ARCHER-DANIELS-MIDLAND COMPANY Company Overview
This MD&A should be read in conjunction with the accompanying consolidated financial statements.
ADM is a global leader in human and animal nutrition and one of the world's premier agricultural origination and processing company. It is one of the world's leading producers of ingredients for human and animal nutrition, and other products made from nature. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in more 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 our shareholders, principally from margins earned on these activities. EffectiveJuly 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 three reportable business segments: Ag Services and Oilseeds, Carbohydrate Solutions, and 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. Financial information with respect to the Company's reportable business segments is set forth in Note 17 of "Notes to Consolidated Financial Statements" included in Item 8 herein, "Financial Statements and Supplementary Data" (Item 8).
The Company's recent significant portfolio actions and announcements include:
• the acquisition in
of value-added animal nutrition solutions, with 72 production facilities
and a presence in 25 countries;
• the purchase in February 2019 of the remaining 50% interest owned byKingdom;
• the acquisition in
of citrus oils and ingredients;
• the formal launch in
with Cargill that will develop digital tools to help North American
farmers consolidate information on production economics and grain
marketing activities into a single digital platform;
• the acquisition in
natural citrus flavor ingredients;
• the sale in
• the acquisition in
extracts and ingredients manufacturer in
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 existing
businesses through a combination of data and analytics, process simplification
and standardization, and behavioral and cultural change, building upon its
earlier 1ADM and operational excellence programs. Readiness will also support
the execution of the Company's growth strategies across its five key growth
platforms: Taste, Nutrition, Animal Nutrition, Health and Wellness, and
Carbohydrates.
26--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Operating Performance Indicators
The Company's Ag Services and Oilseeds 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. As a result, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. 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. The Company's Carbohydrate Solutions operations and Nutrition 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 correlate to changes in cost of products sold. 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. The Company has consolidated subsidiaries in more than 70 countries. For the majority of the Company's subsidiaries located outsidethe United States , the local currency is the functional currency except certain significant subsidiaries inSwitzerland where Euro is the functional currency, andBrazil andArgentina whereU.S. dollar is the functional currency. Revenues and expenses denominated in foreign currencies are translated intoU.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company's business activities inBrazil andArgentina , the functional currency is theU.S. dollar; however, certain transactions, including taxes, occur in local currency and require remeasurement 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 theU.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." 27 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Market Factors Influencing Operations or Results in the Twelve Months Ended
The Company is subject to a variety of market factors which affect the Company's operating results. In Ag Services and Oilseeds, sales volumes and margins were negatively impacted by challenging North American weather conditions, in particular high water in the Mississippi river system in the first half of the year, and the continuing global trade tensions withChina . Handling volumes inNorth America were impacted by the late harvest as planting was delayed due to spring flooding. Continued good global meal demand resulted in strong global crushing volumes and solid margins. South American origination volumes benefited from theU.S. -China trade dispute but were also impacted by softer Chinese demand due to the African swine fever impact on local feed demand and intermittent farmer selling. Global demand and margins for refined oil and biodiesel remained solid. In Carbohydrate Solutions, demand and prices for sweeteners and starches remained solid inNorth America while co-product prices were stable. Although ethanol demand remained steady inNorth America , margins were severely pressured asU.S. industry ethanol production and stocks remained at high levels andU.S. exports toChina ceased during the trade dispute. The severe weather conditions inNorth America also adversely impacted operations in the Carbohydrate Solutions business unit. Nutrition benefited from growing demand for flavors, flavors systems, human and pet health and wellness products, and plant-based proteins but was negatively impacted by the African swine fever inAsia Pacific , which also resulted in pricing pressures in the global lysine market.
Year Ended
Net earnings attributable to controlling interests decreased 24% or$0.4 billion , to$1.4 billion . Segment operating profit decreased 10% or$0.3 billion , to$2.9 billion , and included a net charge of$134 million consisting of asset impairment, restructuring, and settlement charges, gains on sale of certain assets, and a step-up gain on an equity investment. Included in segment operating profit in the prior year was a net charge of$89 million consisting of asset impairment, restructuring, and settlement charges and a net gain on sales of assets and businesses. Adjusted segment operating profit decreased$0.3 billion to$3.1 billion due to lower results in Ag Services, Crushing, and Carbohydrate Solutions, and lower equity earnings from Wilmar, partially offset by higher results in Refined Products and Other and Nutrition. Refined Products and Other in the current year included$270 million related to the biodiesel tax credit for 2018 and 2019 compared to$120 million for 2017 recorded in the prior year. Corporate results were a net charge of$1.4 billion in the current year, and included restructuring and pension settlement and remeasurement charges of$159 million primarily related to early retirement and reorganization initiatives, a loss on sale of the Company's equity investment in CIP of$101 million , and a charge of$37 million from the effect of changes in agricultural commodity prices on last-in, first-out (LIFO) inventory valuation reserves, compared to a credit of$18 million in the prior year. Corporate results in the prior year of$1.2 billion included a pension settlement charge of$117 million , a$49 million charge related to a discontinued software project, and restructuring charges of$24 million primarily related to the reorganization of IT services. Income taxes of$209 million decreased$36 million . The Company's effective tax rate for 2019 was 13.2% compared to 11.9% for 2018. The low 2019 tax rate was primarily due to the impact ofU.S. tax credits, including the 2018 and 2019 biodiesel tax credit and the railroad maintenance tax credit, signed into law inDecember 2019 . The effective tax rate for 2018 included the 2017 biodiesel tax credit recorded in the first quarter of 2018 and the additional true-up adjustments related to the 2017 U.S. tax reform, along with certain favorable discrete tax items netting to a favorable$74 million .
