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 companies. 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 200 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. 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 Business. 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). EffectiveJanuary 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 sells/brokersADM'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. The Company's review of its strategic options related to VCP is ongoing.
Prior period results have been reclassified to conform to the current period segment presentation.
The Company's recent significant portfolio actions and announcements include:
•the acquisition inJanuary 2020 of Yerbalatina, a natural plant-based extracts and ingredients manufacturer inBrazil ; •the temporary idling inApril 2020 of ethanol production at the corn dry mill facilities inCedar Rapids, Iowa , andColumbus, Nebraska due to reduced demand. 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; •the announcements in March andMay 2020 of new goals to, by 2035, reduce the Company's absolute greenhouse gas emissions by 25%, energy intensity by 15%, and water intensity by 10%, and achieve a 90% landfill diversion rate; •the announcement inJuly 2020 ofADM's participation as signatory, along with almost one hundred flavor and fragrance companies, to an ambitious new sustainability charter seeking to improve sustainability across the two industries; •the sale inAugust 2020 of a portion of the Company's shares in Wilmar and the issuance of$300 million aggregate principal amount of zero-coupon bonds, exchangeable into Wilmar shares; •the repurchase and redemption inSeptember 2020 of$1.2 billion aggregate principal amount of debentures and notes; •the announcement inOctober 2020 of an agreement withSpiber Inc. (Spiber ) to expand the production ofSpiber's innovative Brewed Protein™ polymers for use in apparel and other consumer products; •the announcement inOctober 2020 of the Company's plan to construct a new, state-of-the-art facility inValencia, Spain , that will expand its capabilities to meet growing demand for microbiome solutions; •the launch inOctober 2020 ofPlantPlus Foods , a 30% joint venture with Marfrig, one of the world's leading beef producers and the world's largest beef patty producer, that will offer a wide range of finished plant-based food products acrossNorth and South America ; 32 --------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) •the announcement inNovember 2020 of the Company's investment in the Health for Life Capital Fund II, a leading venture capital fund dedicated to health, nutrition, microbiota, and digital health; •the announcement inNovember 2020 of plans to collaborate with InnovaFeed, the world leader in producing premium insect ingredients for animal feed, on the construction and operation of the world's largest insect protein production site inDecatur, Illinois ; and •the announcement inDecember 2020 of the end of dry lysine production in early 2021. The Company executes its strategic vision through three pillars: Optimize the Core, Drive Efficiencies, and Expand Strategically, all supported by its Readiness effort. 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.
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." 33
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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. North American crushing margins were volatile due to slow farmer selling and COVID-19 impacts on demand for meal and oil earlier in 2020, but strengthened in the third quarter due to the increasingly tight soybean stocks inSouth America .South America saw record origination volumes in the first half of 2020 as it benefited from strong farmer selling inBrazil driven by the devaluation of the Brazilian Real. RecordU.S. industry exports in the fourth quarter were driven by strong demand fromChina and the rest of the world. Demand and margins for biodiesel remained solid inNorth and South America . Margins for starches and sweeteners and wheat flour remained solid while demand was soft due to the impacts of COVID-19 in the food service sector. Ethanol margins were mixed asU.S. industry ethanol production exceeded demand and inventories remained high early in the year, but improved and stabilized the rest of the year asADM and many ethanol producers idled some capacity due to the low demand. Nutrition benefited from growing demand for flavors, pet food, feed for livestock, plant-based proteins, edible beans, and probiotics. Lower out-of-home consumption caused by COVID-19 lockdown measures negatively impacted flavors and textured plant-based protein volumes, especially in the food service channel, as well as demand for aqua feed and amino acids. Global demand for amino acids was also negatively impacted by lower livestock counts following an African swine fever outbreak. