (2,598 | ) |
Other comprehensive income before reclassifications | 626 |
| | (10 | ) | | 151 |
| | 1 |
| | 768 |
|
Amounts reclassified from AOCI | — |
| | 22 |
| | 42 |
| | — |
| | 64 |
|
Tax effect | (4 | ) | | 1 |
| | (74 | ) | | — |
| | (77 | ) |
Net current period other comprehensive income | 622 |
| | 13 |
| | 119 |
| | 1 |
| | 755 |
|
Balance at September 30, 2017 | $ | (1,480 | ) | | $ | 19 |
| | $ | (402 | ) | | $ | 20 |
| | $ | (1,843 | ) |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 12. Accumulated Other Comprehensive Income (AOCI) (Continued)
|
| | | | | | | | |
| Amount reclassified from AOCI | |
| Three months ended March 31, | Affected line item in the consolidated statement of earnings |
Details about AOCI components | 2020 | | 2019 |
| (In millions) | |
Deferred loss (gain) on hedging activities | | | | |
| $ | (5 | ) | | $ | 13 |
| Revenues |
| 24 |
| | (5 | ) | Cost of products sold |
| 25 |
| | — |
| Other (income) expense-net |
| 44 |
| | 8 |
| Total before tax |
| (5 | ) | | (2 | ) | Tax |
| $ | 39 |
| | $ | 6 |
| Net of tax |
| | | | |
Pension liability adjustment | | | | |
Amortization of defined benefit pension items: | | | | |
Prior service credit | $ | (8 | ) | | $ | (4 | ) | Other (income) expense-net |
Actuarial losses | 8 |
| | 1 |
| Other (income) expense-net |
| — |
| | (3 | ) | Total before tax |
| (11 | ) | | 14 |
| Tax |
| $ | (11 | ) | | $ | 11 |
| Net of tax |
|
| | | | | | | | | | | | | | | | | | |
| | Amount reclassified from AOCI | | |
| | Three months ended | | Nine months ended | | |
Details about AOCI components | | Sep 30 2017 | | Sep 30 2016 | | Sep 30 2017 | | Sep 30 2016 | | Affected line item in the consolidated statement of earnings |
| | (In millions) | | |
| | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | (75 | ) | | Other income/expense |
| | — |
| | — |
| | — |
| | — |
| | Tax |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | (75 | ) | | Net of tax |
| | | | | | | | | | |
Deferred loss (gain) on hedging activities | | | | | | | | | | |
| | $ | 15 |
| | $ | 37 |
| | $ | 20 |
| | $ | 61 |
| | Cost of products sold |
| | — |
| | 2 |
| | — |
| | 2 |
| | Interest expense |
| | — |
| | 3 |
| | 2 |
| | 25 |
| | Other income/expense |
| | — |
| | 9 |
| | — |
| | 14 |
| | Revenues |
| | 15 |
| | 51 |
| | 22 |
| | 102 |
| | Total before tax |
| | (5 | ) | | (19 | ) | | (8 | ) | | (38 | ) | | Tax |
| | $ | 10 |
| | $ | 32 |
| | $ | 14 |
| | $ | 64 |
| | Net of tax |
| | | | | | | | | | |
Pension liability adjustment | | | | | | | | | | |
Amortization of defined benefit pension items: | | | | | | | | | | |
Prior service credit | | $ | (2 | ) | | $ | (5 | ) | | $ | (8 | ) | | $ | (12 | ) | | Selling, general, and administrative expenses |
Actuarial losses | | 16 |
| | 15 |
| | 50 |
| | 44 |
| | Selling, general, and administrative expenses |
| | 14 |
| | 10 |
| | 42 |
| | 32 |
| | Total before tax |
| | (5 | ) | | (4 | ) | | (15 | ) | | (7 | ) | | Tax |
| | $ | 9 |
| | $ | 6 |
| | $ | 27 |
| | $ | 25 |
| | Net of tax |
| | | | | | | | | | |
Unrealized loss on investments | | | | | | | | | | |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 6 |
| | Asset impairment, exit, and restructuring costs |
| | — |
| | — |
| | — |
| | — |
| | Tax |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 6 |
| | Net of tax |
| | | | | | | | | | |
The Company’s accounting policy is to release the income tax effects from AOCI when the individual units of account are sold, terminated, or extinguished.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 13. | Other (Income) Expense - Net |
The following table sets forth the items in other (income) expense:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2020 | | 2019 |
| (In millions) |
| | | |
Gains on sales of assets | $ | — |
| | $ | (15 | ) |
Other – net | (32 | ) | | 7 |
|
Other (Income) Expense - Net | $ | (32 | ) | | $ | (8 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
(Gains) losses on sales of assets and businesses | $ | (15 | ) | | $ | 7 |
| | $ | (66 | ) | | $ | (117 | ) |
Loss on debt extinguishment | 11 |
| | — |
| | 11 |
| | — |
|
Other – net | — |
| | (11 | ) | | 42 |
| | (21 | ) |
Other (Income) Expense - Net | $ | (4 | ) | | $ | (4 | ) | | $ | (13 | ) | | $ | (138 | ) |
Gains on sales of assets forin the three months ended September 30, 2017 included disposals of individually insignificant assets in the ordinary course of business. Gains on sales of assets and businesses for the nine months ended September 30, 2017March 31, 2019 included gains related toon the sale of the crop risk services businesscertain assets and disposals of other individually insignificant assetsstep-up gains on equity investments.
Other - net in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business. Losses on sale of assets for the three months ended September 30, 2016 related principally to aMarch 31, 2020 included foreign exchange gains, the non-service components of net pension benefit income of $13 million, and other income, partially offset by loss on the sale of an investment. Gains on sales of assets and businesses for the nine months ended September 30, 2016 included realized additional considerationprovisions related to the sale of the Company’s equity investment in Gruma S.A.B. de C.V. in December 2012, recovery of loss provisionsfutures commission and gain related to the sale of the Company’s Brazilian sugar ethanol facilities, and gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors.
Loss on debt extinguishment for the three and nine months ended September 30, 2017 related to the early redemption of the Company’s $559 million notes due on March 15, 2018.
brokerage business. Other - net forin the ninethree months ended September 30, 2017March 31, 2019 included foreign exchange losses, and changes in contingent settlement provisions. Other -partially offset by the non-service components of net for the three and nine months ended September 30, 2016 included foreign exchange gainspension benefit income of $2 million and other income.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 14. Segment Information
The Company is principally engagedAs discussed in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. Note 1, prior period results have been reclassified to conform to the current period segment presentation.
The Company’s operations are organized, managed, and classified into four3 reportable business segments: AgriculturalAg Services Corn Processing,and Oilseeds, Processing,Carbohydrate Solutions, and Wild Flavors and Specialty Ingredients.Nutrition. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other.Other Business.
The AgriculturalAg Services segment utilizes its extensive global grain elevator and transportation networks, and port operations to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. The Agricultural Services segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. Agricultural Services’ grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include barge, ocean-going vessel, truck, rail, and container freight services. The Agricultural Services segment also includes the activities related to structured trade finance, the processing of wheat into wheat flour, and the Company’s share of the results of its Pacificor (formerly Kalama Export Company LLC) joint venture. The Agricultural Services segment also included returns associated with the Company’s 19.8% investment in GrainCorp until its sale in December 2016. In July 2017, the Company completed the acquisition of a 51% controlling interest in Industries Centers, an Israeli company specializing in the import and distribution of agricultural feed products, which is now known as ADM Israel.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 14. | Segment Information (Continued) |
The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, utilizing its asset base primarily located in the central part of the United States with additional facilities in China, Bulgaria, France, Morocco, Spain, and Turkey. The Corn Processing segment converts corn into sweeteners, starches, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose. Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Bioproducts also include essential amino acids such as lysine and threonine used in swine and poultry diets to optimize performance. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. The Corn Processing segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products. Other Corn Processing products include citric acids and glycols, all of which are used in various food and industrial products. The Corn Processing segment also included the activities of the Company’s Brazilian sugarcane ethanol plant and related operations until the Company completed the sale of these operations in May 2016. This segment also includes the Company’s share of the results of its equity investments in Almidones Mexicanos S.A. and Red Star Yeast Company LLC. In February 2017, the Company acquired Crosswind Industries, Inc., an industry leader in the manufacture of contract and private label pet treats and foods, as well as specialty ingredients, and an 89% controlling interest in Biopolis SL, a leading provider of microbial technology with a strong portfolio of novel food ingredients. In June 2017, the Company completed the acquisition of Chamtor SA, a French producer of wheat-based sweeteners and starches.
The Oilseeds Processing segment includes global activities related to the origination, merchandising, transportation, and storage of agricultural raw materials, and the crushing and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the Companysegment include ingredients for the food, feed, energy, and industrial products industries.customers. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel and glycols or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. In EuropeThe Ag Services and South America, the Oilseeds Processing segment includes origination and merchandising activities as adjuncts to its oilseeds processing assets. These activities include a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport grains and oilseeds. The Oilseeds Processing segment is also a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and other industrial markets. The Ag Services and Oilseeds Processingsegment's grain sourcing, handling, and transportation network (including barge, ocean-going vessel, truck, rail, and container freight services) provides reliable and efficient services to the Company's customers and agricultural processing operations. The Ag Services and Oilseeds segment also includes agricultural commodity and feed product import, export, and global distribution, and structured trade finance activities. This segment also includes the Company’sCompany's share of the results of its equity investment in Wilmar International Limited (Wilmar) and its share of the results of its Pacificor, Stratas Foods LLC, Edible Oils Limited, Olenex, and OlenexSoyVen joint ventures. During
The Carbohydrate Solutions segment is engaged in corn and wheat wet and dry milling and other activities. The Carbohydrate Solutions segment converts corn and wheat into products and ingredients used in the nine months ended September 30, 2017,food and beverage industry including sweeteners, corn and wheat starches, syrup, glucose, wheat flour, and dextrose. Dextrose and starch are used by the Carbohydrate Solutions segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Carbohydrate Solutions segment produces alcohol and other food and animal feed ingredients. Ethyl alcohol is produced by the Company acquired additional sharesfor industrial use as ethanol or as beverage grade. Ethanol, in Wilmar, increasinggasoline, increases octane and is used as an extender and oxygenate. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. Other Carbohydrate Solutions products include citric acids which are used in various food and industrial products. This segment also includes the Company’s share of the results of its ownership interest from 23.2% to 24.9% as of September 30, 2017.equity investments in Hungrana Ltd., Almidones Mexicanos S.A., Red Star Yeast Company, LLC, and Aston Foods and Food Ingredients.
The Wild FlavorsNutrition segment serves customer needs for food, beverages, health and Specialty Ingredients (WFSI)wellness, and more. The segment engages in the manufacturing, sales,sale, and distribution of specialtya wide array of products from nature including plant-based proteins, natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products including probiotics, prebiotics, enzymes, and botanical extracts, and other specialty food and feed ingredients. The WFSINutrition segment also includes the activities related to the procurement, processing, and distribution of edible beans. The Nutrition segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products and the manufacture of contract and private label pet treats and foods. In January 2020, ADM acquired Yerbalatina, a natural plant-based extracts and ingredients manufacturer.
Other Business includes the Company’s remaining operations, primarily its financial business units related to futures commission and insurance activities. On May 1, 2017, the
Archer-Daniels-Midland Company completed the sale of its crop risk services business
Notes to Validus Holdings, a global group of insurance and reinsurance companies.Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 14. | Segment Information (Continued) |
Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses and specified items.expenses. Also included in operating profit for each segment is equity in earnings of affiliates based on the equity method of accounting. Specified items included in total segment operating profit and certain corporate items are not allocated to the Company’s individual business segments because operating performance of each business segment is evaluated by management exclusive of these items. Corporate results principally include the impact of LIFO-related adjustments, unallocated corporate expenses, interest cost net of investment income, and the Company’s share of the results of its equity investment in Compagnie Industrialle et Financiere des Produits Amylaces SA (Luxembourg) (CIP)., which was sold in December 2019.