Analysis of Statements of Earnings
Processed volumes by product for the years endedDecember 31, 2019 and 2018 are as follows (in metric tons): (In thousands) 2019 2018 Change Oilseeds 36,271 36,308 - % Corn 22,079 22,343 (1 )% Total 58,350 58,651 (1 )% The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to local supply and demand conditions. Processed volumes of Corn decreased slightly from the prior year levels primarily related to the production disruptions in theColumbus, Nebraska corn processing plant due to flooding and production issues in theDecatur, Illinois corn complex. 28 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
Revenues by segment for the years endedDecember 31, 2019 and 2018 are as follows: (In millions) 2019 2018 Change Ag Services and Oilseeds Ag Services$ 31,705 $ 31,766 $ (61 ) Crushing 9,479 10,319 (840 ) Refined Products and Other 7,557 7,806 (249 ) Total Ag Services and Oilseeds 48,741 49,891 (1,150 ) Carbohydrate Solutions Starches and Sweeteners 6,692 6,696 (4 ) Bioproducts 3,194 3,583 (389 ) Total Carbohydrate Solutions 9,886 10,279 (393 ) Nutrition Wild Flavors and Specialty Ingredients 2,745 2,571 174 Animal Nutrition 2,932 1,219 1,713 Total Nutrition 5,677 3,790 1,887 Other 352 381 (29 ) Total Other 352 381 (29 ) Total$ 64,656 $ 64,341 $ 315 Revenues and cost of products sold in agricultural merchandising and processing businesses are significantly correlated to the underlying commodity prices and volumes. In periods of significant changes in market prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Ag Services and Oilseeds, generally have a relatively equal impact from market price changes which generally result in an insignificant impact to gross profit. Revenues increased$315 million to$64.7 billion due to overall higher sales volumes ($3.2 billion ), partially offset by lower sales prices ($2.9 billion ). The increase in sales volumes was due principally to soybeans, wheat, cotton, and higher sales volumes of feed ingredients related to acquisitions. The decrease in sales prices was due principally to soybeans, meal, and wheat. Ag Services and Oilseeds revenues decreased 2% to$48.7 billion due to lower sales prices ($3.0 billion ), partially offset by higher sales volumes ($1.8 billion ). Carbohydrate Solutions revenues decreased 4% to$9.9 billion due to lower sales volumes ($0.4 billion ). Nutrition revenues increased 50% to$5.7 billion due to higher sales volumes ($1.8 billion ), primarily related to acquisitions and higher sales prices ($0.1 billion ). Cost of products sold increased$0.3 billion to$60.5 billion due to overall higher sales volumes, partially offset by lower prices of commodities. Included in cost of products sold in the current year was a charge of$37 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves compared to a credit of$18 million in the prior year. Manufacturing expenses increased$0.3 billion to$5.7 billion due principally to new acquisitions.
Foreign currency translation impacts decreased both revenues and cost of
products sold by
Gross profit decreased$34 million or 1%, to$4.1 billion . Lower results in Ag Services and Oilseeds ($40 million ), Carbohydrate Solutions ($301 million ), and Other ($6 million ) were offset by higher results in Nutrition ($400 million ). These factors are explained in the discussions of segment operating profit on page 32 and selling, general, and administrative expenses below. The effect of changes in agricultural commodity prices on LIFO inventory valuation reserves had a negative impact on gross profit of$37 million compared to a positive impact of$18 million in the prior year. 29 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
Selling, general, and administrative expenses increased 15% to$2.5 billion due principally to new acquisitions, primarily in the Nutrition segment, and higher spending on IT, business transformation, growth-related investments, and Readiness-related projects, partially offset by lower variable performance-related and stock compensation expenses. Asset impairment, exit, and restructuring costs increased$132 million to$303 million . Current year charges consisted of asset impairments of$131 million related to certain facilities, vessels, and other long-lived assets and$11 million related to goodwill and other intangible assets presented as specified items within segment operating profit and$159 million of restructuring and pension settlement and remeasurement charges in Corporate primarily related to early retirement and reorganization initiatives and several individually insignificant restructuring charges presented as specified items within segment operating profit. Prior year charges totaling$171 million consisted of$56 million of impairment of certain long-lived assets, a$12 million impairment of an equity investment, a$21 million impairment related to a long-term financing receivable, and$9 million of other individually insignificant impairment and restructuring charges presented as specified items within segment operating profit, and a$49 million charge related to a discontinued software project,$18 million of restructuring charges related to the reorganization of IT services and$6 million individually insignificant restructuring charges in Corporate.
Interest expense increased
Equity in earnings of unconsolidated affiliates decreased$64 million to$454 million due to lower earnings from the Company's investments in Wilmar and CIP, partially offset by higher earnings from the Company's investments in Olenex and other equity investees. Other expense - net of$7 million decreased$94 million . Current year expense included a loss on sale of the Company's equity investment in CIP and foreign exchange loss, partially offset by gains on the sale of certain assets, step-up gains on equity investments, gains on disposals of individually insignificant assets in the ordinary course of business, and other income. Prior year expense included foreign exchange losses and a non-cash pension settlement charge of$117 million related to the purchase of a group annuity contract that irrevocably transferred the future benefit obligations and annuity administration for certainU.S. salaried retirees under the Company'sADM Retirement Plan. These expenses were partially offset by gains on disposals of businesses, an equity investment, and individually insignificant assets in the ordinary course of business, and other income. 30 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the years endedDecember 31, 2019 and 2018 are as follows: Segment Operating Profit 2019 2018 Change (In millions) Ag Services and Oilseeds Ag Services$ 502 $ 657 $ (155 ) Crushing 580 650 (70 ) Refined Products and Other 586 370 216 Wilmar 267 343 (76 ) Total Ag Services and Oilseeds 1,935 2,020 (85 ) Carbohydrate Solutions Starches and Sweeteners 803 894 (91 ) Bioproducts (159 ) 51 (210 ) Total Carbohydrate Solutions 644 945 (301 ) Nutrition Wild Flavors and Specialty Ingredients 376 318 58 Animal Nutrition 42 21 21 Total Nutrition 418 339 79 Other 85 58 27 Total Other 85 58 27 Specified Items: Gains on sales of assets and businesses 12 13 (1 ) Impairment, restructuring, and settlement charges (146 ) (102 ) (44 ) Total Specified Items (134 ) (89 )
(45 )
Total Segment Operating Profit$ 2,948 $ 3,273 $
(325 )
Adjusted Segment Operating Profit(1)$ 3,082 $ 3,362 $ (280 ) Segment Operating Profit$ 2,948 $ 3,273 $ (325 ) Corporate (1,360 ) (1,213 ) (147 ) Earnings Before Income Taxes$ 1,588 $ 2,060 $ (472 )
(1) Adjusted segment operating profit is segment operating profit excluding the listed specified items.
31--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Ag Services and Oilseeds operating profit decreased 4%. Ag Services results were
lower due to weaker North American grain margins and lower volumes, in part due
to challenging weather conditions and the U.S. -China trade tensions. Results in
the current period were negatively impacted by high water conditions in the
first half of the year, which limited grain movement and sales in North America .
Slow farmer selling and lower Chinese demand of South American origination, in
part due to African swine fever, also impacted results. Crushing results were
strong but down compared to the prior year. Lower executed crush margins around
the globe drove lower results, partially offset by favorable timing effects of
approximately $102 million from hedges entered in the prior year. Refined
Products and Other results were up compared to the prior period primarily due to
the retroactive biodiesel tax credit of $270 million for 2018 and 2019 recorded
in the current year compared to $120 million for 2017 recorded in the prior
year, strong demand, and higher results from equity investments. Wilmar results
were lower year over year.