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net earnings attributable to controlling interests increased 28% or$0.4 billion , to$1.8 billion . Segment operating profit increased 17% or$0.5 billion , to$3.5 billion , and included net income of$7 million consisting of gains on the sale of a portion of the Company's shares in Wilmar and certain other assets, partially offset by asset impairment, restructuring, and settlement charges. Included in segment operating profit in the prior year was a net charge of$134 million consisting of asset impairment, restructuring, and settlement charges, gains on the sale of certain assets, and a step-up gain on an equity investment. Adjusted segment operating profit increased$0.4 billion to$3.4 billion due primarily to higher results in Ag Services,Vantage Corn Processors , Human and Animal Nutrition, and higher equity earnings from the Wilmar investment, partially offset by lower results in Crushing, Refined Products and Other, and Other Business. Refined Products and Other in the prior year included the$128 million 2018 portion of the two-year retroactive biodiesel tax credits. Corporate results in the current year were a net charge of$1.6 billion included early debt retirement charges of$409 million , a mark-to-market loss of$17 million on the conversion option of the exchangeable bonds issued inAugust 2020 , impairment and restructuring charges of$16 million , acquisition-related expenses of$4 million , gains on the sale of certain assets of$7 million , and a credit of$91 million from the elimination of the last-in, first-out (LIFO) reserve in connection with the accounting change effectiveJanuary 1, 2020 . Corporate results in the prior year were a net charge of$1.4 billion 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 LIFO inventory valuation reserves. Income taxes of$101 million decreased$108 million . The Company's effective tax rate for 2020 was 5.4% compared to 13.2% for 2019. The change in rate was due primarily to changes in the geographic mix of earnings, foreign currency remeasurement, and adjustments to previously filed returns. The rates for 2020 and 2019 were also impacted byU.S. tax credits, mainly the railroad maintenance tax credit, which had an offsetting expense in cost of products sold.
Analysis of Statements of Earnings
Processed volumes by product for the years ended
(In thousands) 2020 2019 Change Oilseeds 36,565 36,271 294 Corn 17,885 22,079 (4,194) Total 54,450 58,350 (3,900) 34
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to local supply and demand conditions. The overall increase in oilseeds is due to increased plant capacity utilization combined with downtime in the prior year due to weather-related issues. The overall decrease in corn processed is primarily related to the temporary idling of two dry mill facilities in the second quarter due to the low ethanol demand. The Company currently expects that the idled facilities will be restarted as demand for ethanol improves within the next 12 months. Revenues by segment for the years endedDecember 31, 2020 and 2019 are as follows: (In millions) 2020 2019 Change Ag Services and Oilseeds Ag Services$ 32,726 $ 31,705 $ 1,021 Crushing 9,593 9,479 114
Refined Products and Other 7,397 7,557 (160) Total Ag Services and Oilseeds 49,716 48,741 975
Carbohydrate Solutions Starches and Sweeteners 6,387 6,854 (467) Vantage Corn Processors 2,085 3,032 (947)
Total Carbohydrate Solutions 8,472 9,886 (1,414)
Nutrition Human Nutrition 2,812 2,745 67 Animal Nutrition 2,988 2,932 56 Total Nutrition 5,800 5,677 123 Other Business 367 352 15 Total Other Business 367 352 15 Total$ 64,355 $ 64,656 $ (301) 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 decreased$0.3 billion to$64.4 billion due to lower sales volumes ($2.3 billion ), partially offset by higher sales prices ($2.0 billion ). Lower sales volumes of rice, ethanol, oils, and corn by-products and lower sales prices of biodiesel were partially offset by higher sales volumes of biodiesel and higher sales prices of soybeans, oils, and meal. Ag Services and Oilseeds revenues increased 2% to$49.7 billion due to higher sales prices ($1.9 billion ), partially offset by lower sales volumes ($0.9 billion ). Carbohydrate Solutions revenues decreased 14% to$8.5 billion due to lower sales volumes ($1.4 billion ) primarily due to temporarily idled dry mill facilities. Nutrition revenues increased 2% to$5.8 billion due to higher sales prices ($0.1 billion ). 35