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In millions) | 2020 | | 2019 |
Gross revenues | | | |
Ag Services and Oilseeds | $ | 12,350 |
| | $ | 12,873 |
|
Carbohydrate Solutions | 2,554 |
| | 2,576 |
|
Nutrition | 1,516 |
| | 1,300 |
|
Other Business | 104 |
| | 81 |
|
Intersegment elimination | (1,554 | ) | | (1,526 | ) |
Total gross revenues | $ | 14,970 |
| | $ | 15,304 |
|
| | | |
Intersegment sales | |
| | |
|
Ag Services and Oilseeds | $ | 1,271 |
| | $ | 1,335 |
|
Carbohydrate Solutions | 238 |
| | 173 |
|
Nutrition | 45 |
| | 18 |
|
Total intersegment sales | $ | 1,554 |
| | $ | 1,526 |
|
| | | |
Revenues from external customers | |
| | |
|
Ag Services and Oilseeds | | | |
Ag Services | $ | 6,926 |
| | $ | 7,377 |
|
Crushing | 2,313 |
| | 2,349 |
|
Refined Products and Other | 1,840 |
| | 1,812 |
|
Total Ag Services and Oilseeds | 11,079 |
| | 11,538 |
|
Carbohydrate Solutions | | | |
Starches and Sweeteners | 1,650 |
| | 1,598 |
|
Vantage Corn Processors | 666 |
| | 805 |
|
Total Carbohydrate Solutions | 2,316 |
| | 2,403 |
|
Nutrition | | | |
Human Nutrition | 719 |
| | 674 |
|
Animal Nutrition | 752 |
| | 608 |
|
Total Nutrition | 1,471 |
| | 1,282 |
|
| | | |
Other Business | 104 |
| | 81 |
|
Total revenues from external customers | $ | 14,970 |
| | $ | 15,304 |
|
| | | |
| | | |
| | | |
| | | |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 14. | Segment Information (Continued) |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In millions) | 2020 | | 2019 |
Segment operating profit | | | |
Ag Services and Oilseeds | $ | 422 |
| | $ | 417 |
|
Carbohydrate Solutions | 68 |
| | 96 |
|
Nutrition | 142 |
| | 81 |
|
Other Business | 11 |
| | 14 |
|
Specified Items: | | | |
Gains (losses) on sales of assets and businesses(1) | — |
| | 12 |
|
Asset impairment charges(2) | (44 | ) | | (9 | ) |
Total segment operating profit | 599 |
| | 611 |
|
Corporate | (224 | ) | | (296 | ) |
Earnings before income taxes | $ | 375 |
| | $ | 315 |
|
| | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Gross revenues | | | | | | | |
Agricultural Services | $ | 7,022 |
| | $ | 7,953 |
| | $ | 21,351 |
| | $ | 22,486 |
|
Corn Processing | 2,517 |
| | 2,630 |
| | 7,318 |
| | 7,570 |
|
Oilseeds Processing | 6,797 |
| | 6,498 |
| | 20,109 |
| | 19,418 |
|
Wild Flavors and Specialty Ingredients | 586 |
| | 614 |
| | 1,809 |
| | 1,893 |
|
Other | 98 |
| | 95 |
| | 293 |
| | 314 |
|
Intersegment elimination | (2,193 | ) | | (1,958 | ) | | (6,122 | ) | | (5,836 | ) |
Total gross revenues | $ | 14,827 |
| | $ | 15,832 |
| | $ | 44,758 |
| | $ | 45,845 |
|
| | | | | | | |
Intersegment sales | |
| | |
| | |
| | |
|
Agricultural Services | $ | 947 |
| | $ | 993 |
| | $ | 2,622 |
| | $ | 2,659 |
|
Corn Processing | 192 |
| | 239 |
| | 475 |
| | 620 |
|
Oilseeds Processing | 1,045 |
| | 723 |
| | 3,003 |
| | 2,547 |
|
Wild Flavors and Specialty Ingredients | 9 |
| | 3 |
| | 22 |
| | 10 |
|
Total intersegment sales | $ | 2,193 |
| | $ | 1,958 |
| | $ | 6,122 |
| | $ | 5,836 |
|
| | | | | | | |
Revenues from external customers | |
| | |
| | |
| | |
|
Agricultural Services | | | | | | | |
Merchandising and Handling | $ | 5,265 |
| | $ | 6,146 |
| | $ | 16,434 |
| | $ | 17,331 |
|
Milling and Other | 757 |
| | 754 |
| | 2,141 |
| | 2,325 |
|
Transportation | 53 |
| | 60 |
| | 154 |
| | 171 |
|
Total Agricultural Services | 6,075 |
| | 6,960 |
| | 18,729 |
| | 19,827 |
|
Corn Processing | | | | | | | |
Sweeteners and Starches | 1,087 |
| | 1,057 |
| | 3,192 |
| | 3,061 |
|
Bioproducts | 1,238 |
| | 1,334 |
| | 3,651 |
| | 3,889 |
|
Total Corn Processing | 2,325 |
| | 2,391 |
| | 6,843 |
| | 6,950 |
|
Oilseeds Processing | | | | | | | |
Crushing and Origination | 3,665 |
| | 3,660 |
| | 10,850 |
| | 10,799 |
|
Refining, Packaging, Biodiesel, and Other | 2,025 |
| | 2,042 |
| | 6,064 |
| | 5,852 |
|
Asia | 62 |
| | 73 |
| | 192 |
| | 220 |
|
Total Oilseeds Processing | 5,752 |
| | 5,775 |
| | 17,106 |
| | 16,871 |
|
| | | | | | | |
Wild Flavors and Specialty Ingredients | 577 |
| | 611 |
| | 1,787 |
| | 1,883 |
|
Total Wild Flavors and Specialty Ingredients | 577 |
| | 611 |
| | 1,787 |
| | 1,883 |
|
| | | | | | | |
Other - Financial | 98 |
| | 95 |
| | 293 |
| | 314 |
|
Total Other | 98 |
| | 95 |
| | 293 |
| | 314 |
|
Total revenues from external customers | $ | 14,827 |
| | $ | 15,832 |
| | $ | 44,758 |
| | $ | 45,845 |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 14. | Segment Information (Continued) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Segment operating profit | | | | | | | |
Agricultural Services | $ | 87 |
| | $ | 195 |
| | 284 |
| | 328 |
|
Corn Processing | 253 |
| | 214 |
| | 648 |
| | 506 |
|
Oilseeds Processing | 119 |
| | 145 |
| | 639 |
| | 641 |
|
Wild Flavors and Specialty Ingredients | 61 |
| | 73 |
| | 228 |
| | 237 |
|
Other | 21 |
| | 23 |
| | 78 |
| | 84 |
|
Specified Items: | | | | | | | |
Gains (losses) on sales of assets and businesses(1) | 12 |
| | (4 | ) | | 20 |
| | 114 |
|
Impairment, restructuring, settlement charges(2) | (63 | ) | | (4 | ) | | (98 | ) | | (16 | ) |
Hedge timing effects(3) | (5 | ) | | 3 |
| | 4 |
| | 4 |
|
Total segment operating profit | 485 |
| | 645 |
| | 1,803 |
| | 1,898 |
|
Corporate | (260 | ) | | (165 | ) | | (737 | ) | | (705 | ) |
Earnings before income taxes | $ | 225 |
| | $ | 480 |
| | $ | 1,066 |
| | $ | 1,193 |
|
| | | | | | | |
(1) Current quarter gain related to disposals of individually insignificant assets in the ordinary course of business Current year to date gain related to the sale of the crop risk services business and disposals of other individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business. Prior quarter loss related principally togains consisted of a lossgain on the sale of certain assets and a step up gain on an equity investment. Prior year to date gain primarily
(2) Current and prior quarter charges related to recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities, realized contingent consideration on the December 2012 sale of the Company’s equity investment in Gruma S.A. de C.V., and revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors.
(2) Current quarter and year to date charges consisted of asset impairments related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex in the Corn processing segment and several individually insignificant asset impairments and restructuring charges. Prior quarter and YTD charges primarily related to impairment of certain long-lived assets and restructuring charges.assets.
(3) Hedge timing effects relate to hedge ineffectiveness associated with documented hedge programs.
Note 15. Asset Impairment, Exit, and Restructuring Costs
Asset impairment, exit, and restructuring costs of $41 million in the three months ended March 31, 2020 consisted primarily of impairments related to certain intangible and other long-lived assets presented as specified items within segment operating profit. Asset impairment, exit, and restructuring costs in the quarterthree months ended September 30, 2017March 31, 2019 consisted of $107 million included $63$9 million of asset impairments principally in the Corn Processing segment related to the reconfiguration of the Peoria, Illinois ethanol complex due to the Company’s decision to focus on the more profitable high grade industrialcertain long-lived assets presented as specified items within segment operating profit and beverage alcohol as well as export fuel. The impaired assets were determined to have no alternative use with zero net salvage value. Other costs in the current quarter included $44$2 million of restructuring charges related to the reduction of certain positions within the Company’s global workforce. Asset impairment, exit, and restructuring costs in the nine months ended September 30, 2017 of $140 million consisted of $63 million of asset impairments in the Corn processing segment primarily related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex, $47 million ofindividually insignificant restructuring charges in Corporate primarily related to the reduction of certain positions within the Company’s global workforce, and $30 million of several individually insignificant asset impairments and restructuring charges.Corporate.
Asset impairment, exit, and restructuring costs in the quarter ended September 30, 2016 consisted of $6 million of other-than-temporary impairment charges on available for sale equity security investments in Corporate and $5 million of several individually insignificant asset impairments and restructuring charges. Asset impairment, exit, and restructuring costs in the nine months ended September 30, 2016 consisted of $17 million of software impairment and other-than-temporary impairment charges on available for sale equity security investments in Corporate, $5 million of asset impairments in the Corn Processing segment, and $14 million of other individually insignificant asset impairments and restructuring charges.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 16. Sale of Accounts Receivable
Since March 2012, theThe Company has had an accounts receivable securitization program (the “Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Purchasers”“First Purchasers”). Under the Program, certain U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Receivables, LLC (“ADM Receivables”). ADM Receivables in turn transfers such purchased accounts receivable in their entirety to the First Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Receivables receives a cash payment of up to $1.21.3 billion and an additional amount upon the collection of the accounts receivable (deferred consideration). The Program terminates on June 22, 2018,18, 2020, unless extended.
In March 2014, theThe Company entered into a secondalso has an accounts receivable securitization program (the “Second Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Second Purchasers”). Under the Second Program, certain non-U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Ireland Receivables Company (“ADM Ireland Receivables”). ADM Ireland Receivables in turn transfers such purchased accounts receivable in their entirety to the Second Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Ireland Receivables receives a cash payment of up to $0.5$0.6 billion as amended,(€0.5 billion) and an additional amount upon the collection of the accounts receivable (deferred consideration). The Second Program terminates on March 16, 2018,12, 2021, unless extended.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 16. Sale of Accounts Receivable (Continued)
Under the Program and Second Program (collectively, the “Programs”), ADM Receivables and ADM Ireland Receivables use the cash proceeds from the transfer of receivables to the First Purchasers and Second Purchasers (collectively, the “Purchasers”) and other consideration to finance the purchase of receivables from the Company and the ADM subsidiaries originating the receivables.
The Company accounts for these transfers as sales. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred consideration. At September 30, 2017March 31, 2020 and December 31, 20162019, the Company did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions, and its cost of servicing the receivables sold.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the fair value of trade receivables transferred to the Purchasers and Second Purchasers under the Programs and derecognized from the Company’s consolidated balance sheet was $1.81.9 billion and $1.6 billion, respectively.. In exchange for the transfertransfers as of September 30, 2017March 31, 2020 and December 31, 2016,2019, the Company received cash of $1.4 billion and $1.0 billion, and recorded a receivable for deferred consideration included in other current assets of $399496 million and $540$446 million, respectively. Cash collections from customers on receivables sold were $24.38.5 billion and $24.48.4 billion for the ninethree months ended September 30, 2017March 31, 2020 and 20162019, respectively. Of this amount, $24.3$3.3 billion and $23.9$3.1 billion pertain towere cash collections on the deferred receivables consideration reflected as cash inflows from investing activities for the ninethree months ended September 30, 2017March 31, 2020 and 20162019, respectively. Deferred receivables consideration is paid to the Company in cash on behalf of the Purchasers as receivables are collected; however, as this is a revolving facility, cash collected from the Company’s customers is reinvested by the Purchasers daily in new receivable purchases under the Program.Programs.
The Company’s risk of loss following the transfer of accounts receivable under the ProgramPrograms is limited to the deferred receivables consideration outstanding. The Company carries the deferred receivables consideration at fair value determined by calculating the expected amount of cash to be received and is principally based on observable inputs (a Level 2 measurement under the applicable accounting standards) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred receivables consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs which have historically been insignificant.
Transfers of receivables under the Programs resulted in an expense for the loss on sale of $2 million duringand $8 million for the three months ended September 30, 2017March 31, 2020 and 2016, and $7 million and $4 million for the nine months ended September 30, 2017 and 2016,2019, respectively, which is classified as selling, general, and administrative expenses in the consolidated statements of earnings.
TheIn accordance with the amended guidance of Topic 230, the Company reflects all cash flows related to the deferred receivables consideration of the Programs as operatinginvesting activities in its consolidated statementstatements of cash flows. All other cash flows for the nine months ended September 30, 2017 and 2016are classified as operating activities because the cash received from the Purchasers and Second Purchasers upon both the sale and collection of the receivables is not subject to significantly different riskssignificant interest rate risk given the short-term nature of the Company’s trade receivables.
On April 1, 2020, the Company restructured the Second Program from a deferred purchase price to a pledge structure. Under the new structure, ADM Ireland Receivables transfers a portion of the purchased accounts receivable together with an equally proportional interest in all of its right, title and interest in the remaining purchased accounts receivable to each of the Second Purchasers. In exchange, ADM Ireland Receivables receives a cash payment for the accounts receivables transferred.