Carbohydrate Solutions operating profit decreased 32%. Starches and Sweeteners
results were down primarily due to lower results in EMEA where margins were
pressured due to low sugar prices and the Turkish quota on starch-based
sweeteners. Higher manufacturing costs at the Decatur, IL complex and weaker
margins in flour milling also contributed to the decrease. Bioproducts results
were down due to significantly lower ethanol margins amid a continued
unfavorable ethanol industry environment, exacerbated by the lack of Chinese
demand for ethanol due to the U.S. -China trade dispute.
Nutrition operating profit increased 23%. Wild Flavors and Specialty Ingredients
results were higher year over year on strong sales and margin growth in North
America and Europe , Middle East , Africa , and India (EMEAI) and contributions
from acquisitions. Animal Nutrition results were up driven largely by
contributions from the acquisition of Neovia, partially offset by additional
expenses related to inventory valuation of newly-acquired Neovia and weaker
lysine results.
Other operating profit increased 47% primarily due to improved results from the Company's futures commission brokerage business and captive insurance underwriting performance.
Corporate results are as follows: (In millions) 2019 2018 Change LIFO credit (charge)$ (37 ) $ 18 $ (55 ) Interest expense - net (348 ) (321 ) (27 ) Unallocated corporate costs (647 ) (660 ) 13 Loss on sale of asset (101 ) - (101 ) Expenses related to acquisitions (17 ) (8 ) (9 ) Impairment, restructuring, and settlement charges (159 ) (190 ) 31 Other charges (51 ) (52 ) 1 Total Corporate$ (1,360 ) $ (1,213 ) $ (147 ) Corporate results were a net charge of$1.4 billion in the current year compared to$1.2 billion in the prior year. The effect of changes in agricultural commodity prices on LIFO inventory valuation reserves resulted in a charge of$37 million in the current year compared to a credit of$18 million in the prior year. Interest expense - net increased$27 million due to higher borrowings to fund recent acquisitions, partially offset by interest savings from cross-currency swaps. Unallocated corporate costs decreased$13 million due principally to decreased performance-related compensation accruals partially offset by higher spending on IT, business transformation, growth-related investments, and Readiness-related projects. Loss on sale of asset related to the sale of the Company's equity investment in CIP. Expenses related to acquisitions in the current year consisted of expenses primarily related to the Neovia acquisition compared to prior year's expenses and losses on foreign currency derivative contracts entered into to economically hedge certain acquisitions. Impairment, restructuring, and settlement charges in the current year included restructuring and pension settlement and remeasurement charges related to early retirement and reorganization initiatives. Impairment, restructuring, and settlement charges in the prior year included pension settlement charge of$117 million related to the purchase of a group annuity contract that irrevocably transferred the future benefit obligations and annuity administration for certainU.S. salaried retirees under the Company'sADM Retirement Plan, a$49 million charge related to a discontinued software project, and restructuring charges of$24 million primarily related to the reorganization of IT services. Other charges in the current year included railroad maintenance expenses of$51 million . Other charges in the prior year included foreign exchange losses which were partially offset by earnings from the Company's equity investment in CIP. 32 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. 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 theSEC , to evaluate the Company's financial performance. These performance measures are not defined by accounting principles generally accepted inthe 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 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
years ended
2019 2018
In millions Per share In millions Per share
Average number of shares outstanding - diluted 565 567
Net earnings and reported EPS (fully diluted) $ 1,379 $ 2.44 $ 1,810 $ 3.19
Adjustments:
LIFO charge (credit) (net of tax of $9 million
in 2019 and $4 million in 2018) (1) 28 0.05 (14 ) (0.02 )
(Gains) Losses on sales of assets and businesses
(after tax of $35 million in 2019 and $0 million
in 2018) (2) 124 0.22 (13 ) (0.02 )
Asset impairment, restructuring, and settlement
charges (net of tax of $56 million in 2019 and
$66 million in 2018) (2) 249 0.44 226 0.40
Expenses related to acquisitions (net of tax of
$6 million in 2019 and $2 million in 2018) (2) 11 0.02 6 0.01
Tax adjustments (3) 39 0.07 (33 ) (0.06 )
Adjusted net earnings and adjusted EPS $ 1,830 $
3.24
(1) Tax effected using the Company'sU.S. tax rate. (2) Tax effected using the applicable tax rates. (3) Includes tax adjustments related to theU.S. Tax Cuts and Jobs Act and other discrete items. 33
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
The tables below provide a reconciliation of earnings before income taxes to
adjusted EBITDA and adjusted EBITDA by segment for the years ended December 31,
2019 and 2018.
(In millions) 2019 2018 Change
Earnings before income taxes $ 1,588 $ 2,060 $ (472 )
Interest expense 402 364 38
Depreciation and amortization 993 941 52
LIFO charge (credit) 37 (18 ) 55
(Gains) Losses on sales of assets and businesses 89 (13 ) 102
Asset impairment, restructuring, and settlement charges 305 292 13
Railroad maintenance expense 51 -
51
Expenses related to acquisitions 17 8 9 Adjusted EBITDA$ 3,482 $ 3,634 $ (152 ) (In millions) 2019 2018 Change Ag Services and Oilseeds$ 2,311 $ 2,410 (99 ) Carbohydrate Solutions 974 1,282 (308 ) Nutrition 642 486 156 Other 117 92 25 Corporate (562 ) (636 ) 74 Adjusted EBITDA$ 3,482 $ 3,634 $ (152 ) 34
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Market Factors Influencing Operations or Results in the Twelve Months Ended
The Company is subject to a variety of market factors which affect the Company's operating results. In 2018, markets were volatile amid escalating global trade tensions including the announcement of tariffs on Chinese imports ofU.S. soybeans. In Ag Services and Oilseeds, strong demand for feedstuffs in light of weather conditions inNorthern Europe resulted in higher sales volumes and margins in destination markets, and strong basis positions across commodities resulted in higher margins. South American origination volumes and margins benefited from stronger farmer selling. Dry conditions inArgentina resulted in a smaller soybean crop, which combined with continued good global meal demand, resulted in strong global crushing margins and volumes. Demand and margins for refined oil remained solid, and biodiesel margins improved. Excess global peanut supply resulted in weak peanut margins. In Carbohydrate Solutions, global demand and prices for starches and sweeteners remained solid inNorth America while co-product prices were stable.U.S. ethanol industry production remained at high levels. Although ethanol demand remained strong both inNorth America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, margins continued to remain under pressure. Nutrition benefited from strong demand for flavor ingredients and flavor systems and from strong demand for and favorable margin development in certain non-flavor food businesses.