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cost of products sold decreased$0.6 billion to$59.9 billion due principally to lower sales volumes, partially offset by higher commodity prices. Included in cost of products sold in the current year was a credit of$91 million from the effect of the elimination of the LIFO reserve in connection with the accounting change in the current year compared to a charge of$37 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves in the prior year. Manufacturing expenses decreased$0.1 billion to$5.6 billion due principally to lower energy costs and decreased operating supplies, partially offset by increased railroad maintenance expenses. Foreign currency translation impacts decreased both revenues and cost of products sold by$0.3 billion . Gross profit increased$0.3 billion or 7%, to$4.5 billion . Higher results in Human and Animal Nutrition ($0.2 billion ) and Ag Services ($0.3 billion ) were partially offset by lower results in Refined Products and Other ($0.1 billion ) and Crushing ($0.1 billion ). These factors are explained in the segment operating profit discussion on page 38. In Corporate, the positive period-over-period impact from LIFO of$0.1 billion due to the elimination of the LIFO reserve in connection with the accounting change effectiveJanuary 1, 2020 and the changes in agricultural commodity prices on LIFO inventory valuation reserves in the prior period, were offset by the increase in railroad maintenance expenses of$0.1 billion . Selling, general, and administrative expenses increased 8% to$2.7 billion due principally to higher variable performance related compensation expenses and increased IT and project-related expenses. Asset impairment, exit, and restructuring costs decreased$223 million to$80 million . Charges in the current year consisted primarily of$47 million of impairments related to certain intangible and other long-lived assets and$17 million of individually insignificant restructuring charges presented as specified items within segment operating profit,$7 million of individually insignificant impairments and$9 million of individually insignificant restructuring charges in Corporate. Prior year charges consisted of 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,$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. Interest expense decreased$63 million to$339 million due to lower interest rates and net interest savings from cross currency swaps, partially offset by the mark-to-market loss adjustment related to the conversion option of the exchangeable bonds issued inAugust 2020 .
Equity in earnings of unconsolidated affiliates increased
Loss on debt extinguishment of
Interest income decreased$104 million to$88 million . Interest income on segregated funds in the Company's futures commission and brokerage business declined due to lower interest rates. Other income - net of$278 million increased$285 million . Current year income included gains related to the sale of a portion of the Company's shares in Wilmar and certain other assets, an investment revaluation gain, the non-service components of net pension benefit income, foreign exchange gains, and other income. Prior year expense included a loss on sale of the Company's equity investment in CIP and foreign exchange losses, partially offset by gains on the sale of certain assets, step-up gains on equity investments, gains on disposals of individually insignificant assets in the ordinary course of business, and other income. 36
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the years endedDecember 31, 2020 and 2019 are as follows: Segment Operating Profit 2020 2019 Change (In millions) Ag Services and Oilseeds Ag Services$ 828 $ 502 $ 326 Crushing 466 580 (114) Refined Products and Other 439 586 (147) Wilmar 372 267 105 Total Ag Services and Oilseeds 2,105 1,935 170 Carbohydrate Solutions Starches and Sweeteners 762 753 9 Vantage Corn Processors (45) (109) 64 Total Carbohydrate Solutions 717 644 73 Nutrition Human Nutrition 462 376 86 Animal Nutrition 112 42 70 Total Nutrition 574 418 156 Other Business 52 85 (33) Total Other 52 85 (33) Specified Items: Gain on sales of assets 83 12 71
Impairment, restructuring, and settlement charges (76) (146)
70 Total Specified Items 7 (134) 141 Total Segment Operating Profit$ 3,455 $ 2,948
Adjusted Segment Operating Profit(1)$ 3,448 $ 3,082 $ 366 Segment Operating Profit$ 3,455 $ 2,948 $ 507 Corporate (1,572) (1,360) (212) Earnings Before Income Taxes$ 1,883 $ 1,588 $ 295
(1) Adjusted segment operating profit is segment operating profit excluding the listed specified items.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Ag Services and Oilseeds operating profit increased 9%. Ag Services results were higher than the prior year, which was negatively impacted by challenging weather conditions and theU.S. -China trade tensions. Strong performance in global trade was driven by strong results in destination marketing and increased trading volumes. Robust farmer selling inBrazil and strong margins inNorth America drove higher origination results. Current year results also included a$54 million settlement related toU.S. high water insurance claims in 2019. Crushing results were lower than the prior year. Although volumes were strong and execution margins were solid, negative timing impacts drove lower results in the current year compared to the favorable timing effects in the prior year. Refined