Note 17. Subsequent Event
On April 23, 2020, the Company announced that due to the challenging operating environment, it is currently managing ethanol production throughout its U.S. corn processing network to focus on cash flows and to divert corn grind to other products that are in higher demand, such as alcohol for hand sanitizer. As part of this process, ADM is temporarily idling ethanol production at its corn dry mill facilities in Cedar Rapids, Iowa, and Columbus, Nebraska, for a period of four months subject to market conditions. To better align production with current demand, the Company has also reduced the ethanol grind at its corn wet mill plants and rebalanced grind to produce more industrial alcohol for the sanitizer market and industrial starches for the container board market.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Company Overview
This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements.
The CompanyADM is principally engageda global leader in procuring, transporting, storing,human and animal nutrition and one of the world’s premier agricultural origination and processing companies. It is one of the world’s leading producers of ingredients for human and merchandising agricultural commoditiesanimal nutrition, and products.other products made from nature. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in 163more than 190 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. The Company also engages in the manufacturing, sale, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to efficiently connect the harvest to the home thereby generating returns for itsour shareholders, principally from margins earned on these activities.
Effective January 1, 2020, the Company started reporting its newly created dry mill ethanol subsidiary, Vantage Corn Processors (VCP), as a sub-segment within the Carbohydrate Solutions segment. VCP replaces the Bioproducts sub-segment which included the combined results of the Company’s corn dry and wet mill ethanol operations. The wet mill ethanol operations that were previously reported in Bioproducts are now included in the Starches and Sweeteners sub-segment. In addition to dry mill ethanol production, VCP will sell/broker ADM’s wet mill ethanol production as the sole marketer of ethanol produced at the Company’s facilities. The change does not have an impact on the total results of the Carbohydrate Solutions segment.
Effective July 1, 2019, the Company changed its segment reporting to reflect the creation of the combined Ag Services and Oilseeds segment. The former Origination and Oilseeds businesses were merged into a combined Ag Services and Oilseeds segment which enables the Company to better respond to market changes by integrating the supply and value chains and risk management, while delivering significant simplification and efficiency to the day-to-day business. As part of the Company’s efforts for a streamlined management structure, the combined segment is led by the former President of Oilseeds expanding his role to President of Ag Services and Oilseeds.
Prior period results have been reclassified to conform to the current period segment presentation.
The Company’s operations are organized, managed, and classified into fourthree reportable business segments: AgriculturalAg Services Corn Processing,and Oilseeds, Processing,Carbohydrate Solutions, and Wild Flavors and Specialty Ingredients.Nutrition. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable business segments, as defined by the applicable accounting standard, and are classified as Other. SeeOther Business. Financial information with respect to the Company’s reportable business segments is set forth in Note 14 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information about.
The Company executes its strategic vision through three pillars: Optimize the Core, Drive Efficiencies, and Expand Strategically, all supported by its Readiness effort. During 2018, the Company launched Readiness to drive new efficiencies and improve the customer experience in the Company’s business segments.
The Company’s recent significant portfolio actionsexisting businesses through a combination of data analytics, process simplification and announcements include:
standardization, and behavioral and cultural change, building upon its earlier 1ADM and operational excellence programs. Readiness also supports the acquisition in February 2017 of Crosswind Industries, Inc., an industry leader in the manufacture of contract and private label pet treats and foods, as well as specialty ingredients;
the acquisition in February 2017 of an 89% controlling interest in Biopolis SL, a leading provider of microbial technology with a strong portfolio of novel food ingredients;
the construction of a new feed-premix facility in Xiangtan, China, which is expected to be completed in 2019;
the sale in May 2017 of the Company's crop risk services business to Validus Holdings, a global group of insurance and reinsurance companies;
the completion in May 2017 of a series of major enhancements at the Company’s export terminal in Santos, in the Brazilian state of Sao Paulo;
the construction of a new flour mill in Mendota, Illinois, which is expected to be completed in 2019;
the expansion of a Golden Peanut and Tree Nuts production facility in Blakely, Georgia, which is expected to be completed in 2018;
the completion of a new silo located on the Danube River in Silistra, Bulgaria;
the acquisition in June 2017 of Chamtor, a French producer of wheat-based sweeteners and starches;
the acquisition in July 2017 of a 51% controlling interest in Industries Centers, an Israeli company specializing in the import and distribution of agricultural feed products, which will now be known as ADM Israel; and
the modernization of the flour mill in Enid, Oklahoma, which is expected to be completed in 2018.
As part of the implementationexecution of the Company’s strategic plan, the Company continues to evaluate the capital intensity ofgrowth strategies across its operationsfive key growth platforms: Taste, Nutrition, Animal Nutrition, Health and portfolio, seeking ways to reduceWellness, and redeploy capital in its efforts to drive long-term returns.Carbohydrates.
Operating Performance Indicators
The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The Company’s agricultural servicesAg Services and oilseeds processingOilseeds operations are principally agricultural commodity-based businesses where changes in
selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. Therefore,As a result, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Thus,Therefore, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit. Thus, gross margins per volume or metric ton are more meaningful than gross margins as percentage of revenues.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The Company’s corn processingCarbohydrate Solutions operations and Wild Flavors and Specialty IngredientsNutrition businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily equalcorrelate to changes in cost of products sold. Thus,Therefore, changes in revenues of these businesses may correspond to changes in margins or gross profit. Thus, gross margin rates are more meaningful as a performance indicator in these businesses.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The Company has consolidated subsidiaries in 76more than 70 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency except certain significant subsidiaries in Switzerland where
Euro is the functional currency, and Brazil and Argentina where U.S. dollar is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil and Argentina, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require conversionremeasurement to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.
The Company measures its performance using key financial metrics including net earnings, gross margins, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, trade policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Market Factors Influencing Operations or Results in the Three Months Ended September 30, 2017March 31, 2020
As an agricultural commodity-based business, theThe Company is subject to a variety of market factors which affect the Company's operating results. AgriculturalIn Ag Services wasand Oilseeds, North American origination margins were impacted by weak U.S. grainlow export competitiveness. Overall low market prices and price volatility continueddemand while crushing margins were compressed due to a surplusslow farmer selling. South American origination volumes benefited from strong farmer selling in Brazil driven by the devaluation of grainsthe Real. Demand and oilseedsmargins for refined oils and biodiesel in the global market.EMEAI were challenging. In Corn Processing,Carbohydrate Solutions, demand and prices for sweetenersstarches and starchessweeteners remained solid in North America while co-product prices were stable. Ethanol continues to face a challenging environment. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing statusmargins were significantly pressured as a competitive octane enhancer, U.S. industry ethanol production also remained at high levels, limiting margins. Global oilseeds processing volumes remained strong but competition from Argentine exports significantly decreased margins, especially in Europe. Slow selling by farmers in Brazil lowered volumes and pressured grain origination and soy crushing margins. Whileexceeded demand and margins for refined oilinventories remained solid across all regions,high. In addition, the uncertainty surroundingeffects of COVID-19 depressed ethanol demand resulting in record high industry stock levels towards the biodiesel tax credit has negatively impacted biodiesel margins. Wild Flavors and Specialty Ingredientsend of the quarter. Nutrition benefited from stronggrowing demand for flavor ingredientsflavors, flavors systems, minerals, premix, pet food, livestock, plant-based proteins, and flavor systems, but continuedprobiotics, and saw shifting demand from foodservice to be adversely affected by start-up costs and margin pressure in certain non-flavor food ingredient markets.other retail channels.
Three Months Ended September 30, 2017March 31, 2020 Compared to Three Months Ended September 30, 2016March 31, 2019
Net earnings attributable to controlling interests was $192increased $158 million in the third quarter of 2017 compared to $341 million in the third quarter of 2016.$391 million. Segment operating profit was $485decreased $12 million in the third quarter of 2017 compared to $645 million in the third quarter of 2016.$599 million. Included in segment operating profit in the current quarter was a net chargewere asset impairment charges of $56 million consisting of a net gain on sales of assets, impairment and restructuring charges, and corn hedge timing effects.$44 million. Included in segment operating profit in the prior year quarter was a net chargegain of $5$3 million consisting of a lossasset impairment charges, gains on the sale of certain assets, and a step-up gain on an investment, impairment and restructuring charges, and corn hedge timing effects.equity investment. Adjusted segment operating profit decreased $109increased $35 million to $541$643 million due primarily to higher results in Nutrition and Ag Services, and higher equity earnings from the lack of competitiveness of U.S. grainsWilmar investment, partially offset by lower results in the global markets, compressed global crush margins, risk management losses,Crushing and start-up costs.Starches and Sweeteners. Corporate results were a net charge of $260$224 million thisin the current quarter compared to $165$296 million in last year’sthe prior year quarter. Corporate results thisin the current quarter included an immaterial chargea credit of $91 million from the effect of changingthe elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020, compared to a charge of $1 million in the prior year quarter from changes in agricultural commodity prices on LIFO inventory valuation reserves, comparedreserves.
Income tax expense decreased $97 million to a creditbenefit of $85 million in the third quarter of 2016.
Income taxes decreased $106 million to $30$16 million due to lower earnings before income taxes and a lower effective tax rate. The Company’s effective tax rate for the quarter ended September 30, 2017 decreased to 13.3%March 31, 2020 was a benefit of 4.3% compared to 28.3%an expense of 25.7% for the quarter ended September 30, 2016,March 31, 2019. The change in the rate was primarily due to the impact of changesU.S. tax credits signed into law in December 2019, including a $73 million discrete tax benefit related to 45G railroad credits recognized in the quarter ended March 31, 2020, which are now reflected in the 2020 projected effective tax rate. The prior quarter rate also included unfavorable discrete tax items including the favorable resolution of an uncertain tax positionprimarily related to a 2014 acquisition and return to provision in the current quarter, partially offset by changes in the forecasted geographic mix of pre-tax earnings and the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016.reform transition tax adjustments.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
In March 2020, the CARES Act was signed into law in the United States. The Company does not expect the provisions of the CARES Act to have a material impact on the annual effective tax rate for the year ending December 31, 2020.
Analysis of Statements of Earnings
Processed volumes by product for the quarter are as follows (in metric tons):
| | | Three Months Ended | | Three Months Ended | |
| September 30, | | | March 31, | | |
(In thousands) | 2017 | | 2016 | | Change | 2020 | | 2019 | | Change |
Oilseeds | 8,265 |
| | 8,388 |
| | (123 | ) | 9,163 |
| | 9,167 |
| | (4 | ) |
Corn | 5,621 |
| | 5,794 |
| | (173 | ) | 5,534 |
| | 5,132 |
| | 402 |
|
Total | 13,886 |
| | 14,182 |
| | (296 | ) | 14,697 |
| | 14,299 |
| | 398 |
|
The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. The overall decreaseincrease in corn is primarily related to lower production in the reconfiguration ofprior year caused by adverse weather conditions and production issues in the Company’s Peoria,Decatur, Illinois ethanolcorn complex.
Revenues by segment for the quarter are as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2017 | | 2016 | | Change |
| (In millions) |
Agricultural Services | | | | | |
Merchandising and Handling | $ | 5,265 |
| | $ | 6,146 |
| | $ | (881 | ) |
Milling and Other | 757 |
| | 754 |
| | 3 |
|
Transportation | 53 |
| | 60 |
| | (7 | ) |
Total Agricultural Services | 6,075 |
| | 6,960 |
| | (885 | ) |
| | | | | |
Corn Processing | |
| | |
| | |
|
Sweeteners and Starches | 1,087 |
| | 1,057 |
| | 30 |
|
Bioproducts | 1,238 |
| | 1,334 |
| | (96 | ) |
Total Corn Processing | 2,325 |
| | 2,391 |
| | (66 | ) |
| | | | | |
Oilseeds Processing | |
| | |
| | |
|
Crushing and Origination | 3,665 |
| | 3,660 |
| | 5 |
|
Refining, Packaging, Biodiesel, and Other | 2,025 |
| | 2,042 |
| | (17 | ) |
Asia | 62 |
| | 73 |
| | (11 | ) |
Total Oilseeds Processing | 5,752 |
| | 5,775 |
| | (23 | ) |
| | | | | |
Wild Flavors and Specialty Ingredients | 577 |
| | 611 |
| | (34 | ) |
Total Wild Flavors and Specialty Ingredients | 577 |
| | 611 |
| | (34 | ) |
| | | | | |
Other - Financial | 98 |
| | 95 |
| | 3 |
|
Total Other | 98 |
| | 95 |
| | 3 |
|
Total | $ | 14,827 |
| | $ | 15,832 |
| | $ | (1,005 | ) |
|
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 | | Change |
| (In millions) |
Ag Services and Oilseeds | | | | | |
Ag Services | $ | 6,926 |
| | $ | 7,377 |
| | $ | (451 | ) |
Crushing | 2,313 |
| | 2,349 |
| | (36 | ) |
Refined Products and Other | 1,840 |
| | 1,812 |
| | 28 |
|
Total Ag Services and Oilseeds | 11,079 |
| | 11,538 |
| | (459 | ) |
| | | | | |
Carbohydrate Solutions | |
| | |
| | |
|
Starches and Sweeteners | 1,650 |
| | 1,598 |
| | 52 |
|
Vantage Corn Processors | 666 |
| | 805 |
| | (139 | ) |
Total Carbohydrate Solutions | 2,316 |
| | 2,403 |
| | (87 | ) |
| | | | | |
Nutrition | | | | | |
Human Nutrition | 719 |
| | 674 |
| | 45 |
|
Animal Nutrition | 752 |
| | 608 |
| | 144 |
|
Total Nutrition | 1,471 |
| | 1,282 |
| | 189 |
|
| | | | | |
Other Business | 104 |
| | 81 |
| | 23 |
|
Total | $ | 14,970 |
| | $ | 15,304 |
| | $ | (334 | ) |
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Revenues and cost of products sold in a commodity merchandising and processing business are affected bysignificantly correlated to the underlying commodity prices and volumes. During periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins sincebecause both revenues and cost of products sold, particularly in Oilseeds ProcessingAg Services and Agricultural Services,Oilseeds, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.