Year Ended
Net earnings attributable to controlling interests increased 13% or$0.2 billion , to$1.8 billion . Segment operating profit increased 29% or$0.7 billion , to$3.3 billion . Included in segment operating profit in 2018 was a net charge of$89 million consisting of asset impairment, restructuring, and settlement charges and a net gain on sales of assets and businesses. Included in segment operating profit in 2017 was a net charge of$134 million consisting of asset impairment and restructuring charges, a net gain on sales of assets and businesses, and corn hedge timing effects. Adjusted segment operating profit increased$0.7 billion to$3.4 billion due to an increase in sales prices and volumes of corn and meal, improved margins in Ag Services and Oilseeds and Nutrition, and the benefits of the 2017 biodiesel tax credit which was approved and received in the first quarter of 2018, partially offset by lower ethanol margins. Corporate results were a net charge of$1.2 billion in 2018 compared to$0.9 billion in 2017. Corporate results in 2018 included a pension settlement charge of$117 million , a$49 million charge related to a discontinued software project, restructuring charges of$24 million primarily related to the reorganization of IT services, and a credit of$18 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves, compared to a credit of$2 million in 2017. Corporate results in 2017 also included$54 million of restructuring charges primarily related to the reduction of certain positions within the Company's global workforce. Income taxes of$245 million increased$238 million due to a higher effective tax rate and higher earnings before income taxes. The Company's effective tax rate for 2018 increased to 11.9% compared to 0.4% for 2017 due primarily to the low rate in 2017 that was impacted by favorable tax adjustments related to the Tax Cuts and Jobs Act of 2017 totaling$379 million . The effective tax rate for 2018 also included the final effects of theU.S. tax reform and the 2017 biodiesel tax credit recorded in the first quarter of 2018, along with certain favorable discrete tax items netting to a favorable$74 million .
Analysis of Statements of Earnings
Processed volumes by product for the years ended
(In thousands) 2018 2017 Change Oilseeds 36,308 34,733 5 % Corn 22,343 22,700 (2 )% Total 58,651 57,433 2 % The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to local supply and demand conditions. Processed volumes of oilseeds increased due to increasing global demand for oilseed products, particularly meal, and higher crushing volumes inNorth America due to the reduced soybean crop inArgentina . The overall decrease in corn is primarily related to decreased current year processing after the reconfiguration of the Company'sPeoria, Illinois ethanol complex in the third quarter of fiscal 2017 and production issues in theDecatur, Illinois corn complex in 2018. 35 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
Revenues by segment for the years endedDecember 31, 2018 and 2017 are as follows: (In millions) 2018 2017 Change Ag Services and Oilseeds Ag Services$ 31,766 $ 29,124 $ 2,642 Crushing 10,319 9,265 1,054 Refined Products and Other 7,806 8,123 (317 ) Total Ag Services and Oilseeds 49,891 46,512 3,379 Carbohydrate Solutions Starches and Sweeteners 6,696 6,565 131 Bioproducts 3,583 3,841 (258 ) Total Carbohydrate Solutions 10,279 10,406 (127 ) Nutrition Wild Flavors and Specialty Ingredients 2,571 2,367 204 Animal Nutrition 1,219 1,156 63 Total Nutrition 3,790 3,523 267 Other 381 387 (6 ) Total Other 381 387 (6 ) Total$ 64,341 $ 60,828 $ 3,513 Revenues and cost of products sold in commodity merchandising and processing businesses are significantly correlated to the underlying commodity prices and volumes. In 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 Ag Services and Oilseeds, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit. Revenues increased$3.5 billion or 6%, to$64.3 billion due principally to higher sales prices ($2.3 billion ) and higher sales volumes ($1.2 billion ). The increase in sales prices and volumes was due primarily to increases in corn and soybean meal. Ag Services and Oilseeds revenues increased 7% to$49.9 billion due to higher sales prices ($2.5 billion ) and higher sales volumes ($0.8 billion ). Carbohydrate Solutions revenues decreased 1% to$10.3 billion due to lower sales prices ($0.2 billion ), partially offset by higher sales volumes ($0.1 billion ). Nutrition revenues increased 8% to$3.8 billion due to higher sales volumes ($0.3 billion ). Cost of products sold increased$2.9 billion to$60.2 billion due principally to higher sales volumes and higher prices for commodities. Included in cost of products sold in 2018 was a credit of$18 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves compared to$2 million in 2017. Manufacturing expenses increased$0.2 billion to$5.4 billion due principally to increased energy cost, railroad maintenance expense that has an offsetting benefit in income tax expense, and other individually insignificant increases in certain expense categories.
Foreign currency translation impacts increased both revenues and cost of
products sold by
Gross profit increased$0.7 billion or 19%, to$4.2 billion . Higher results in Ag Services and Oilseeds ($815 million ) and Nutrition ($58 million ) were partially offset by lower results in Carbohydrate Solutions ($126 million ) and Other ($36 million ). These factors are explained in the segment operating profit discussion on page 39. The effect of changes in agricultural commodity prices on LIFO inventory valuation reserves had a positive impact on gross profit of$18 million in 2018 compared to$2 million in 2017. 36 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
Selling, general, and administrative expenses increased 9% to$2.2 billion due principally to higher performance-related compensation accruals and increased pension and project-related expenses. Asset impairment, exit, and restructuring costs decreased$2 million to$171 million . Charges in 2018 consisted of$56 million of impairment of certain long-lived assets, a$12 million impairment of an equity investment, a$21 million impairment related to a long-term financing receivable, and$9 million of other individually insignificant impairment and restructuring charges (presented as specified items within segment operating profit), and a$49 million charge related to a discontinued software project,$18 million of restructuring charges related to the reorganization of IT services and$6 million of individually insignificant restructuring charges in Corporate. Charges in 2017 consisted of$63 million of asset impairments related to the reconfiguration of the Company'sPeoria, Illinois ethanol complex,$20 million of asset impairments related to the closure of a facility, and$36 million of several individually insignificant asset impairments and restructuring charges presented as specified items within segment operating profit, and$54 million of restructuring charges in Corporate primarily related to the reduction of certain positions within the Company's global workforce.