Products and Other results were lower due to decreased biodiesel margins inNorth America and the$128 million 2018 portion of retroactive biodiesel tax credits that were recorded in the prior year. Equity earnings from Wilmar were higher year-over-year. Carbohydrate Solutions operating profit increased 11%. Starches and Sweeteners results were higher due to strong margins in corn wet milling and wheat milling inNorth America and improved conditions in EMEAI, partially offset by negative mark-to-market timing effects on corn oil and COVID-related impacts on volumes across the business.Vantage Corn Processors results improved from the prior year due to effective risk management and strong demand for industrial alcohol. Nutrition operating profit increased 37%. Human Nutrition delivered strong performance and growth across its broad portfolio. Strong execution to meet rising customer demand for plant-based proteins and edible beans drove higher results in Specialty Ingredients. Additional income from fermentation and strong sales for probiotics and fiber drove higher performance in Health & Wellness. Flavors continued to deliver strong results. Animal Nutrition results improved year-over-year driven by strong performance from Neovia, good margins in commercial and livestock premix, and improved margins in amino acids. Other Business operating profit decreased 39%. Lower results, including loss provisions related to the Company's futures commission and brokerage business, were partially offset by improvements in underwriting performance at the captive insurance operations. Corporate results are as follows: (In millions) 2020 2019 Change LIFO credit (charge)$ 91 $ (37) $ 128 Interest expense - net (313) (348) 35 Unallocated corporate costs (857) (647) (210) Gain (loss) on sale of assets 7 (101) 108 Expenses related to acquisitions (4) (17) 13 Loss on debt extinguishment (409) -
(409)
Loss on debt conversion option (17) -
(17)
Impairment, restructuring, and settlement charges (16) (159) 143 Other charges (54) (51) (3) Total Corporate$ (1,572) $ (1,360) $ (212) 38
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Corporate results were a net charge of$1.6 billion in the current year compared to$1.4 billion in the prior year. The elimination of the LIFO reserve in connection with the accounting change effectiveJanuary 1, 2020 resulted in a credit of$91 million in the current year compared to a charge of$37 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves in the prior year. Interest expense - net decreased$35 million due principally to lower interest rates and net interest savings from cross currency swaps. Unallocated corporate costs increased$210 million due principally to higher variable performance-related compensation expenses and increased IT and project-related expenses related to the business transformation program which includes the implementation of an Enterprise Resource Planning system. Loss on sale of assets in the prior year related to the sale of the Company's equity investment in CIP. Expenses related to acquisitions in the prior year consisted of expenses primarily related to the Neovia acquisition. Loss on debt extinguishment was related to multiple early debt redemptions and the$0.7 billion debt tender inSeptember 2020 . Loss on debt conversion option was related to the mark-to-market adjustment of the conversion option of the exchangeable bonds issued inAugust 2020 . Impairment and restructuring charges in the current year related to impairment of certain assets and individually insignificant restructuring charges. Impairment, restructuring, and settlement charges in the prior year included restructuring and pension settlement and remeasurement charges related to early retirement and reorganization initiatives. Other charges in the current year included railroad maintenance expenses of$138 million , partially offset by foreign exchange gains, an investment revaluation gain, and the non-service components of net pension benefit income. Other charges in the prior year included railroad maintenance expenses of$51 million . 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. 39
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The table below provides a reconciliation of diluted EPS to adjusted EPS for the
years ended
2020 2019 In millions Per share In millions Per share Average number of shares outstanding - diluted 563 565 Net earnings and reported EPS (fully diluted)$ 1,772 $ 3.15 $ 1,379 $ 2.44 Adjustments: LIFO charge (credit) (net of tax of$22 million in 2020 and$9 million in 2019) (1) (69) (0.12) 28 0.05 (Gain) loss on sales of assets (net of tax of$10 million in 2020 and$35 million in 2019) (2) (80) (0.14) 124 0.22
Asset impairment, restructuring, and settlement charges
(net of tax of
69 0.12 249 0.44
Expenses related to acquisitions (net of tax of
3 0.01 11 0.02
Loss on debt extinguishment (net of tax of