Revenues decreased $1.0 billion to $14.8 billion due to lower sales volumes ($0.9 billion) and lower average selling prices ($0.1 billion). The decrease in sales volumes was due principally to a decrease in volumes of unprocessed commodities, in particular volumes of soybeans, corn, and rapeseed. Agricultural Services revenues decreased 13% to $6.1 billion due to lower sales volumes ($0.8 billion) and lower average selling prices ($0.1 billion). Corn Processing revenues decreased 3% to $2.3 billion due to lower sales volumes ($0.1 billion). Oilseeds Processing revenues of $5.8 billion and Wild Flavors and Specialty Ingredients revenues of $0.6 billion were in line with the prior year’s quarter.
Cost of products sold decreased $0.7 billion to $14.0 billion due principally to lower sales volumes. Included in cost of products sold during this quarter was an immaterial charge from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves compared to a credit of $85 million in the prior year’s quarter. Manufacturing expenses of $1.3 billion in the current quarter was in line with the prior year’s quarter.
Gross profit decreased $0.3 billion to $0.8 billion. The decrease in gross profit consisted principally of lower results in merchandising and handling ($72 million), soybean and canola processing ($64 million) and biodiesel ($51 million) in Oilseeds Processing, partially offset by higher results in sweeteners and starches ($18 million). These factors are explained in the segment operating profit discussion on page 38. Current period gross profit included an immaterial charge from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves compared to a credit of $85 million during the same period last year.
Selling, general, and administrative expenses decreased $68 million to $478 million due principally to prior period expenses related to a settled legal matter and lower pension expense in the current quarter.
Asset impairment, exit, and restructuring charges increased $96 million to $107 million. Current period charges consisted of $63 million of asset impairments primarily related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex in the Corn Processing segment and $44 million of restructuring charges related to the reduction of certain positions within the Company’s global workforce. Prior period charges included $6 million of other-than-temporary impairment charges on two available for sale equity security investments in Corporate and $5 million of several individually insignificant asset impairments and restructuring charges.
Interest expense increased $1 million to $79 million due principally to higher interest rates on short-term debt and the issuance of the $1 billion fixed-rate notes in August 2016.
Equity in earnings of unconsolidated affiliates increased from a loss of $2 million to income of $46 million primarily due to higher earnings from the Company’s investment in Wilmar resulting from the increased ownership stake in and higher results from Wilmar, partially offset by lower results from the Company’s equity investment in CIP.
Other income of $4 million was comparable to the prior period. Current period income included gains related to disposals of individually insignificant assets in the ordinary course of business, partially offset by a charge related to the early redemption of the Company’s $559 million notes due on March 15, 2018. Prior period income included foreign exchange gains and other income partially offset by a loss on the sale of an investment.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Segment operatingRevenues decreased $0.3 billion to $15.0 billion due to overall lower sales volumes and lower sales prices. Lower sales volumes of soybeans were partially offset by higher sales volumes of wheat and animal nutrition products. The decrease in sales prices was due principally to wheat, flours, sweeteners, and oils. Ag Services and Oilseeds revenues decreased 4% to $11.1 billion due to lower sales volumes ($0.4 billion). Carbohydrate Solutions revenues decreased 4% to $2.3 billion due to lower sales prices ($0.1 billion). Nutrition revenues increased 15% to $1.5 billion due to higher sales volumes ($0.2 billion).
Cost of products sold decreased $0.4 billion to $14.0 billion due to overall lower sales volumes. Included in cost of products sold in the current quarter was a credit of $91 million from the effect of the elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020 compared to a charge of $1 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves in the prior year quarter. Manufacturing expenses increased $63 million to $1.5 billion due principally to railroad maintenance expenses and the acquisition of Neovia, partially offset by lower energy costs and maintenance expenses.
Foreign currency translation impacts decreased both revenues and cost of products sold by $0.1 billion.
Gross profit adjustedincreased $23 million or 2%, to $1.0 billion. Higher results in Nutrition ($75 million) were offset by lower results in Ag Services and Oilseeds ($62 million) and Carbohydrate Solutions ($36 million). These factors are explained in the segment operating profit (a non-GAAP measure),discussion on page 37. The elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020 had a positive impact on gross profit of $91 million in the current quarter compared to a negative impact of $1 million in the prior year quarter from changes in agricultural commodity prices on LIFO inventory valuation reserves.
Selling, general, and earnings before income taxes foradministrative expenses increased $5 million to $664 million due principally to higher variable performance-related and stock compensation expense accruals and IT expenses, partially offset by lower salaries and wages.
Asset impairment, exit, and restructuring costs increased $30 million to $41 million. Charges in the current quarter areconsisted primarily of impairments related to certain intangible and other long-lived assets presented as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
Segment Operating Profit | 2017 | | 2016 | | Change |
| (In millions) |
Agricultural Services | | | | | |
Merchandising and Handling | $ | 20 |
| | $ | 92 |
| | $ | (72 | ) |
Milling and Other | 53 |
| | 60 |
| | (7 | ) |
Transportation | 14 |
| | 43 |
| | (29 | ) |
Total Agricultural Services | 87 |
| | 195 |
| | (108 | ) |
| | | | | |
Corn Processing | |
| | |
| | |
|
Sweeteners and Starches | 202 |
| | 176 |
| | 26 |
|
Bioproducts | 51 |
| | 38 |
| | 13 |
|
Total Corn Processing | 253 |
| | 214 |
| | 39 |
|
| | | | | |
Oilseeds Processing | |
| | |
| | |
|
Crushing and Origination | 39 |
| | 76 |
| | (37 | ) |
Refining, Packaging, Biodiesel, and Other | 66 |
| | 119 |
| | (53 | ) |
Asia | 14 |
| | (50 | ) | | 64 |
|
Total Oilseeds Processing | 119 |
| | 145 |
| | (26 | ) |
| | | | | |
Wild Flavors and Specialty Ingredients | 61 |
| | 73 |
| | (12 | ) |
Total Wild Flavors and Specialty Ingredients | 61 |
| | 73 |
| | (12 | ) |
| | | | | |
Other - Financial | 21 |
| | 23 |
| | (2 | ) |
Total Other | 21 |
| | 23 |
| | (2 | ) |
| | | | | |
Specified Items: | | | | | |
Gains (losses) on sales of assets and businesses | 12 |
| | (4 | ) | | 16 |
|
Impairment and restructuring charges | (63 | ) | | (4 | ) | | (59 | ) |
Hedge timing effects | (5 | ) | | 3 |
| | (8 | ) |
Total Specified Items | (56 | ) | | (5 | ) | | (51 | ) |
| | | | | |
Total Segment Operating Profit | $ | 485 |
| | $ | 645 |
| | $ | (160 | ) |
| | | | | |
Adjusted Segment Operating Profit(1) | $ | 541 |
| | $ | 650 |
| | $ | (109 | ) |
| | | | | |
Segment Operating Profit | $ | 485 |
| | $ | 645 |
| | $ | (160 | ) |
Corporate | (260 | ) | | (165 | ) | | (95 | ) |
Earnings Before Income Taxes | $ | 225 |
| | $ | 480 |
| | $ | (255 | ) |
(1) Adjustedspecified items within segment operating profit. Charges in the prior year quarter consisted of $9 million of impairments related to certain long-lived assets presented as specified items within the segment operating profit is segment operating profit excludingand $2 million of individually insignificant restructuring charges in Corporate.
Interest expense decreased $18 million to $83 million due principally to lower interest rates and interest savings from cross currency swaps.
Equity in earnings of unconsolidated affiliates increased $39 million to $140 million due to higher earnings from the above specified items.Company’s investment in Wilmar, partially offset by lower earnings from the Company’s investment in Olenex and the sale of the CIP investment in December 2019.
Other income - net increased $24 million to $32 million. Income in the current quarter included foreign exchange gains, the non-service components of net pension benefit income, and other income, partially offset by loss provisions related to the Company’s futures commission and brokerage business. Income in the prior year quarter included gains on the sale of certain assets, step-up gains on equity investments, the non-service components of net pension benefit income, and other income, partially offset by foreign exchange losses.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Agricultural ServicesSegment operating profit decreased 55%. Merchandising and Handling operating results decreased due to the lack of competitiveness of U.S. grains in the global markets resulting in a significant decrease in margins and lower U.S. grain export volumes. Global Trade generated good results from international origination and destination marketing businesses partially offset by some hedge position losses. Milling and Other results declined due to decreased volumes, mainly in the U.S.(loss), while maintaining steady product margins. Transportation results decreased primarily due to low U.S. grain exports and a slower start to harvest in North America resulting in lower barge freight volumes and margins.
Corn Processingadjusted segment operating profit increased 18%. Sweeteners(a non-GAAP measure), and Starches operating profit increased due to strong margins in North America while international operations continued to provide solid contributions to overall results. Bioproducts results increased with better ethanol margins.
Oilseeds Processing operating profit decreased 18%. Crushing and Origination operating profit decreased due to compressed global crush margins amid ample meal supplies, weak canola margins due in part to higher seed costs, increased competition from Argentine meal exports, and weak South America origination margins resulting from continued low commodity prices that reduced the pace of farmer selling forcing higher basis costs. Refining, Packaging, Biodiesel, and Other operating profit declined due to the uncertainty surrounding the biodiesel tax credit that has negatively impacted biodiesel margins. Asia results increased on higher earnings from the Company’s investment in Wilmar due to the increased ownership stake in and higher results from Wilmar.
Wild Flavors and Specialty Ingredients operating profit decreased 16%. Weaker results in specialty ingredients, due in part to operational start-up costs, were partially offset by the continuing strong demand for flavor ingredients and flavor systems in Africa and Asia.
Other - Financial operating profit decreased 9% primarily due to lower results from the captive insurance operations.