Interest expense increased
Equity in earnings of unconsolidated affiliates increased$62 million to$518 million due to earnings from a new equity investment and higher earnings from the Company's equity investments in CIP and Olenex, partially offset by lower earnings from other equity investments. Other expense - net of$101 million increased$111 million from net income of$10 million . Expense in 2018 included foreign exchange losses and a non-cash pension settlement charge of$117 million related to the purchase of a group annuity contract that irrevocably transferred the future benefit obligations and annuity administration for certainU.S. salaried retirees under the Company'sADM Retirement Plan. These expenses were partially offset by gains on disposals of businesses, an equity investment, and individually insignificant assets in the ordinary course of business, and other income. Income in 2017 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, changes in contingent settlement provisions, a charge related to the early redemption of the Company's$559 million notes dueMarch 15, 2018 , and foreign exchange losses. 37
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Operating profit by segment and earnings before income taxes for the years ended
December 31, 2018 and 2017 are as follows:
Segment Operating Profit 2018 2017 Change
(In millions)
Ag Services and Oilseeds
Ag Services $ 657 $ 453 $ 204
Crushing 650 203 447
Refined Products and Other 370 244 126
Wilmar 343 329 14
Total Ag Services and Oilseeds 2,020 1,229 791
Carbohydrate Solutions
Sweeteners and Starches 894 930 (36 )
Bioproducts 51 148 (97 )
Total Carbohydrate Solutions 945 1,078 (133 )
Nutrition
Wild Flavors and Specialty Ingredients 318 279 39
Animal Nutrition 21 33 (12 )
Total Nutrition 339 312 27
Other 58 51 7
Total Other 58 51 7
Specified Items:
Gains on sales of assets and businesses 13 22 (9 )
Impairment, restructuring, and exit charges (102 ) (160 ) 58
Hedge timing effects - 4 (4 )
Total Specified Items (89 ) (134 ) 45
Total Segment Operating Profit 3,273 2,536 737
Adjusted Segment Operating Profit(1) 3,362 2,670 692
Segment Operating Profit 3,273 2,536 737 Corporate (1,213 ) (927 ) (286 ) Earnings Before Income Taxes$ 2,060 $ 1,609 $ 451
(1) Adjusted segment operating profit is segment operating profit excluding the above specified items.
38--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Ag Services and Oilseeds operating profit increased 64%. Ag Services was up
significantly year-over-year. Global trade delivered strong results due to
increased volumes, strong margins, and improved opportunities in the soybean and
feedstuff value chain. North American grain was up due to improved margins and
higher volumes. South America saw strong origination volumes and improving
margins as farmer selling accelerated. Crushing results increased due to a
strong global demand and margin environment. The reduced soybean crop in
Argentina combined with continued good global meal demand resulted in strong
crushing margins and volumes. Refined Products and Other results were higher
mainly due to the 2017 biodiesel tax credit of approximately $120 million which
was approved and received in the first quarter of 2018, solid biodiesel results,
and higher earnings from the Company's investment in Olenex, partially offset by
weaker peanut shelling margins primarily caused by large peanut inventories and
difficult market conditions. Wilmar results were higher year over year.
Carbohydrate Solutions operating profit decreased 12%. Starches and Sweeteners
results decreased due to lower margins and volumes in liquid sweeteners mainly
due to production issues in the Decatur, Illinois corn complex partially offset
by improved results from starches and dry sweeteners. Bioproducts results were
down as near record industry fuel ethanol inventories pressured margins and
production issues in the Decatur, IL corn complex increased costs, partially
offset by effective ethanol risk management.
Nutrition operating profit increased 9%. Wild Flavors and Specialty Ingredients
results were up due to improved earnings across the segment and higher sales
volumes related to contributions from new acquisitions and organic growth. In
Wild Flavors, an improved portfolio mix boosted sales and margins. Health and
Wellness improved driven largely by increased contributions from bioactives.
Specialty Ingredients was up due to improved volumes and margins in proteins and
increased sales in fibers partially offset by lower results in polyols. Animal
Nutrition was down due to operational issues in Decatur, IL that constrained
lysine production volumes and increased manufacturing costs partially offset by
improved premix and commercial feed margins.
Other operating profit increased 14% primarily due to stronger results from its
futures commission brokerage business due to higher short-term interest rates,
partially offset by lower underwriting results from the Company's captive
insurance operations during the first half of 2018.
Corporate results are as follows:
(In millions) 2018 2017 Change
LIFO credit (charge) $ 18 $ 2 $ 16
Interest expense - net (321 ) (310 ) (11 )
Unallocated corporate costs (660 ) (470 ) (190 )
Expenses related to acquisitions (8 ) - (8 )
Loss on debt extinguishment - (11 ) 11
Asset impairment, restructuring, and settlement charges (190 ) (54 ) (136 )
Other charges (52 ) (84 ) 32
Total Corporate $ (1,213 ) $ (927 ) $ (286 )
Corporate results were a net charge of $1.2 billion in 2018 compared to $0.9
billion in 2017. The effect of changes in agricultural commodity prices on LIFO
inventory valuation reserves resulted in a credit of $18 million in 2018
compared to a credit of $2 million in 2017. Interest expense - net increased $11
million due to higher interest rates on short-term debt and higher borrowings,
partially offset by interest income related to a tax credit and lower-tax
related expense. Unallocated corporate costs increased $190 million due
principally to higher performance-related compensation accruals, increased
pension and project-related expenses, and railroad maintenance expense that has
an offsetting benefit in income tax expense. Adjustments related to acquisitions
in 2018 related to expenses and losses on foreign currency derivative contracts
entered into to economically hedge certain acquisitions. Loss on debt
extinguishment in 2017 related to the early redemption of the $559 million
aggregate principal amount of 5.45% notes due on March 15, 2018 . Impairment,
restructuring, and settlement charges in 2018 included a pension settlement
charge of $117 million , a $49 million charge related to a discontinued software
project, and restructuring charges of $24 million primarily related to the
reorganization of IT services compared to restructuring charges related to the
reduction of certain positions within the Company's global workforce of $54
million in 2017. Other charges decreased $32 million primarily due to improved
results in the Company's investment in CIP and lower non-service cost related
pension expenses.
39--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. 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 theSEC , to evaluate the Company's financial performance. These performance measures are not defined by accounting principles generally accepted inthe 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 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
years ended
2018 2017
In millions Per share In millions Per share
Average number of shares outstanding - diluted 567 572
Net earnings and reported EPS (fully diluted)
$ 1,595 $ 2.79 Adjustments: LIFO charge (credit) (net of tax of$4 million in 2018 and$1 million in 2017(1) (14 ) (0.02 ) (1 ) - (Gains) Losses on sales of assets and businesses (net of tax of$0 million in 2018 and$32 million in 2017) (2) (13 ) (0.02 ) 10 0.02
Asset impairment, restructuring, and settlement
charges (net of tax of
226 0.40 144 0.25
Expenses related to acquisitions (net of tax of
6 0.01 - -
Loss on debt extinguishment (net of tax of $4
million ) (1) - - 7 0.01
Tax adjustments (3) (33 ) (0.06 ) (366 ) (0.64 )
Adjusted net earnings and and adjusted EPS $ 1,982 $ 3.50
(1) Tax effected using the Company's
40--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
The tables below provide a reconciliation of earnings before income taxes to
adjusted EBITDA and adjusted EBITDA by segment for the years ended December 31,
2018 and 2017.