310 0.55 - - Loss on debt conversion option (net of tax of$0 ) (2) 17 0.03 - - Tax adjustments (3) (0.01) 39 0.07 Adjusted net earnings and adjusted EPS$ 2,019 $
3.59
(1) Tax effected using the Company's
The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the years endedDecember 31, 2020 and 2019. (In millions) 2020 2019 Change Earnings before income taxes$ 1,883 $ 1,588 $ 295 Interest expense 339 402 (63) Depreciation and amortization 976 993 (17) LIFO charge (credit) (91) 37 (128) (Gain) loss on sales of assets (90) 89 (179) Asset impairment, restructuring, and settlement charges 92 305 (213) Railroad maintenance expense 138 51 87 Expenses related to acquisitions 4 17 (13) Loss on debt extinguishment 409 - 409 Adjusted EBITDA$ 3,660 $ 3,482 $ 178 (In millions) 2020 2019 Change Ag Services and Oilseeds$ 2,469 $ 2,311 158 Carbohydrate Solutions 1,029 974 55 Nutrition 802 642 160 Other Business 61 117 (56) Corporate (701) (562) (139) Adjusted EBITDA$ 3,660 $ 3,482 $ 178 40
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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. Sales volumes and margins in Ag Services and Oilseeds were negatively impacted by challenging North American weather conditions, in particular high water in the Mississippi river system in the first half of 2019, 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. 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 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. 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 2019 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 2019, 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 LIFO inventory valuation reserves, compared to a credit of$18 million in 2018. Corporate results in 2018 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$74 million .
Analysis of Statements of Earnings
Processed volumes by product for the years ended
(In thousands) 2019 2018 Change Oilseeds 36,271 36,308 (37) Corn 22,079 22,343 (264) Total 58,350 58,651 (301) 41
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to local supply and demand conditions. Processed volumes of Corn decreased slightly from the prior year levels primarily related to the production disruptions in theColumbus, Nebraska corn processing plant due to flooding and production issues in theDecatur, Illinois corn complex. Revenues by segment for the years endedDecember 31, 2019 and 2018 are as follows: (In millions) 2019 2018 Change Ag Services and Oilseeds Ag Services$ 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 6,854 6,922 (68) Vantage Corn Processors 3,032 3,357 (325)
Total Carbohydrate Solutions 9,886 10,279 (393)
Nutrition Human Nutrition 2,745 2,571 174 Animal Nutrition 2,932 1,219 1,713 Total Nutrition 5,677 3,790 1,887 Other Business 352 381 (29) Total Other Business 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 2019 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 2018. 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$0.8 billion . 42 --------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 45. The effect of changes in agricultural commodity prices on LIFO inventory valuation reserves had a negative impact on gross profit of$37 million in 2019 compared to a positive impact of$18 million in 2018. 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 . Charges in 2019 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. Charges in 2018 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$38 million to$402 million due to higher borrowings to fund recent acquisitions, partially offset by lower interest rates. 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 . Expense in 2019 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. Expense in 2018 included foreign exchange losses and a non-cash pension settlement charge of$117 million related to the purchase of a group annuity contract that irrevocably transferred the future benefit obligations and annuity administration for certainU.S. salaried retirees under the Company'sADM Retirement Plan. These expenses were partially offset by gains on disposals of businesses, an equity investment, and individually insignificant assets in the ordinary course of business, and other income. 43
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating profit by segment and earnings before income taxes for the years endedDecember 31, 2019 and 2018 are as follows: Segment Operating Profit 2019 2018 Change (In millions) Ag Services and Oilseeds Ag Services$ 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 Sweeteners and Starches 753 905 (152) Vantage Corn Processors (109) 40 (149) Total Carbohydrate Solutions 644 945 (301) Nutrition Human Nutrition 376 318 58 Animal Nutrition 42 21 21 Total Nutrition 418 339 79 Other Business 85 58 27 Total Other Business 85 58 27 Specified Items: Gain on sales of assets and businesses 12 13
(1)
Impairment, restructuring, and exit 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 above specified items.