Corporate resultsbefore income taxes for the quarter are as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2017 | | 2016 | | Change |
| (In millions) |
LIFO credit (charge) | $ | — |
| | $ | 85 |
| | $ | (85 | ) |
Interest expense - net | (72 | ) | | (74 | ) | | 2 |
|
Unallocated corporate costs | (109 | ) | | (106 | ) | | (3 | ) |
Other charges | (55 | ) | | (74 | ) | | 19 |
|
Minority interest and other | (24 | ) | | 4 |
| | (28 | ) |
Total Corporate | $ | (260 | ) | | $ | (165 | ) | | $ | (95 | ) |
|
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
Segment Operating Profit (Loss) | 2020 | | 2019 | | Change |
| (In millions) |
Ag Services and Oilseeds | | | | | |
Ag Services | $ | 164 |
| | $ | 75 |
| | $ | 89 |
|
Crushing | 70 |
| | 216 |
| | (146 | ) |
Refined Products and Other | 81 |
| | 72 |
| | 9 |
|
Wilmar | 107 |
| | 54 |
| | 53 |
|
Total Ag Services and Oilseeds | 422 |
| | 417 |
| | 5 |
|
| | | | | |
Carbohydrate Solutions | |
| | |
| | |
|
Starches and Sweeteners | 99 |
| | 135 |
| | (36 | ) |
Vantage Corn Processors | (31 | ) | | (39 | ) | | 8 |
|
Total Carbohydrate Solutions | 68 |
| | 96 |
| | (28 | ) |
| | | | | |
Nutrition | | | | | |
Human Nutrition | 113 |
| | 88 |
| | 25 |
|
Animal Nutrition | 29 |
| | (7 | ) | | 36 |
|
Total Nutrition | 142 |
| | 81 |
| | 61 |
|
| | | | | |
Other Business | 11 |
| | 14 |
| | (3 | ) |
| | | | | |
Specified Items: | | | | | |
Gains (losses) on sales of assets and businesses | — |
| | 12 |
| | (12 | ) |
Asset impairment charges | (44 | ) | | (9 | ) | | (35 | ) |
Total Specified Items | (44 | ) | | 3 |
| | (47 | ) |
| | | | | |
Total Segment Operating Profit | $ | 599 |
| | $ | 611 |
| | $ | (12 | ) |
| | | | | |
Adjusted Segment Operating Profit(1) | $ | 643 |
| | $ | 608 |
| | $ | 35 |
|
| | | | | |
Segment Operating Profit | $ | 599 |
| | $ | 611 |
| | $ | (12 | ) |
Corporate | (224 | ) | | (296 | ) | | 72 |
|
Earnings Before Income Taxes | $ | 375 |
| | $ | 315 |
| | $ | 60 |
|
Corporate results were a net charge of $260 million this quarter compared to $165 million in last year’s quarter. The effect of changing agricultural commodity prices on LIFO inventory valuation reserves resulted in an immaterial charge this quarter compared to a credit of $85 million in(1) Adjusted segment operating profit is segment operating profit excluding the prior year quarter. Other charges in the current period included a charge related to the early redemption of the Company’s $559 million notes due on March 15, 2018 and restructuring charges related to the reduction of certain positions within the Company’s global workforce. Other charges in the prior period included legal settlement costs and legal fees, other-than-temporary impairment charges on available for sale equity security investments, a loss on the sale of an investment, and restructuring charges. Minority interest and other expense increased $28 million due principally to lower results from the Company’s equity investment in CIP.above specified items.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Ag Services and Oilseeds operating profit increased 1%. Ag Services results more than doubled compared to the first quarter of 2019, which were negatively impacted by high water conditions in North America. Strong performance in global trade was driven by strong results in destination marketing and structured trade finance. Robust farmer selling in Brazil drove higher origination volumes and margins, which were partially offset by weaker results in North America. Crushing results were lower than the prior year quarter. Volumes were strong and execution margins were solid although below the high realized margins in the first quarter of 2019, which benefited from the short crop in Argentina. The prior year quarter also benefited from positive timing effects. Refined Products and Other results were higher due to margins in both biodiesel and refined oils in North America, partially offset by lower biodiesel margins in EMEAI. Peanut shelling results significantly improved from the prior year quarter. Wilmar results were significantly higher year-over-year.
Carbohydrate Solutions operating profit decreased 29%. Starches and Sweeteners results, which includes the wet mill ethanol results, were down driven largely by negative mark-to-market timing effects on forward sales of certain co-products. Absent those impacts, results were higher due to better operating performance at the Decatur facility, strong results in wheat milling, and improved conditions in EMEAI. VCP results were slightly higher versus the prior year quarter. Effective risk management and the lack of severe weather impacts seen in the first quarter of 2019, were partially offset by weak industry ethanol margins caused by significantly decreased demand.
Nutrition operating profit increased 75%. Human Nutrition, which includes businesses in flavors, specialty ingredients, and health and wellness, delivered strong performance and growth across its broad portfolio. Increased revenues in North America and EMEAI flavors, continued sales growth in alternative proteins, and additional bioactives income, drove improved results. Animal Nutrition results improved year-over-year driven by strong performance from Neovia, good volumes and margins in feed additives, and solid sales in pet care. Amino acids were negatively impacted by a decline in the global pricing environment.
Other Business operating profit decreased 21%. Loss provisions related to the Company’s futures commission and brokerage business were partially offset by improvements in the captive insurance operations.
Corporate results for the quarter are as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 | | Change |
| (In millions) |
LIFO adjustment | $ | 91 |
| | $ | (1 | ) | | $ | 92 |
|
Interest expense-net | (77 | ) | | (90 | ) | | 13 |
|
Unallocated corporate costs | (189 | ) | | (183 | ) | | (6 | ) |
Expenses related to acquisitions | — |
| | (14 | ) | | 14 |
|
Restructuring adjustments (charges) | 3 |
| | (2 | ) | | 5 |
|
Other charges | (52 | ) | | (6 | ) | | (46 | ) |
Total Corporate | $ | (224 | ) | | $ | (296 | ) | | $ | 72 |
|
Corporate results were a net charge of $224 million in the current quarter compared to $296 million in the prior year quarter. The elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020 resulted in a credit of $91 million in the current quarter compared to a charge of $1 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves in the prior quarter. Interest expense-net decreased $13 million due principally to lower interest rates and interest savings from cross currency swaps. Unallocated corporate costs increased $6 million due principally to higher variable performance-related and stock compensation expense accruals and IT expenses. Expenses related to acquisitions in the prior quarter related to the Neovia acquisition. Other charges in the current quarter included railroad maintenance expenses of $73 million that had an offsetting benefit in income tax expense, partially offset by the non-service components of net pension benefit income of $13 million and foreign exchange gains. Other charges in the prior quarter included foreign exchange losses, partially offset by earnings from the Company’s equity investment in CIP which was sold in December 2019.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Non-GAAP Financial Measures
The Company uses adjusted earnings per share (EPS)(“EPS”), adjusted earnings before taxes, interest, and depreciation and amortization (EBITDA)(“EBITDA”), and adjusted segment operating profit, non-GAAP financial measures as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of certain specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items.
Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes, and segment operating profit, respectively, the most directly comparable amounts reported under GAAP.
The table below provides a reconciliation of diluted EPS to adjusted EPS for the three months ended September 30, 2017March 31, 2020 and 2016.2019.
| | | Three months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | 2020 | | 2019 |
| In millions | | Per share | | In millions | | Per share | In millions | | Per share | | In millions | | Per share |
Average number of shares outstanding - diluted | 569 |
| | | | 589 |
| | | 564 |
| | | | 566 |
| | |
| | | | | | | | | | | | | | |
Net earnings and reported EPS (fully diluted) | $ | 192 |
| | $ | 0.34 |
| | $ | 341 |
| | $ | 0.58 |
| $ | 391 |
| | $ | 0.69 |
| | $ | 233 |
| | $ | 0.41 |
|
Adjustments: | | | | | | | | | | | | | | |
LIFO charge (credit) - net of tax of $32 million(1) | — |
| | — |
| | (53 | ) | | (0.09 | ) | |
(Gains) losses on sales of assets and businesses - net of tax of $2 million in 2017 and at 0% in 2016 (2) | (10 | ) | | (0.02 | ) | | 9 |
| | 0.02 |
| |
Asset impairment, restructuring, and settlement charges - net of tax of $38 million in 2017 and $25 million in 2016 (2) | 69 |
| | 0.12 |
| | 48 |
| | 0.08 |
| |
Loss on debt extinguishment - net of tax of $4 million(1) | 7 |
| | 0.01 |
| | — |
| | — |
| |
LIFO adjustment - net of tax of $22 million in 2020 and $0 million in 2019 (1) | | (69 | ) | | (0.12 | ) | | 1 |
| | — |
|
(Gains) losses on sales of assets and businesses - net of tax of $3 million in 2019 (2) | | — |
| | — |
| | (9 | ) | | (0.02 | ) |
Asset impairment and restructuring charges - net of tax of $9 million in 2020 and $1 million in 2019 (2) | | 32 |
| | 0.06 |
| | 10 |
| | 0.02 |
|
Expenses related to acquisitions - net of tax of $5 million in 2019 (2) | | — |
| | — |
| | 9 |
| | 0.02 |
|
Certain discrete tax adjustments | | 7 |
| | 0.01 |
| | 17 |
| | 0.03 |
|
Total adjustments | 66 |
| | 0.11 |
| | 4 |
| | 0.01 |
| (30 | ) | | (0.05 | ) | | 28 |
| | 0.05 |
|
Adjusted net earnings and adjusted EPS | $ | 258 |
| | $ | 0.45 |
| | $ | 345 |
| | $ | 0.59 |
| $ | 361 |
| | $ | 0.64 |
| | $ | 261 |
| | $ | 0.46 |
|
(1) Tax effected using the Company’s U.S. tax rate.
(2) Tax effected using the U.S. and other applicable tax rates.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the three months ended September 30, 2017March 31, 2020 and 2016.2019.
| | | | | | | | | Three months ended | | |
| Three months ended September 30, | | | March 31, | | |
(In millions) | 2017 | | 2016 | | Change | 2020 | | 2019 | | Change |
Earnings before income taxes | $ | 225 |
| | $ | 480 |
| | $ | (255 | ) | $ | 375 |
| | $ | 315 |
| | $ | 60 |
|
Interest expense | 79 |
| | 78 |
| | 1 |
| 83 |
| | 101 |
| | (18 | ) |
Depreciation and amortization | 232 |
| | 225 |
| | 7 |
| 245 |
| | 245 |
| | — |
|
LIFO | — |
| | (85 | ) | | 85 |
| (91 | ) | | 1 |
| | (92 | ) |
(Gains) losses on sales of assets and businesses | (12 | ) | | 9 |
| | (21 | ) | — |
| | (12 | ) | | 12 |
|
Loss on debt extinguishment | 11 |
| | — |
| | 11 |
| |
Asset impairment, restructuring, and settlement charges | 107 |
| | 73 |
| | 34 |
| |
Expenses related to acquisitions | | — |
| | 14 |
| | (14 | ) |
Railroad maintenance expenses | | 73 |
| | — |
| | 73 |
|
Asset impairment and restructuring charges | | 41 |
| | 11 |
| | 30 |
|
Adjusted EBITDA | $ | 642 |
| | $ | 780 |
| | $ | (138 | ) | $ | 726 |
| | $ | 675 |
| | $ | 51 |
|
| | | | | | | | | | |
| Three months ended September 30, | | | Three months ended | | |
| | March 31, | | |
(In millions) | 2017 | | 2016 | | Change | 2020 | | 2019 | | Change |
Agricultural Services | $ | 138 |
| | $ | 245 |
| | $ | (107 | ) | |
Corn Processing | 338 |
| | 306 |
| | 32 |
| |
Oilseeds Processing | 171 |
| | 194 | | (23 | ) | |
Wild Flavors and Specialty Ingredients | 85 |
| | 95 |
| | (10 | ) | |
Other - Financial | 26 |
| | 26 |
| | — |
| |
Ag Services and Oilseeds | | $ | 514 |
| | $ | 510 |
| | $ | 4 |
|
Carbohydrate Solutions | | 148 |
| | 178 |
| | (30 | ) |
Nutrition | | 199 |
| | 134 |
| | 65 |
|
Other Business | | 15 |
| | 24 |
| | (9 | ) |
Corporate | (116 | ) | | (86 | ) | | (30 | ) | (150 | ) | | (171 | ) | | 21 |
|
Adjusted EBITDA | $ | 642 |
| | $ | 780 |
| | $ | (138 | ) | $ | 726 |
| | $ | 675 |
| | $ | 51 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Market Factors Influencing Operations or Results in the Nine Months Ended September 30, 2017
As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. In Agricultural Services, U.S. export competitiveness was strong during the first half of the year but weakened during the third quarter. Overall low market volatility continued due to surplus in the global market. In Corn Processing, demand and prices for sweeteners and starches remained solid in North America while co-product prices were stable. Ethanol continues to face a challenging environment. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, U.S. industry ethanol production also remained at high levels limiting margins. Global oilseeds processing volumes remained strong, although slower meal demand growth pressured margins due to meal exports from Argentina and ample supply of competing proteins. Slow selling by farmers in Brazil continues to depress grain origination margins despite strong export volumes. While demand and margins for refined oil remained solid across all regions, the uncertainty surrounding the biodiesel tax credit has negatively impacted biodiesel margins. Wild Flavors and Specialty Ingredients benefited from strong demand for flavor ingredients and flavor systems, but continued to be adversely affected by start-up costs and margin pressure in certain non-flavor food ingredient markets.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net earnings attributable to controlling interests decreased $48 million to $807 million. Segment operating profit was $1.8 billion in the current period compared to $1.9 billion in the prior period. Included in segment operating profit in the current period was a net charge of $74 million consisting of a net gain on sales of assets and businesses, impairment, restructuring, and settlement charges, and corn hedge timing effects. Included in segment operating profit in the prior period was income of $102 million consisting of a net gain on sales of assets and businesses/revaluation, impairment and restructuring charges, and corn hedge timing effects. Adjusted segment operating profit increased $0.1 billion to $1.9 billion due to solid results in Corn Processing, partially offset by weaker South American origination margins, lower soybean crush margins, and weaker results in some specialty ingredients. Corporate results were a charge of $737 million for the nine months compared to $705 million the same period last year. Corporate results for the nine months included a credit of $4 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to a charge of $17 million the same period last year.
Income taxes decreased $75 million due to lower earnings before income taxes and a lower effective tax rate. The Company’s effective tax rate for the nine months ended September 30, 2017 decreased to 24.0% compared to 27.7% for the nine months ended September 30, 2016, primarily due to the impact of changes in discrete tax items, including the favorable resolution of an uncertain tax position related to a 2014 acquisition and return to provision in the current period, partially offset by changes in the forecasted geographic mix of pre-tax earnings and the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016.