(In millions) 2018 2017 Change
Earnings before income taxes $ 2,060 $ 1,609 $ 451
Interest expense 364 330 34
Depreciation and amortization 941 924 17
LIFO charge (credit) (18 ) (2 ) (16 )
Gains (Losses) on sales of assets and businesses (13 ) (22 ) 9
Asset impairment, restructuring, and settlement charges 292 214 78
Expenses related to acquisitions 8 - 8 Loss on debt extinguishment - 11 (11 ) Adjusted EBITDA$ 3,634 $ 3,064 $ 570 (In millions) 2018 2017 Change Ag Services and Oilseeds$ 2,410 $ 1,620 790 Carbohydrate Solutions 1,282 1,415 (133 ) Nutrition 486 450 36 Other - Financial 92 69 23 Corporate (636 ) (490 ) (146 ) Adjusted EBITDA$ 3,634 $ 3,064 $ 570 41
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. 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 depends on access to credit markets, which can be impacted by its credit rating and factors outside ofADM's control, to fund its working capital needs and capital expenditures. The primary source of funds to financeADM'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 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 bothU.S. and international markets. Cash used in operating activities was$5.5 billion for 2019 compared to$4.8 billion in 2018. Working capital changes, including the increase in deferred consideration, decreased cash by$7.7 billion in the current year compared to$7.5 billion in the prior year. Trade receivables decreased$0.3 billion due to lower revenues, net of acquisitions.
Deferred consideration in securitized receivables of
Cash provided by investing activities was$5.3 billion this year compared to$6.6 billion last year. Capital expenditures and net assets of businesses acquired were$0.8 billion and$1.9 billion , respectively, this year compared to$0.8 billion and$0.5 billion , respectively, last year. Proceeds from the sale of businesses and assets were$0.3 billion in the current year were compared to$0.2 billion in the prior year. There were sales of marketable securities, net of purchases, of$0.1 billion in the current year compared to immaterial marketable securities sales transactions in the prior year. Investments in and advances to affiliates were immaterial in the current year compared to$0.2 billion in the prior year. Net consideration received for beneficial interest obtained for selling trade receivables was$7.7 billion and$7.8 billion in 2019 and 2018, respectively. Cash used in financing activities was$0.7 billion this year compared to cash provided of$0.2 billion last year. Long-term debt borrowings in the current year were$8 million . Long-term debt borrowings in the prior year of$1.8 billion consisted of the €650 million ($744 million as ofDecember 31, 2018 ) aggregate principal amount of 1.000% Notes issued onSeptember 12, 2018 and theDecember 3, 2018 issuance of$600 million and$400 million aggregate principal amounts of 4.5% and 3.375% Notes, respectively. Long-term debt payments in the current year of$626 million primarily related to the €500 million Floating Rate Notes that matured inJune 2019 compared to$30 million in the prior year. Commercial paper borrowings in the current year of$0.9 billion were used to fund acquisitions and general corporate expenses compared to payments of$0.7 billion in the prior year. Share repurchases in the current year were$0.2 billion compared to$0.1 billion in the prior year. AtDecember 31, 2019 ,ADM had$0.9 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 1.6 to 1. Included in working capital is$5.7 billion of readily marketable commodity inventories. AtDecember 31, 2019 , the Company's capital resources included shareholders' equity of$19.2 billion and lines of credit, including the accounts receivable securitization programs described below, totaling$9.0 billion , of which$6.4 billion was unused.ADM's ratio of long-term debt to total capital (the sum of long-term debt and shareholders' equity) was 29% atDecember 31, 2019 andDecember 31, 2018 . The Company uses this ratio as a measure ofADM's long-term indebtedness and 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) increased from 25% atDecember 31, 2018 to 29% atDecember 31, 2019 due to acquisitions. Of the Company's total lines of credit,$5.0 billion supported the combinedU.S. and European commercial paper borrowing programs, against which there was$1.0 billion ofU.S. and European commercial paper outstanding atDecember 31, 2019 . As ofDecember 31, 2019 , the Company had$0.9 billion of cash and cash equivalents,$0.3 billion of which is cash held by foreign subsidiaries whose undistributed earnings are considered indefinitely reinvested. Based on the Company's historical ability to generate sufficient cash flows from itsU.S. operations and unused and availableU.S. credit capacity of$4.3 billion , the Company has asserted that these funds are indefinitely reinvested outside theU.S. 42
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
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 $1.9 billion 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 19 in Item
8 for more information and disclosures on the Programs). As of December 31,
2019 , the Company utilized $1.4 billion of its facility under the Programs. The
Programs are due to terminate during the first half of 2020. However, the
Company currently expects to extend these Programs upon termination.
On November 5, 2014 , the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to 100,000,000
shares of the Company's common stock during the period commencing January 1,
2015 and ending December 31, 2019 . On August 7, 2019 , the Company's Board of
Directors approved the extension of the stock repurchase program through
December 31, 2024 and the repurchase of up to an additional 100,000,000 shares
under the extended program. The Company has acquired approximately 91.7 million
shares under this program as of December 31, 2019 .
In 2020, the Company expects capital expenditures of
The Company's credit facilities and certain debentures require the Company to comply with specified financial and non-financial covenants including maintenance of minimum tangible net worth as well as limitations related to incurring liens, secured debt, and certain other financing arrangements. The Company was in compliance with these covenants as ofDecember 31, 2019 .
The three major credit rating agencies have maintained the Company's credit ratings at solid investment grade levels with stable outlooks.
Contractual Obligations
In the normal course of business, the Company enters into contracts and commitments which obligate the Company to make payments in the future. The following table sets forth the Company's significant future obligations by time period. Purchases include commodity-based contracts entered into in the normal course of business, which are further described in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," energy-related purchase contracts entered into in the normal course of business, and other purchase obligations related to the Company's normal business activities. The following table does not include unrecognized income tax benefits of$130 million as ofDecember 31, 2019 as the Company is unable to reasonably estimate the timing of settlement. Where applicable, information included in the Company's consolidated financial statements and notes is cross-referenced in this table. Payments Due by Period Item 8 Contractual Obligations and Note Less than 1 - 3 3 - 5 More than Other Commitments Reference Total 1 Year Years Years 5 Years (In millions) Purchases Inventories$ 10,488 $ 10,242 $ 238 $ 8 $ - Energy 319 260 59 - - Other 1,386 938 223 27 198 Total purchases 12,193 11,440 520 35 198 Short-term debt 1,202 1,202 - - - Long-term debt Note 10 7,679 7 1,081 726 5,865 Estimated interest payments 5,380 324 581 533 3,942 One-time transition tax Note 13 183 20 40 87 36 Operating leases Note 14 1,177 251 403 231 292 Estimated pension and other postretirement plan contributions (1) Note 15 149 43 29 26 51 Total$ 27,963 $ 13,287 $ 2,654 $ 1,638 $ 10,384 43
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
(1) Includes pension contributions of $27 million for fiscal 2020. The Company
is unable to estimate the amount of pension contributions beyond fiscal year
2020. For more information concerning the Company's pension and other
postretirement plans, see Note 15 in Item 8.