44
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 theU.S. -China trade tensions. Results in 2019 were negatively impacted by high water conditions in the first half of the year, which limited grain movement and sales inNorth America . Slow farmer selling and lower Chinese demand for South American origination, in part due to African swine fever, also impacted results. Crushing results were strong but down compared to 2018. Lower executed crush margins around the globe drove lower results, partially offset by favorable timing effects of approximately$102 million from hedges entered in 2018. Refined Products and Other results were up compared to 2018 primarily due to the retroactive biodiesel tax credit of$270 million for 2018 and 2019 recorded in 2019 compared to$120 million for 2017 recorded in 2018, strong demand, and higher results from equity investments. Wilmar results were lower year over year. Carbohydrate Solutions operating profit decreased 32%. Starches and Sweeteners results were down primarily due to lower results in EMEA where margins were pressured due to low sugar prices and the Turkish quota on starch-based sweeteners. Higher manufacturing costs at theDecatur, IL complex and weaker margins in flour milling also contributed to the decrease.Vantage Corn Processors results were down due to significantly lower ethanol margins amid a continued unfavorable ethanol industry environment, exacerbated by the lack of Chinese demand for ethanol due to theU.S. -China trade dispute. Nutrition operating profit increased 23%. Human Nutrition results were higher year over year on strong sales and margin growth inNorth America andEurope ,Middle East ,Africa , andIndia (EMEAI) and contributions from acquisitions. Animal Nutrition results were up driven largely by contributions from the acquisition of Neovia, partially offset by additional expenses related to inventory valuation of newly-acquired Neovia and weaker lysine results. Other Business operating profit increased 47% primarily due to improved results from the Company's futures commission brokerage business and captive insurance underwriting performance. Corporate results are as follows: (In millions) 2019 2018 Change LIFO credit (charge)$ (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 2019 compared to$1.2 billion in 2018. The effect of changes in agricultural commodity prices on LIFO inventory valuation reserves resulted in a charge of$37 million in 2019 compared to a credit of$18 million in 2018. 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 2019 consisted of expenses primarily related to the Neovia acquisition. Expenses related to acquisitions in 2018 consisted of expenses and losses on foreign currency derivative contracts entered into to economically hedge certain acquisitions. Impairment, restructuring, and settlement charges in 2019 included restructuring and pension settlement and remeasurement charges related to early retirement and reorganization initiatives. Impairment, restructuring, and settlement charges in 2018 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 2019 included railroad maintenance expenses of$51 million . Other charges in 2018 included foreign exchange losses which were partially offset by earnings from the Company's equity investment in CIP. 45 --------------------------------------------------------------------------------
Item 7. 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 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$4 million in 2018) (1) 28 0.05 (14) (0.02)
(Gain) loss on sales of assets and businesses (net of tax
of
124 0.22 (13) (0.02)
Asset impairment, restructuring, and settlement charges
(net of tax of
249 0.44 226 0.40
Expenses related to acquisitions (net of tax of
11 0.02 6 0.01 Tax adjustments (3) 39 0.07 (33) (0.06) Adjusted net earnings and adjusted EPS$ 1,830
(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. 46
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Item 7. 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 years endedDecember 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 Gain (loss) 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 Business 117 92 25 Corporate (562) (636) 74 Adjusted EBITDA$ 3,482 $ 3,634 $ (152) 47
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Item 7. 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 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
Trade receivables increased$0.1 billion primarily due to lower receivables sold. Inventories increased$2.4 billion primarily due to higher inventory prices. Other current assets and accrued expenses and other payables increased$2.1 billion and$1.3 billion , respectively, primarily due to increases in contracts and futures gains and losses. Trade payables increased$0.7 billion principally reflecting seasonal cash payments for North American harvest-related grain purchases. Payables to brokerage customers increased$1.4 billion due to increased customer trading activity in the Company's futures commission and brokerage business.