Analysis of Statements of Earnings
Processed volumes by product for the nine months are as follows (in metric tons):
|
| | | | | | | | |
| Nine Months Ended | |
| September 30, | | |
(In thousands) | 2017 | | 2016 | | Change |
Oilseeds | 25,602 |
| | 25,137 |
| | 465 |
|
Corn | 16,851 |
| | 16,623 |
| | 228 |
|
Total | 42,453 |
| | 41,760 |
| | 693 |
|
The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. Processed volumes of oilseeds increased due to the strong demand environment for soybean meal and canola oil. The overall increase in corn is due to the strong demand environment for ethanol, partially offset by the production disruption in one of the Company’s plants due to a water pipe leak in the first quarter and the reconfiguration of the Company’s Peoria, Illinois ethanol complex.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Revenues by segment for the nine months are as follows:
|
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 30, | | |
| 2017 | | 2016 | | Change |
| (In millions) |
Agricultural Services | |
| | |
| | |
|
Merchandising and Handling | $ | 16,434 |
| | $ | 17,331 |
| | $ | (897 | ) |
Milling and Other | 2,141 |
| | 2,325 |
| | (184 | ) |
Transportation | 154 |
| | 171 |
| | (17 | ) |
Total Agricultural Services | 18,729 |
| | 19,827 |
| | (1,098 | ) |
| | | | | |
Corn Processing | |
| | |
| | |
|
Sweeteners and Starches | 3,192 |
| | 3,061 |
| | 131 |
|
Bioproducts | 3,651 |
| | 3,889 |
| | (238 | ) |
Total Corn Processing | 6,843 |
| | 6,950 |
| | (107 | ) |
| | | | | |
Oilseeds Processing | | | | | |
Crushing and Origination | 10,850 |
| | 10,799 |
| | 51 |
|
Refining, Packaging, Biodiesel, and Other | 6,064 |
| | 5,852 |
| | 212 |
|
Asia | 192 |
| | 220 |
| | (28 | ) |
Total Oilseeds Processing | 17,106 |
| | 16,871 |
| | 235 |
|
| | | | | |
Wild Flavors and Specialty Ingredients | 1,787 |
| | 1,883 |
| | (96 | ) |
Total Wild Flavors and Specialty Ingredients | 1,787 |
| | 1,883 |
| | (96 | ) |
| | | | | |
Other - Financial | 293 |
| | 314 |
| | (21 | ) |
Total Other | 293 |
| | 314 |
| | (21 | ) |
Total | $ | 44,758 |
| | $ | 45,845 |
| | $ | (1,087 | ) |
Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. During periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.
Revenues decreased $1.1 billion to $44.8 billion due to lower sales volumes ($1.1 billion) in Agricultural Services ($1.1 billion), Corn Processing ($0.1 billion), and Wild Flavors and Specialty Ingredients ($0.1 billion), partially offset by higher sales volumes in Oilseeds Processing ($0.2 billion). The decrease in sales volumes was due principally to a decrease in volumes of unprocessed commodities, in particular volumes of soybeans, corn, rapeseed, and wheat.
Cost of products sold decreased $1.0 billion to $42.2 billion due to lower sales volumes. Included in cost of products sold was a credit of $4 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $17 million in the prior year’s period. Manufacturing expenses increased $0.1 billion to $3.9 billion due to higher salaries and benefits and increased expenses for energy, operating and maintenance supplies, and contracted labor.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Gross profit of $2.6 billion in the current period was comparable to the prior period. Lower results in soybean processing ($143 million) and grain origination ($67 million) were offset by higher results in canola processing ($46 million), sweeteners and starches ($51 million), and ethanol ($75 million). These factors are explained in the segment operating profit discussion on page 45. Current period gross profit included a credit of $4 million from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $17 million during the same period last year.
Selling, general, and administrative expenses of $1.5 billion was comparable to the prior period. Current period increase in salaries and benefits cost related to increased investments in the Company’s business transformation, IT, and innovation initiatives was offset by prior period expenses related to a settled legal matter.
Asset impairment, exit, and restructuring costs increased $104 million to $140 million. Current period charges consisted of $63 million of asset impairments in the Corn processing segment primarily related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex, $47 million of restructuring charges in Corporate primarily related to the reduction of certain positions within the Company’s global workforce, and $30 million of several individually insignificant asset impairments and restructuring charges. Prior period charges included $17 million of software impairment and other-than-temporary impairment charges on available for sale equity security investments in Corporate, $5 million of asset impairments in the Corn Processing segment, and $14 million of other individually insignificant asset impairments and restructuring charges.
Interest expense increased $33 million to $246 million due principally to higher interest rates on short-term debt, the issuance of the $1 billion fixed-rate notes in August 2016, and interest related to a prior year foreign income tax amended return, partially offset by the retirement of the $261 million bond that matured in April 2017. Interest expense in the prior period also included a credit of $8 million for the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations.
Equity in earnings of unconsolidated affiliates increased $174 million to $327 million primarily due to higher earnings from the Company’s investment in Wilmar resulting from the increased ownership stake in and higher results from Wilmar and improved results from the Company’s equity investment in CIP, partially offset by losses from a new equity investment and decreased earnings resulting from the disposal of an equity investment.
Other income decreased $125 million to $13 million. Current period income included gains related to the sale of the crop risk services business and disposals of other individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business, a charge related to the early redemption of the Company’s $559 million notes due on March 15, 2018, foreign exchange losses, and changes in contingent settlement provisions. Prior period income included realized additional consideration related to the December 2012 sale of the Company’s equity investment in Gruma S.A.B de C.V., recovery of loss provisions as well as gain related to the sale of the Company’s Brazilian sugar ethanol facilities, gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors, foreign exchange gains, and other income.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the nine months are as follows:
|
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 30, | | |
Segment Operating Profit | 2017 | | 2016 | | Change |
| (In millions) |
Agricultural Services | |
| | |
| | |
|
Merchandising and Handling | $ | 79 |
| | $ | 102 |
| | $ | (23 | ) |
Milling and Other | 156 |
| | 164 |
| | (8 | ) |
Transportation | 49 |
| | 62 |
| | (13 | ) |
Total Agricultural Services | 284 |
| | 328 |
| | (44 | ) |
| | | | | |
Corn Processing | |
| | |
| | |
|
Sweeteners and Starches | 561 |
| | 499 |
| | 62 |
|
Bioproducts | 87 |
| | 7 |
| | 80 |
|
Total Corn Processing | 648 |
| | 506 |
| | 142 |
|
| | | | | |
Oilseeds Processing | | | | | |
Crushing and Origination | 197 |
| | 331 |
| | (134 | ) |
Refining, Packaging, Biodiesel, and Other | 208 |
| | 251 |
| | (43 | ) |
Asia | 234 |
| | 59 |
| | 175 |
|
Total Oilseeds Processing | 639 |
| | 641 |
| | (2 | ) |
| | | | | |
Wild Flavors and Specialty Ingredients | 228 |
| | 237 |
| | (9 | ) |
Total Wild Flavors and Specialty Ingredients | 228 |
| | 237 |
| | (9 | ) |
| |
| | |
| | |
|
Other - Financial | 78 |
| | 84 |
| | (6 | ) |
Total Other | 78 |
| | 84 |
| | (6 | ) |
| | | | | |
Specified Items: | | | | | |
Gains (losses) on sales of assets and businesses | 20 |
| | 114 |
| | (94 | ) |
Impairment, restructuring, settlement charges | (98 | ) | | (16 | ) | | (82 | ) |
Hedge timing effects | 4 |
| | 4 |
| | — |
|
Total Specified Items | (74 | ) | | 102 |
| | (176 | ) |
| | | | | |
Total Segment Operating Profit | $ | 1,803 |
| | $ | 1,898 |
| | $ | (95 | ) |
| | | | | |
Adjusted Segment Operating Profit(1) | $ | 1,877 |
| | $ | 1,796 |
| | $ | 81 |
|
| | | | | |
Segment Operating Profit | $ | 1,803 |
| | $ | 1,898 |
| | $ | (95 | ) |
Corporate | (737 | ) | | (705 | ) | | (32 | ) |
Earnings Before Income Taxes | $ | 1,066 |
| | $ | 1,193 |
| | $ | (127 | ) |
(1) Adjusted segment operating profit is segment operating profit excluding the above specified items.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Agricultural Services operating profits decreased 13%. Merchandising and Handling operating results decreased due to decreased volumes in the U.S. corn exports and lower export margins. Global Trade generated solid results benefiting from improved margins which was partially offset by some hedge position losses. Milling and Other decreased due to lower volumes and margins. Transportation results decreased due to river conditions and lower barge freight volumes and margins.
Corn Processing operating profit increased 28%. Sweeteners and Starches operating profit increased due to improved domestic demand and higher volumes and margins from the international business. Bioproducts profit increased due to strong ethanol export demand and improved margins, and improved lysine margins, partially offset by lower volumes caused by a mild winter.
Oilseeds Processing operating profit was comparable to the prior period. Crushing and Origination operating profit decreased from the prior period. Higher softseed results in North America and Europe were offset by lower crushing and origination results in South America as margins remain challenged. A competitive global protein meal market continued to pressure soybean crush margins in all regions. Refining, Packaging, Biodiesel, and Other operating profit declined due to the uncertainty surrounding the biodiesel tax credit that has negatively impacted biodiesel margins partially offset by higher results in South American refined and packaged oils and the global peanut business. Asia results increased on higher earnings from the Company’s investment in Wilmar due to the increased ownership stake in and higher results from Wilmar.
Wild Flavors and Specialty Ingredients operating profit decreased 4%. Weaker results in specialty ingredients, due in part to operational start-up costs, were partially offset by the continuing strong demand for flavor ingredients and flavor systems especially in Africa and Asia.
Other - Financial operating profit decreased 7% primarily due to the absence of the Company’s share in the earnings of an equity investment that was sold in the third quarter of fiscal 2016 partially offset by improved results from the captive insurance operations.
Corporate results for the nine months are as follows:
|
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 30, | | |
| 2017 | | 2016 | | Change |
| (In millions) |
LIFO credit (charge) | $ | 4 |
| | $ | (17 | ) | | $ | 21 |
|
Interest expense - net | (232 | ) | | (205 | ) | | (27 | ) |
Unallocated corporate costs | (376 | ) | | (325 | ) | | (51 | ) |
Other charges | (58 | ) | | (87 | ) | | 29 |
|
Minority interest and other | (75 | ) | | (71 | ) | | (4 | ) |
Total Corporate | $ | (737 | ) | | $ | (705 | ) | | $ | (32 | ) |
Corporate results were a net charge of $737 million in the current period compared to $705 million in the prior period. The effects of increasing commodity prices on LIFO inventory valuations resulted in a credit of $4 million in the current period compared to a charge of $17 million in the prior period. Interest expense - net increased $27 million due principally to higher interest rates on short-term debt, the issuance of the new $1 billion fixed-rate debt in August 2016, and interest related to a prior year foreign income tax amended return, partially offset by the retirement of the $261 million bond that matured in April 2017. Unallocated corporate costs increased $51 million due principally to increased investments in the Company’s business transformation, IT, and innovation initiatives. Other charges in the current period included a charge related to the early redemption of the Company’s $559 million notes due on March 15, 2018 and restructuring charges related to the reduction of certain positions within the Company’s global workforce. Other charges in the prior period included legal settlement costs and legal fees, a software impairment charge, other-than-temporary impairment charges on available for sale equity security investments, a loss on the sale of an investment, and other asset impairment and restructuring charges.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Non-GAAP Financial Measures
The Company uses adjusted earnings per share (EPS), adjusted earnings before taxes, interest, and depreciation and amortization (EBITDA), and adjusted segment operating profit, non-GAAP financial measures as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of certain specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items.
Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes and segment operating profit, respectively, the most directly comparable amounts reported under GAAP.
The table below provides a reconciliation of diluted EPS to adjusted EPS for the nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| In millions | | Per share | | In millions | | Per share |
Average number of shares outstanding - diluted | 574 |
| | | | 593 |
| | |
| | | | | | | |
Net earnings and reported EPS (fully diluted) | $ | 807 |
| | $ | 1.41 |
| | $ | 855 |
| | $ | 1.44 |
|
Adjustments: | | | | | | | |
LIFO charge (credit) - net of tax of $2 million in 2017 and $6 million in 2016 (1) | (2 | ) | | — |
| | 11 |
| | 0.02 |
|
(Gains) losses on sales of assets and businesses - net of tax of $32 million in 2017 and $17 million in 2016 (2) | 12 |
| | 0.02 |
| | (92 | ) | | (0.15 | ) |
Asset impairment, restructuring, and settlement charges - net of tax of $47 million in 2017 and $34 million in 2016 (2) | 98 |
| | 0.17 |
| | 64 |
| | 0.10 |
|
Loss on debt extinguishment - net of tax of $4 million(1) | 7 |
| | 0.01 |
| | — |
| | — |
|
Certain discrete tax adjustments | 4 |
| | 0.01 |
| | — |
| | — |
|
Total adjustments | 119 |
| | 0.21 |
| | (17 | ) | | (0.03 | ) |
Adjusted net earnings and adjusted EPS | $ | 926 |
| | $ | 1.62 |
| | $ | 838 |
| | $ | 1.41 |
|
| | | | | | | |
(1) Tax effected using the Company’s U.S. tax rate.