At December 31, 2019 , the Company estimates it will spend approximately $1.1
billion through fiscal year 2024 to complete currently approved capital projects
which are not included in the table above.
The Company also has outstanding letters of credit and surety bonds of
The Company has entered into agreements, primarily debt guarantee agreements related to equity-method investees, which could obligate the Company to make future payments. The Company's liability under these agreements arises only if the primary entity fails to perform its contractual obligation. The Company has collateral for a portion of these contingent obligations.
Off Balance Sheet Arrangements
Accounts Receivable Securitization Programs
InSeptember 2019 , the Company amended its accounts receivable securitization program (the "Program") with certain commercial paper conduit purchasers and committed purchasers (collectively, the "First Purchasers") and increased its facility from$1.2 billion to$1.3 billion . The program terminates onJune 18, 2020 unless extended (see Note 19 of "Notes to Consolidated Financial Statements" included in Item 8 herein, "Financial Statements and Supplementary Data" for more information and disclosures on the Programs).
There were no other material changes in the Company's off balance sheet arrangements during the year.
Critical Accounting Policies
The process of preparing financial statements requires management to make estimates and judgments that affect the carrying values of the Company's assets and liabilities as well as the recognition of revenues and expenses. These estimates and judgments are based on the Company's historical experience and management's knowledge and understanding of current facts and circumstances. Certain of the Company's accounting policies are considered critical, as these policies are important to the depiction of the Company's financial statements and require significant or complex judgment by management. Management has discussed with the Company's Audit Committee the development, selection, disclosure, and application of these critical accounting policies. Following are the accounting policies management considers critical to the Company's financial statements.
Fair Value Measurements - Inventories and Commodity Derivatives
Certain of the Company's inventory and commodity derivative assets and liabilities as ofDecember 31, 2019 are valued at estimated fair values, including$4.7 billion of merchandisable agricultural commodity inventories,$0.5 billion of commodity derivative assets,$0.6 billion of commodity derivative liabilities, and$0.7 billion of inventory-related payables. Commodity derivative assets and liabilities include forward fixed-price purchase and sale contracts for agricultural commodities. Merchandisable agricultural commodities are freely traded, have quoted market prices, and may be sold without significant additional processing. Management estimates fair value for its commodity-related assets and liabilities based on exchange-quoted prices, adjusted for differences in local markets. The Company's inventory and derivative commodity fair value measurements are mainly based on observable market quotations without significant adjustments and are therefore reported as Level 2 within the fair value hierarchy. Level 3 fair value measurements of approximately$1.7 billion of assets and$0.2 billion of liabilities represent fair value estimates where unobservable price components represent 10% or more of the total fair value price. For more information concerning amounts reported as Level 3, see Note 4 in Item 8. Changes in the market values of these inventories and commodity contracts are recognized in the statement of earnings as a component of cost of products sold. If management used different methods or factors to estimate market value, amounts reported as inventories and cost of products sold could differ materially. Additionally, if market conditions change subsequent to year-end, amounts reported in future periods as inventories and cost of products sold could differ materially. 44 --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Item 7. OF OPERATIONS (Continued)
Derivatives - Designated Hedging Activities
The Company, from time to time, uses derivative contracts designated as cash flow hedges to hedge the purchase or sales price of anticipated volumes of commodities to be purchased and processed in a future month. Assuming normal market conditions, the change in the market value of such derivative contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Gains and losses arising from open and closed hedging transactions are deferred in accumulated other comprehensive income, net of applicable income taxes, and recognized as a component of cost of products sold and revenues in the statement of earnings when the hedged item is recognized in earnings. If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in the market value of these exchange-traded futures and exchange-traded and over-the-counter option contracts would be recorded immediately in the statement of earnings as a component of revenues and/or cost of products sold. See Note 5 in Item 8 for additional information. Investments in Affiliates The Company applies the equity method of accounting for investments over which the Company has the ability to exercise significant influence. These investments are carried at cost plus equity in undistributed earnings and are adjusted, where appropriate, for amortizable basis differences between the investment balance and the underlying net assets of the investee. Generally, the minimum ownership threshold for asserting significant influence is 20% ownership of the investee. However, the Company considers all relevant factors in determining its ability to assert significant influence including, but not limited to, ownership percentage, board membership, customer and vendor relationships, and other arrangements. If management used a different accounting method for these investments, then the amount of earnings from affiliates the Company recognizes may materially differ. Income Taxes The Company accounts for income taxes in accordance with the applicable accounting standards. These standards prescribe a minimum threshold a tax position is required to meet before being recognized in the consolidated financial statements. The Company recognizes in its consolidated financial statements tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the position. The Company faces challenges fromU.S. and foreign tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various tax filing positions, the Company records reserves for estimates of potential additional tax owed by the Company. For example, the Company has received tax assessments from tax authorities inBrazil ,Argentina , andthe Netherlands , challenging income tax positions taken by subsidiaries of the Company. The Company evaluated its tax positions for these matters and concluded, based in part upon advice from legal counsel, that it was appropriate to recognize the tax benefits of these positions (see Note 13 in Item 8 for additional information). Deferred tax assets represent items to be used as tax deductions or credits in future tax returns where the related tax benefit has already been recognized in the Company's income statement. The realization of the Company's deferred tax assets is dependent upon future taxable income in specific tax jurisdictions, the timing and amount of which are uncertain. The Company evaluates all available positive and negative evidence including estimated future reversals of existing temporary differences, projected future taxable income, tax planning strategies, and recent financial results. Valuation allowances related to these deferred tax assets have been established to the extent the realization of the tax benefit is not likely. During 2019, the Company increased valuation allowances by approximately$20 million primarily related to newly-generated foreign tax loss carryforwards. To the extent the Company were to favorably resolve matters for which valuation allowances have been established or be required to pay amounts in excess of the aforementioned valuation allowances, the Company's effective tax rate in a given financial statement period may be impacted.