Deferred consideration in securitized receivables of
Cash provided by investing activities was$4.5 billion this year compared to$5.3 billion last year. Capital expenditures of$0.8 billion in the current year were comparable to last year. Net assets of businesses acquired were$15 million this year compared to$1.9 billion last year due to the acquisition of Neovia in 2019. Proceeds from sales of business and assets of$0.7 billion in the current year related to the sale of a portion of the Company shares in Wilmar and certain other assets compared to$0.3 billion in the prior year. Net consideration received for beneficial interest obtained for selling trade receivables was$4.6 billion and$7.7 billion in 2020 and 2019, respectively. Cash used in financing activities was$0.4 billion this year compared to$0.7 billion last year. Long-term debt borrowings in the current year of$1.8 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 onMarch 27, 2020 and the$0.3 billion aggregate principal amount of zero coupon exchangeable bonds due in 2023 issued onAugust 26, 2020 . Proceeds from the borrowings in the current year were used for general corporate purposes, including the reduction of short-term debt. Commercial paper net borrowings were$0.8 billion in the current year compared to$0.9 billion in the prior year. Long-term debt payments in the current year of$2.1 billion related primarily to the early redemption of the$0.5 billion and$0.4 billion aggregate principal amounts of 4.479% debentures due in 2021 and 3.375% debentures due in 2022, respectively, the repurchase of$0.7 billion aggregate principal amount of certain outstanding notes and debentures, and the redemption of$0.2 billion aggregate principal amount of private placement notes due in 2021 and 2024. Long-term debt payments of$0.6 billion in the prior year related to the €500 million Floating Rate Notes that matured inJune 2019 . Share repurchases in the current year were$0.1 billion compared to$0.2 billion in the prior year. Dividends paid in the current year of$0.8 billion were comparable to the prior year. AtDecember 31, 2020 ,ADM had$0.7 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 1.5 to 1. Included in working capital is$7.9 billion of readily marketable commodity inventories. AtDecember 31, 2020 , the Company's capital resources included shareholders' equity of$20.0 billion and lines of credit, including the accounts receivable securitization programs described below, totaling$10.2 billion , of which$6.6 billion was unused.ADM's ratio of long-term debt to total capital (the sum of long-term debt and shareholders' equity) was 28% and 29% atDecember 31, 2020 and 2019, respectively. 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) was 32% and 29% atDecember 31, 2020 and 2019, respectively. Of the Company's total lines of credit,$5.0 billion supported the commercial paper borrowing programs, against which there was$1.7 billion of commercial paper outstanding atDecember 31, 2020 . 48 --------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) COVID-19 has not significantly impactedADM's capital and financial resources, and pricing on its revolving credit facility remains unchanged. However, in line with the overall markets, COVID-19 created dislocations in the credit markets during certain periods in the first half of 2020 with corporate spreads increasing, partially offset by a decline 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 theFederal Reserve's Commercial Paper Financing Facility and theBank of England's COVID Corporate Financing Facility ensuring uninterrupted access to both theU.S. and European commercial paper markets. TheFederal Reserve's Commercial Paper Financing Facility and theBank of England's COVID Corporate Financing Facility expire in March andJune 2021 , respectively, unless renewed. To date, the Company has not utilized these facilities. During the second half of 2020, the global credit market stabilized with corporate credit spreads below pre-pandemic levels. Continued actions by central banks provided additional support in both the short-term and long-term funding markets further stabilizing corporate credit markets. Low benchmark yields and favorable credit spreads coupled with continued strong cash flow generation during the second half of the year presented opportunities forADM to re-balance the company's liability portfolio to pre-pandemic levels. Starting inJune 2020 ,ADM began a series of liability management transactions including multiple early debt redemptions and the$0.7 billion debt tender inSeptember 2020 to capitalize on all-time low interest rates. As ofDecember 31, 2020 , the Company had$0.7 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$4.0 billion , the Company has asserted that these funds are indefinitely reinvested outside theU.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$1.8 billion in funding against accounts receivable transferred into the Programs and expand 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 ofDecember 31, 2020 , the Company utilized$1.6 billion of its facility under the Programs. OnNovember 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 commencingJanuary 1, 2015 and endingDecember 31, 2019 . OnAugust 7, 2019 , the Company's Board of Directors approved the extension of the stock repurchase program throughDecember 31, 2024 and the repurchase of up to an additional 100,000,000 shares under the extended program. The Company has acquired approximately 95.5 million shares under this program as ofDecember 31, 2020 . In 2021, the Company expects capital expenditures of$0.9 billion to$1.0 billion , and additional cash outlays of approximately$0.8 billion in dividends and up to$0.5 billion in share repurchases, subject to other strategic uses of capital. 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, 2020 .