(2) Tax effected using the applicable tax rates.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the nine months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | |
| Nine months ended September 30, | | |
(In millions) | 2017 | | 2016 | | Change |
Earnings before income taxes | $ | 1,066 |
| | $ | 1,193 |
| | $ | (127 | ) |
Interest expense | 246 |
| | 213 |
| | 33 |
|
Depreciation and amortization | 684 |
| | 677 |
| | 7 |
|
LIFO | (4 | ) | | 17 |
| | (21 | ) |
(Gains) losses on sales of assets and businesses | (20 | ) | | (109 | ) | | 89 |
|
Loss on debt extinguishment | 11 |
| | — |
| | 11 |
|
Asset impairment, restructuring, and settlement charges | 145 |
| | 98 |
| | 47 |
|
Adjusted EBITDA | $ | 2,128 |
| | $ | 2,089 |
| | $ | 39 |
|
| | | | | |
| | | | | |
| Nine months ended September 30, | | |
(In millions) | 2017 | | 2016 | | Change |
Agricultural Services | $ | 434 |
| | $ | 479 |
| | $ | (45 | ) |
Corn Processing | 918 |
| | 777 |
| | 141 |
|
Oilseeds Processing | 790 |
| | 788 |
| | 2 |
|
Wild Flavors and Specialty Ingredients | 299 |
| | 304 |
| | (5 | ) |
Other - Financial | 90 |
| | 91 |
| | (1 | ) |
Corporate | (403 | ) | | (350 | ) | | (53 | ) |
Adjusted EBITDA | $ | 2,128 |
| | $ | 2,089 |
| | $ | 39 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Liquidity and Capital Resources
A Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital intensive agricultural commodity-based business. The Company’s strategy involves expanding the volume and diversity of crops that it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. The Company depends on access to credit markets, which can be impacted by its credit rating and factors outside of the Company’sADM’s control, to fund its working capital needs and capital expenditures. The primary source of funds to finance the Company’sADM’s operations, capital expenditures, and advancement of its growth strategy is cash generated by operations and lines of credit, including a commercial paper borrowing facility.facility and accounts receivable securitization programs. In addition, the Company believes it has access to funds from public and private equity and debt capital markets in both U.S. and international markets.
Cash used in operating activities was $0.7 billion for the three months compared to $2.0 billion for the same period last year. Working capital changes, including the increase in deferred consideration, decreased cash by $1.5 billion for the three months compared to $2.5 billion for the same period last year. Inventories decreased approximately $0.2 billion primarily due to lower inventory quantities. Trade payables declined approximately $0.3 billion principally reflecting seasonal cash payments for North American harvest-related grain purchases.
Increase in deferred consideration in securitized receivables of $2.0 billion and $1.8 billion for the three months and the same period last year, respectively, was offset by $2.0 billion and $1.8 billion of net consideration received for beneficial interest obtained for selling trade receivables for the three months and the same period last year, respectively.
Cash provided by investing activities was $1.9 billion for the three months compared to a use of $0.3 billion for the same period last year. Capital expenditures for the three months of $0.2 billion were comparable to the same period last year. Net assets of businesses acquired were $8 million for the three months compared to $1.9 billion for the same period last year due to the Neovia acquisition. Net consideration received for beneficial interest obtained for selling trade receivables was $2.0 billion for the three months compared to $1.8 billion the same period last year.
Cash provided by financing activities was $3.3 billion for the three months compared to $1.1 billion for the same period last year. Long-term debt borrowings for the three months of $1.5 billion consisted of the $0.5 billion and $1.0 billion aggregate principal amounts of 2.75% Notes due in 2025 and 3.25% Notes due in 2030, respectively, issued on March 27, 2020. There were no long-term borrowings in the same period last year. Commercial paper borrowings for the three months were $2.2 billion compared to $1.3 billion for the same period last year. Proceeds from the borrowings in the current period will be used for general corporate purposes, including the reduction of short-term debt. Share repurchases for the three months were $0.1 billion compared to an insignificant amount for the same period last year. Dividends of $0.2 billion for the three months were comparable to the same period last year.
At September 30, 2017,March 31, 2020, the Company had $0.8$4.7 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 1.61.5 to 1. Included in working capital was $5.3$5.6 billion of readily marketable commodity inventories. Cash provided by operating activities was $2.2 billion for the nine months compared to $1.3 billion the same period last year. Working capital changes increased cash by $0.6 billion for the nine months compared to a decrease of $0.3 billion for the same period last year. Trade receivables decreased $0.1 billion due to lower revenues. Inventories decreased approximately $0.7 billion due to lower inventory quantities partially offset by higher prices. Trade payables declined approximately $0.3 billion principally reflecting seasonal cash payments for North American harvest-related grain purchases. Cash used in investing activities was $0.9 billion for the nine months compared to $1.2 billion the same period last year. Sales of marketable securities, net of purchases, were $73 million for the nine months compared to $35 million the same period last year. Capital expenditures and net assets of businesses acquired were $0.9 billion for the nine months compared to $0.8 billion the same period last year. Investments in and advances to affiliates included the additional investment in Wilmar of $0.3 billion for the nine months compared to $0.6 billion the same period last year. Cash used in financing activities was $1.0 billion for the nine months compared to $0.1 billion the same period last year. Long-term debt borrowings for the nine months were $0.5 billion related to the 3.75% notes issued on September 14, 2017 compared to long-term debt borrowings of $1.0 billion the same period last year which related to the 2.5% debt issued on August 11, 2016. Long-term debt payments for the nine months of $0.8 billion primarily related to the redemption of the $559 million notes due on 2018 and the retirement of the $261 million bond that matured in April 2017 compared to long-term debt payments of $9 million the same period last year. Commercial paper borrowings for the nine months were $0.6 billion compared to $0.1 billion the same period last year. Share repurchases for the nine months were $0.7 billion compared to $0.8 billion the same period last year.
At September 30, 2017,March 31, 2020, the Company’s capital resources included net worthshareholders’ equity of $17.6$19.0 billion and lines of credit, including the accounts receivable securitization programs described below, totaling $6.9$10.7 billion, of which $4.8$5.9 billion was unused. The Company’s ratio of long-term debt to total capital (the sum of the Company’s long-term debt and shareholders’ equity) was 27%31% and 29% at September 30, 2017March 31, 2020 and 27% at December 31, 2016.2019, respectively. The Company uses this ratio as a measure of the Company’s long-term indebtedness and as an indicator of financial flexibility. The Company’s ratio of net debt (the sum of short-term debt, current maturities of long-term debt, and long-term debt less the sum of cash and cash equivalents and short-term marketable securities) to capital (the sum of net debt and shareholders’ equity) was 29% at March 31, 2020 and December 31, 2019. Of the Company’s total lines of credit, $4.0$5.0 billion supported athe combined U.S. and European commercial paper borrowing facility,programs, against which there was $0.6$2.2 billion of U.S. and European commercial paper outstanding at September 30, 2017.March 31, 2020.
COVID-19 has not significantly impacted ADM’s capital and financial resources and pricing on its revolving credit facility remains unchanged. However, in line with the overall markets, COVID-19 has created dislocations in the credit markets causing corporate credit spreads to rise, partially offset by a corresponding drop in benchmark yields. The Company has utilized its diversified sources of liquidity, including its inventory financing and bilateral bank facilities, to ensure it has ample cash and is prepared for possible unexpected credit market disruptions. Additionally, ADM has been accepted into the Federal Reserve’s Commercial Paper Financing Facility to ensure uninterrupted access to the commercial paper markets. To date, the Company has not utilized this facility.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
As of September 30, 2017,March 31, 2020, the Company had $0.5$4.7 billion of cash and cash equivalents, $0.4$0.5 billion of which was cash held by foreign subsidiaries whose undistributed earnings are considered permanentlyindefinitely reinvested. Based on the Company’s historical ability to generate sufficient cash flows from its U.S. operations and unused and available U.S. credit capacity of $3.7$3.8 billion, the Company has asserted that these funds are permanentlyindefinitely reinvested outside the U.S.
The Company has accounts receivable securitization programs (the “Programs”) with certain commercial paper conduit purchasers and committed purchasers. The Programs provide the Company with up to $1.7$1.9 billion as amended, in funding against accounts receivable transferred into the Programs and expands the Company’s access to liquidity through efficient use of its balance sheet assets (see Note 16 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information and disclosures on the Programs). As of September 30, 2017,March 31, 2020, the Company utilized $1.4 billion of its facility under the Programs.
For the ninethree months ended September 30, 2017,March 31, 2020, the Company spent approximately $0.7$0.2 billion in capital expenditures, $0.2 billion in acquisitions, $0.3 billion in additional Wilmar investment, $0.5 billion in dividends, and $0.7$0.1 billion in share repurchases. The Company has a stock repurchase program. Under the program, the Company acquired 3.4 million shares for the three months ended March 31, 2020, and has acquired approximately 15.7 million shares during the nine months ended September 30, 2017. The Company has 15.7105 million shares remaining that may be repurchased under the program until December 31, 2019.2024.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The Company expects capital expenditures of approximately $1.0$0.8 billion, dividends of $0.8 billion, and share repurchases of $0.1 billion during 2017. In 2017, the Company expects aggregate cash outlays of approximately $0.7 billion in dividends and up to $1.0 billion in share repurchases, subject to strategic capital requirements and leverage considerations.2020.
Contractual Obligations and Commercial Commitments
The Company’s purchase obligations as of September 30, 2017March 31, 2020 and December 31, 20162019 were $10.0$13.5 billion and $10.6$12.2 billion, respectively. The decreaseincrease is primarily related to obligations to purchase lowerhigher quantities of agricultural commodity inventories and lower prices as well as lower obligations in other commitments.inventories. As of September 30, 2017,March 31, 2020, the Company expects to make payments related to purchase obligations of $8.8$12.6 billion within the next twelve months. There were no other material changes in the Company’s contractual obligations during the quarter ended September 30, 2017March 31, 2020.
Off Balance Sheet Arrangements
In September 2017,On April 1, 2020, the Company amended its secondrestructured the Second Program from a deferred purchase price to a pledge structure. Under the new structure, ADM Ireland Receivables transfers a portion of the purchased accounts receivable securitization program (the “Second Program”)together with certain commercial paper conduit purchasersan equally proportional interest in all of its right, title and committed purchasers (collectively,interest in the “Second Purchasers”) and increased its facility from $0.3 billionremaining purchased accounts receivable to $0.5 billion. The program terminates on March 16, 2018 unless extended (seeeach of the Second Purchasers. In exchange, ADM Ireland Receivables receives a cash payment for the accounts receivables transferred. See Note 16 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information and disclosures onabout the Program).Second Program.
There were no other material changes in the Company’s off balance sheet arrangements during the quarter ended September 30, 2017March 31, 2020.
Critical Accounting Policies
Retirement Benefit Changes
On July 31, 2017, the Company announced that all participants in the Company’s U.S. salaried pension plan and the Supplemental Executive Retirement Plan (SERP) will begin accruing benefits under the cash balance formula effective January 1, 2022. Benefits for participants who were accruing under the final average pay formula will be frozen as of December 31, 2021, including pay and service through that date.
This change, along with other changes in participation associated with divestitures and restructuring, triggered a remeasurement of the salaried pension plan and the SERP resulting in decreases in the fiscal 2017 pension expense, accumulated other comprehensive loss, and underfunded status by $18 million, $182 million, and $164 million, respectively.
Concurrent with this change, the Company also changed the method used to estimate the service and interest cost components of the net periodic pension and postretirement benefit costs for its U.S. plans. The new method uses the spot rate yield curve approach to estimate the service and interest costs. Previously, those costs were determined using a single weighted-average discount rate applied to all future cash outflows. The change does not affect the measurement of the Company’s benefit obligations and was accounted for as a change in accounting estimate in accordance with the guidance of ASC Topic 250, Accounting Estimates and Error Corrections, thereby impacting the current and future quarters. The impact of this change on after-tax earnings and diluted earnings per share for the quarter ended September 30, 2017 was immaterial.
There were no other material changes in the Company’s critical accounting policies during the quarter ended September 30, 2017.March 31, 2020.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices as they relate to the Company’s net commodity position, foreign currency exchange rates, and interest rates. Significant changes in market risk sensitive instruments and positions for the quarter ended September 30, 2017March 31, 2020 are described below. There were no material changes during the period in the Company’s potential loss arising from changes in foreign currency exchange rates and interest rates.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued) |
For detailed information regarding the Company’s market risk sensitive instruments and positions, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued) |
Commodities
The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, crop disease, plantings, government programs and policies, competition, changes in global demand, changes in customer preferences and standards of living, and global production of similar and competitive crops.