Undistributed earnings of the Company's foreign subsidiaries amounting to
approximately
45--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
The Tax Cuts and Jobs Act (the "Act"), which was enacted onDecember 22, 2017 , included a one-time transition tax on accumulated foreign earnings. As a result, the Company recorded a$369 million provisional impact of the transition tax and a$220 million beneficial impact on reserves previously established under Accounting Standards Codification Subtopic 740-30, Income Taxes - Other Considerations or Special Areas, or a net provisional impact of$149 million in 2017. The Company performed a quarterly review of the provisional tax liability recorded in 2017 as new guidance on the Act was issued in 2018. The Company finalized its calculation of the transition tax and recorded an immaterial expense in 2019 and a benefit of$29 million in 2018. The Company elected to pay the one-time transition tax over eight years. Because the Company's undistributed foreign earnings and outside basis differences inherent in foreign entities continue to be indefinitely reinvested in foreign operations, no income taxes have been provided. It is not practicable to determine the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities. The Act also contains new provisions related to Global Intangible Low Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) which were effective for fiscal year 2018. The Company made an accounting policy election to treat GILTI as a period cost. During 2018,U.S. tax authorities issued proposed Treasury Regulations addressing some of the tax reform items that were effective in 2018. The Company has recorded and will continue to record the impact of tax reform items asU.S. tax authorities issue Treasury Regulations and other guidance addressing tax reform-related changes. It is also reasonable to expect that global taxing authorities will be reviewing their current legislation for potential modifications in reaction to the implementation of the Act. The additional guidance in theU.S. , along with the potential for additional global tax legislation changes, may affect significant deductions and income inclusions and could have a material adverse effect on the Company's net income or cash flow.
Property, Plant, and Equipment and Asset Abandonments and Write-Downs
The Company is principally engaged in the business of procuring, transporting, storing, processing, and merchandising agricultural commodities and products. This business is global in nature and is highly capital-intensive. Both the availability of the Company's raw materials and the demand for the Company's finished products are driven by factors such as weather, plantings, government programs and policies, changes in global demand, changes in standards of living, and global production of similar and competitive crops. These aforementioned factors may cause a shift in the supply/demand dynamics for the Company's raw materials and finished products. Any such shift will cause management to evaluate the efficiency and cash flows of the Company's assets in terms of geographic location, size, and age of its facilities. The Company, from time to time, will also invest in equipment, technology, and companies related to new, value-added products produced from agricultural commodities and products. These new products are not always successful from either a commercial production or marketing perspective. Management evaluates the Company's property, plant, and equipment for impairment whenever indicators of impairment exist. Assets are written down to fair value after consideration of the ability to utilize the assets for their intended purpose or to employ the assets in alternative uses or sell the assets to recover the carrying value. If management used different estimates and assumptions in its evaluation of these assets, then the Company could recognize different amounts of expense over future periods. During the years endedDecember 31, 2019 , 2018, and 2017, impairment charges for property, plant, and equipment were$131 million ,$100 million , and$101 million , respectively.
Business Combinations
The Company's acquisitions are accounted for in accordance with Accounting
Standards Codification (ASC) Topic 805, Business Combinations, as amended. The
consideration transferred is allocated to various assets acquired and
liabilities assumed at their estimated fair values as of the acquisition date
with the residual allocated to goodwill. Fair values allocated to assets
acquired and liabilities assumed in business combinations require management to
make significant judgments, estimates, and assumptions, especially with respect
to intangible assets. Management makes estimates of fair values based upon
assumptions it believes to be reasonable. These are estimates are based upon
historical experience and information obtained from the management of the
acquired companies and are inherently uncertain. The estimated fair values
related to intangible assets primarily consist of customer relationships,
trademarks, and developed technology which are determined primarily using
discounted cash flow models. Estimates in the discounted cash flow models
include, but are not limited to, certain assumptions that form the basis of the
forecasted results (e.g. revenue growth rates, customer attrition rates, and
royalty rates). These significant assumptions are forward looking and could be
affected by future economic and market conditions. During the measurement
period, which may take up to one year from the acquisition date, adjustments due
to changes in the estimated fair value of assets acquired and liabilities
assumed may be recorded as adjustments to the consideration transferred and
related allocations. Upon the conclusion of the measurement period or the final
determination of the values of assets acquired and liabilities assumed,
whichever comes first, any such adjustments are charged to the consolidated
statements of earnings.
46
--------------------------------------------------------------------------------MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Item 7. OF OPERATIONS (Continued)
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The Company evaluates goodwill for impairment at the reporting unit level annually onOctober 1 or whenever there are indicators that the carrying value may not be fully recoverable. The Company adopted the provisions of ASC 350, Intangibles -Goodwill and Other, which permits, but does not require, a company to qualitatively assess indicators of a reporting unit's fair value. If after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. Critical estimates in the determination of the fair value of each reporting unit include, but are not limited to, future expected cash flows and discount rates. Definite-lived intangible assets, including capitalized expenses related to the Company's 1ADM program, are amortized over their estimated useful lives of 2 to 50 years and are reviewed for impairment whenever there are indicators that the carrying values may not be fully recoverable. The Company recorded impairment charges totaling$11 million related to goodwill and intangibles, and$9 million related to customer lists during the years endedDecember 31, 2019 and 2018, respectively. There were no impairment charges recorded for goodwill and intangible assets during the year endedDecember 31, 2017 (see Note 18 in Item 8 for more information). If management used different estimates and assumptions in its impairment tests, then the Company could recognize different amounts of expense over future periods.
Employee Benefit Plans
The Company provides substantially allU.S. employees and employees at certain international subsidiaries with retirement benefits including defined benefit pension plans and defined contribution plans. The Company provides certain eligibleU.S. employees who retire under qualifying conditions with subsidized postretirement health care coverage or Health Care Reimbursement Accounts. In order to measure the expense and funded status of these employee benefit plans, management makes several estimates and assumptions, including interest rates used to discount certain liabilities, rates of return on assets set aside to fund these plans, rates of compensation increases, employee turnover rates, anticipated mortality rates, and anticipated future health care costs. These estimates and assumptions are based on the Company's historical experience combined with management's knowledge and understanding of current facts and circumstances. Management also uses third-party actuaries to assist in measuring the expense and funded status of these employee benefit plans. If management used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, and the Company could recognize different amounts of expense over future periods. The Company uses the corridor approach when amortizing actuarial losses. Under the corridor approach, net unrecognized actuarial losses in excess of 10% of the greater of the projected benefit obligation or the market related value of plan assets are amortized over future periods. For plans with little to no active participants, the amortization period is the remaining average life expectancy of the participants. For plans with active participants, the amortization period is the remaining average service period of the active participants. The amortization periods range from 3 to 38 years for the Company's defined benefit pension plans and from 6 to 22 years for the Company's postretirement benefit plans.
© Edgar Online, source