The three major credit rating agencies have maintained the Company's credit ratings at solid investment grade levels with stable outlooks.
49
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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$151 million as ofDecember 31, 2020 as the Company is unable to reasonably estimate the timing of settlement. Where applicable, information included in the Company's consolidated financial statements and notes is cross-referenced in this table. Payments Due by Period Item 8 Contractual Obligations and Note Less than 1 - 3 3 - 5 More than Other Commitments Reference Total 1 Year Years Years 5 Years (In millions) Purchases Inventories$ 18,220 $ 17,915 $ 301 $ 4 $ - Energy 537 184 166 187 - Other 940 553 158 41 188 Total purchases 19,697 18,652 625 232 188 Short-term debt 2,042 2,042 - - - Long-term debt Note 10 7,887 2 1,061 1 6,823 Estimated interest payments 5,370 319 632 598 3,821 One-time transition tax Note 13 164 25 56 83 - Operating leases Note 14 1,299 302 486 251 260 Estimated pension and other postretirement plan contributions (1) Note 15 151 45 29 27 50 Total$ 36,610 $ 21,387 $ 2,889 $ 1,192 $ 11,142 (1) Includes pension contributions of$29 million for fiscal 2021. The Company is unable to estimate the amount of pension contributions beyond fiscal year 2021. For more information concerning the Company's pension and other postretirement plans, see Note 15 in Item 8. AtDecember 31, 2020 , the Company estimates it will spend approximately$1.7 billion through fiscal year 2025 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 is immaterial and arises only if the primary entity fails to perform its contractual obligation. The Company has collateral for a portion of these contingent obligations. 50
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Off Balance Sheet Arrangements
Accounts Receivable Securitization Programs
OnApril 1, 2020 andOctober 1, 2020 , the Company restructured its accounts receivable securitization programs (Programs) from a deferred purchase price to a pledge structure. Under the new structure,ADM Ireland Receivables andADM Receivables transfer 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 commercial paper conduit purchasers and committed purchasers. In exchange,ADM Ireland Receivables andADM Receivables receive a cash payment for the accounts receivables transferred. 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, 2020 are valued at estimated fair values, including$7.9 billion of merchandisable agricultural commodity inventories,$2.8 billion of commodity derivative assets,$2.0 billion of commodity derivative liabilities, and$0.5 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$3.0 billion of assets and$0.9 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.
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. 51 --------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 inArgentina 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 2020, the Company increased valuation allowances by approximately$14 million primarily related to capital 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 and corporate joint
ventures amounting to approximately
The Company has a responsibility to ensure that allADM businesses within the Company follow responsible tax practices.ADM manages its tax affairs based upon the following key principles: -a commitment to paying tax in compliance with all applicable laws and regulations in the jurisdictions in which the Company operates; -a commitment to the effective, sustainable, and active management of the Company's tax affairs; and -developing and sustaining open and honest relationships with the governments and jurisdictions in which the Company operates regarding the formulation of tax laws. 52
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. In addition, 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 2020, the Company temporarily idled certain of its corn processing assets where ethanol is produced and performed a quantitative impairment assessment of those assets, resulting in no impairment charges. The total carrying value of the temporarily idled assets as ofDecember 31, 2020 was immaterial. During the years endedDecember 31, 2020 , 2019, and 2018, asset abandonment and impairment charges for property, plant, and equipment were$28 million ,$131 million , and$100 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 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. 53
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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. During the year endedDecember 31, 2020 , the Company evaluated goodwill for impairment using a qualitative assessment in six reporting units and using a quantitative assessment in one reporting unit. The estimated fair value of the reporting unit evaluated for impairment using a quantitative assessment was substantially in excess of its carrying value. Definite-lived intangible assets, including capitalized expenses related to the Company's 1ADM program, are amortized over their estimated useful lives of 1 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$26 million related to customer lists,$11 million related to goodwill and intangibles, and$9 million related customer lists during the years endedDecember 31, 2020 , 2019, and 2018, respectively (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 2 to 36 years for the Company's defined benefit pension plans and from 6 to 24 years for the Company's postretirement benefit plans.
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