The fair value of the Company’s commodity position is a summation of the fair values calculated for each commodity by valuing all significantof the commodity risk positions at quoted market prices for the period, where available, or utilizing a close proxy. The Company has established metrics to monitor the amount of market risk exposure, which consist of volumetric limits and value-at-risk (VaR)(“VaR”) limits. VaR measures the potential loss, at a 95% confidence level, that could be incurred over a one-year period. Volumetric limits are monitored daily and VaR calculations and sensitivity analysis are monitored weekly.
In addition to measuring the hypothetical loss resulting from an adverse two standard deviation move in market prices (assuming no correlations) over a one-year period using VaR, sensitivity analysis is performed measuring the potential loss in fair value resulting from a hypothetical 10% adverse change in market prices. The highest, lowest, and average weekly position together with the market risk from a hypothetical 10% adverse price change is as follows:
| | | | Nine months ended | | Year ended | | Three months ended | | Year ended |
| | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
Long/(Short) (In millions) | | Fair Value | | Market Risk | | Fair Value | | Market Risk | | Fair Value | | Market Risk | | Fair Value | | Market Risk |
Highest position | | $ | 455 |
| | $ | 46 |
| | $ | 876 |
| | $ | 88 |
| | $ | 400 |
| | $ | 40 |
| | $ | 576 |
| | $ | 58 |
|
Lowest position | | (82 | ) | | (8 | ) | | (529 | ) | | (53 | ) | | (232 | ) | | (23 | ) | | (83 | ) | | (8 | ) |
Average position | | 215 |
| | 21 |
| | 27 |
| | 3 |
| | 109 |
| | 11 |
| | 280 |
| | 28 |
|
The change in fair value of the average position was principally the result of an increasea decrease in average quantities underlying the weekly commodity position and, to a lesser extent,partially offset by an increase in prices.
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ITEM 4. | CONTROLS AND PROCEDURES |
As of September 30, 2017March 31, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (a)(i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b)(ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Company’s internal controls over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
TheDuring 2018, the Company launched Readiness to drive new efficiencies and improve the customer experience in the Company’s existing businesses through a combination of data analytics, process simplification and standardization, and behavioral and cultural change, building upon its earlier 1ADM and operational excellence programs. As part of this transformation, the Company is implementing a new enterprise resource planning (ERP)(“ERP”) system on a worldwide basis, as part of its ongoing business transformation program, which is expected to improve the efficiency and effectiveness of certain financial and business transaction processes. The implementation is expected to occur in phases over the next several years. The Company has currently implemented changescontinues to certain processes in corporate finance, two processing businesses, and in over 200 locations, and will continue to roll out the ERP system over the next several years. The Company has appropriately consideredconsider these changes in its design of and testing for effectiveness of internal controls over financial reporting and concluded, as part of the evaluation described in the above paragraph, that the implementation of the new ERP in these circumstances has not materially affected its internal control over financial reporting.
PART II – OTHER INFORMATION
The Company is routinely involved in a number of actual or threatened legal actions, including those involving alleged personal injuries, employment law, product liability, intellectual property, environmental issues, alleged tax liability (see Note 1110 for information on income tax matters), and class actions. The Company also routinely receives inquiries from regulators and other government authorities relating to various aspects of our business, and at any given time, the Company has matters at various stages of resolution with the applicable government authorities.resolution. The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief including injunctive relief, that could require significant expenditures or result in lost revenues. In accordance with applicable accounting standards, the Company records a liability in its consolidated financial statements for material loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a material loss contingency is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, disgorgement, or punitive damages; or could result in a change in business practice.
The Company ishas been a party to numerous lawsuits pending in various U.S. state and federal courts arising out of Syngenta Corporation’s (Syngenta)(“Syngenta”) marketing and distribution of genetically modified corn products Agrisure Viptera and Agrisure Duracade, in the U.S. First, the Company brought a state court action in Louisiana against Syngenta in 2014, alleging Syngenta was negligent in commercializing its products before the products were approved in China. Second,In December 2017, the Company isand Syngenta reached a party in a numberconfidential settlement of purported class actions filed beginning in 2013 by farmers and other parties againstthis action. Second, Syngenta in federal and state courts, again alleging that Syngenta was negligent in commercializing its products. The federal actions have been consolidated for pretrial proceedings in a multidistrict litigation (MDL) proceeding in federal court in Kansas City, Kansas, and some state actions have been consolidated for pretrial proceedings in MDL in Minnesota state court. In the fourth quarter of 2015, Syngenta filedbrought third-party claims against the Company in 2015 in a federal multidistrict litigation (“MDL”) in Kansas City, Kansas, consolidated state court litigation in Minneapolis, Minnesota, and other grain companies in these MDLscourts, seeking contribution in the event Syngenta is held liable in these lawsuits.class actions by farmers and other parties. In Septemberthe December 2017 settlement, Syngenta filed similaragreed to dismiss all of these third-party claims against the Company in Iowa state court. The federal court in the Kansas MDL dismissed all claims against the Company on April 4, 2016,Company. Third, farmers and the state court in the Minnesota MDL dismissed all claims against the Company on September 6, 2016. Therefore, the Company is no longer a third-party defendant in the federal or state MDL. The Company also intends to move to dismiss the third-party claims in Iowa state court. In September 2017, Syngenta and the farmer plaintiffs announced a tentative settlement, subject to court approval, of all claims by those plaintiffs. Third,other parties have sued the Company and other grain companies have been named as defendants in numerous individual and purported class action suits filed by farmers and other parties in Illinois state and federal courts beginning in the fourth quarter of 2015, alleging the Company and other grain companies were negligent in failing to screen for genetically modified corn. As noted,All of these claims were dismissed, subject to appeal, in several orders entered on September 6,August 17, 2016 by the federal court in the Minnesota state MDL dismissed all claims against the Company, andMinneapolis on January 4, 2017 aby the federal court in the Southern District of Illinois, similarly dismissed alland on August 18, 2017 by a state court in Illinois. Subsequently in 2019, a number of the pending complaintsadditional plaintiffs filed substantially similar claims against the Company and other grain companies in Southern Illinois. Some parties are expectedthe same Illinois state court. On January 30, 2020, the Illinois state court judge held that its August 18, 2017 dismissal order would also be applied to appeal some or all of these dismissals. Currently,more recently filed claims. Thus, subject to appeals, the Company remainswill not be a defendant in only certain state court actions by farmers and other parties pending in Illinois state court, which the Company has moved to dismiss as well.any remaining actions. The Company denies liability in all of the actions in which it has been named as a defendant or third-party defendant or defendant and iswill vigorously defendingdefend itself on appeal in these cases. All of these actions are in pretrial proceedings. At this time, the Company is unable to predict the final outcome of this matter with any reasonable degree of certainty, but believes the outcome will not have a material adverse effect on its financial condition, results of operations, or cash flows.
On September 4, 2019, AOT Holding AG (“AOT”) filed a putative class action under the U.S. Commodities Exchange Act in federal district court in Urbana, Illinois, alleging that the Company sought to manipulate the benchmark price used to price and settle ethanol derivatives traded on futures exchanges. AOT alleges that members of the putative class suffered “hundreds of millions of dollars in damages” as a result of the Company’s alleged actions. The Company filed a motion to dismiss this suit in November 2019, and that motion is awaiting decision by the court. The Company denies liability, and is vigorously defending itself, in this action. As this action is in pretrial proceedings, the Company is unable at this time to predict the final outcome with any reasonable degree of certainty, but believes the outcome will not have a material adverse effect on its financial condition, results of operations, or cash flows.
On September 5, 2019, D&M Farms, Mark Hasty, and Dustin Land filed a putative class action on behalf of a purported class of peanut farmers under the U.S. federal antitrust laws in federal court in Norfolk, Virginia, alleging that the Company’s subsidiary, Golden Peanut, and another peanut shelling company, conspired to fix the price they paid to farmers for raw peanuts. The Company filed a motion to dismiss this suit in October 2019, and that motion is awaiting decision by the court. The Company denies liability, and is vigorously defending itself, in this action. As this action is in pretrial proceedings, the Company is unable at this time to predict the final outcome with any reasonable degree of certainty, but believes the outcome will not have a material adverse effect on its financial condition, results of operations, or cash flows.
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ITEM 1. | LEGAL PROCEEDINGS (Continued) |
The Company is not currently a party to any legal proceeding or environmental claim that it believes would have a material adverse effect on its financial position, results of operations, or liquidity.
There were no significant changesThe information presented below updates, and should be read in conjunction with, the Company’s risk factors during the quarter ended September 30, 2017. For further information about the Company’s risk factors, refer toin Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019. Except as presented below, there were no other significant changes in the Company’s risk factors during the quarter ended March 31, 2020.
The Company faces risks related to health epidemics, pandemics, and similar outbreaks.
ADM is monitoring the global outbreak of the novel coronavirus (COVID-19) and taking steps to mitigate the potential risks posed by its spread, including working with its customers, employees, suppliers, local communities, and other stakeholders. COVID-19 or other health epidemics, pandemics, or similar outbreaks could impact the Company’s operations if significant portions of its workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures, or other restrictions. In such circumstances, ADM may be unable to perform fully on its contracts, supply chain may be affected, and costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. In addition, a prolonged outbreak of COVID-19 or a resurgence of the virus in the future may have a material impact on demand for certain products that ADM produces, particularly biofuels and ingredients that go into food and beverages that service the food services channels. The Company cannot at this time predict the impact of the COVID-19 pandemic on its future financial or operational results, but the impact could potentially be material over time.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program (2) | | Number of Shares Remaining that May be Purchased Under the Program (2) |
July 1, 2017 to | | | | | | | | |
July 31, 2017 | | 475,697 |
| | $ | 41.000 |
| | 475,697 |
| | 19,123,029 |
|
| | | | | | | | |
August 1, 2017 to | | |
| | |
| | |
| | |
|
August 31, 2017 | | 1,959,118 |
| | 41.835 |
| | 1,959,118 |
| | 17,163,911 |
|
| | | | | | | | |
September 1, 2017 to | | |
| | |
| | |
| | |
|
September 30, 2017 | | 1,494,187 |
| | 42.433 |
| | 1,494,187 |
| | 15,669,724 |
|
Total | | 3,929,002 |
| | $ | 41.961 |
| | 3,929,002 |
| | 15,669,724 |
|
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program(2) | | Number of Shares Remaining that May be Purchased Under the Program(2) |
January 1, 2020 to | | | | | | | | |
January 31, 2020 | | 252 |
| | $ | 45.561 |
| | 252 |
| | 108,314,669 |
|
| | | | | | | | |
February 1, 2020 to | | |
| | |
| | |
| | |
|
February 29, 2020 | | 468,174 |
| | 44.770 |
| | 40 |
| | 108,314,629 |
|
| | | | | | | | |
March 1, 2020 to | | |
| | |
| | | | |
|
March 31, 2020 | | 3,355,364 |
| | 33.472 |
| | 3,352,579 |
| | 104,962,050 |
|
Total | | 3,823,790 |
| | $ | 34.856 |
| | 3,352,871 |
| | 104,962,050 |
|
| |
(1) | Total shares purchased represents those shares purchased in the open market as part of the Company’s publicly announced share repurchase program described below, shares received as payment for the exercise price of stock option exercises, and shares received as payment for the withholding taxes on vested restricted stock awards. During the three-month period ended September 30, 2017,March 31, 2020, there were no470,919 shares received as payments for the minimum withholding taxes on vested restricted stock awards and for the exercise price of stock option exercises. |
| |
(2) | On November 5, 2014,August 7, 2019, the Company’s Board of Directors approved athe extension of the stock repurchase program authorizingthrough December 31, 2024 and the Company to repurchase of up to an additional 100,000,000 shares ofunder the Company’s common stock during the period commencing January 1, 2015 and ending December 31, 2019.extended program. |
|
| | |
(3)(i) | | |
| | |
(3)(ii) | | |
| | |
(4.1) | | The registrant hereby agrees that it will, upon request of the Securities and Exchange Commission, furnish a copy of each instrument with respect to long-term debt. |
| | |
(12)18 | | |
| | |
(31.1) | | |
| | |
(31.2) | | |
| | |
(32.1) | | |
| | |
(32.2) | | |
| | |
(101) | | Interactive Data File |
| | |
(104) | | Cover Page Interactive Data File (formatted as Inline XBRL and incorporated by reference to Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| ARCHER-DANIELS-MIDLAND COMPANY |
| |
| |
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| /s/ R. G. Young |
| R. G. Young |
| Executive Vice President and Chief Financial Officer |
| |
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| /s/ D. C. Findlay |
| D. C. Findlay |
| Senior Vice President, General Counsel, and Secretary |
Dated: October 31, 2017May 1, 2020