Archer-Daniels-Midland Co - Annual Report: 2019 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission file number 1-44

ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
DE | 41-0129150 | ||
(State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) | ||
77 West Wacker Drive, Suite 4600 | |||
Chicago, | IL | 60601 | |
(Address of principal executive offices) | (Zip Code) | ||
(312) 634-8100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | ADM | NYSE |
1.000% Notes due 2025 | NYSE |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated Filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
Common Stock, no par value—$22.7 billion
(Based on the closing sale price of Common Stock as reported on the New York Stock Exchange
as of June 28, 2019)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, no par value—557,887,494 shares
(February 14, 2020)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be held May 7, 2020, are incorporated by reference into Part III of this Form 10-K.
SAFE HARBOR STATEMENT
This Form 10-K contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995 that is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking information. Risks and uncertainties that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors" included in this Form 10-K, as may be updated in our subsequent Quarterly Reports on Form 10-Q. To the extent permitted under applicable law, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events.
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Table of Contents
Item No. | Description | Page No. | |
Part I | |||
1. | |||
1A. | |||
1B. | |||
2. | |||
3. | |||
4. | |||
Part II | |||
5. | |||
6. | |||
7. | |||
7A. | |||
8. | |||
9. | |||
9A. | |||
9B. | |||
Part III | |||
10. | |||
11. | |||
12. | |||
13. | |||
14. | |||
Part IV | |||
15. | |||
16. | Form 10-K Summary | ||
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PART I
Item 1. | BUSINESS |
Company Overview
Archer-Daniels-Midland Company (the Company or ADM) unlocks the power of nature to provide access to nutrition worldwide. ADM is a global leader in human and animal nutrition and one of the world’s premier agricultural origination and processing companies. The Company's breadth, depth, insights, facilities, and logistical expertise give it exceptional capabilities to meet needs for food, beverages, health and wellness, and more. From the seed of the idea to the outcome of the solution, ADM enriches the quality of life the world over.
ADM was incorporated in Delaware in 1923, successor to the Daniels Linseed Co. founded in 1902. Today, it is one of the world’s leading producers of ingredients for human and animal nutrition, and other products made from nature. The Company works with customers to bring a wide array of natural products – including proteins, flavors, colors, flours, fibers, and more – together into unique and innovative solutions to meet consumer needs. In addition, ADM offers a deep portfolio of plant-based products for other uses, such as replacing petroleum-based plastics.
In order to meet consumer needs, ADM has an expansive origination, transportation, and production footprint. The Company operates an extensive global grain elevator and transportation network to procure, store, clean, and transport agricultural raw materials, such as oilseeds, corn, wheat, milo, oats, and barley, as well as products derived from those inputs. ADM’s production facilities around the globe produce a wide array of products, ingredients, and solutions. In addition, ADM has significant investments in joint ventures that aim to expand or enhance the market for its products or offer other benefits including, but not limited to, geographic or product-line expansion.
Segment Descriptions
Effective July 1, 2019, the Company changed its segment reporting to reflect the creation of the combined Ag Services and Oilseeds segment. The former Origination and Oilseeds businesses were merged into a combined Ag Services and Oilseeds segment which enables the Company to better respond to market changes by integrating the supply and value chains and risk management, while delivering significant simplification and efficiency to the day-to-day business. As part of the Company’s efforts for a streamlined management structure, the combined segment is led by the former President of Oilseeds expanding his role to President of Ag Services and Oilseeds.
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).
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Item 1. | BUSINESS (Continued) |
Ag Services and Oilseeds
The Ag Services and Oilseeds segment includes global activities related to the origination, merchandising, transportation, and storage of agricultural raw materials, and the crushing and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the segment include ingredients for food, feed, energy, and industrial customers. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel and glycols or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. The Ag Services and Oilseeds segment is also a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cotton cellulose pulp is manufactured and sold to the chemical, paper, and other industrial markets. The Ag Services and Oilseeds segment's grain sourcing, handling, and transportation network (including barge, ocean-going vessel, truck, rail, and container freight services) provides reliable and efficient services to the Company's customers and agricultural processing operations. The Ag Services and Oilseeds segment also includes agricultural commodity and feed product import, export, and global distribution, and structured trade finance activities. In February 2019, the Company purchased the remaining 50% interest owned by InVivo Group in the Gleadell Agriculture Ltd. joint venture located in the United Kingdom.
The Company has a 32.2% interest in Pacificor (formerly Kalama Export Company LLC). Pacificor owns and operates a grain export elevator in Kalama, Washington and a grain export elevator in Portland, Oregon.
The Company has a 24.8% equity interest in Wilmar International Limited (Wilmar), a Singapore publicly listed company. Wilmar is a leading global agribusiness group headquartered in Asia engaged in the businesses of oil palm cultivation, oilseeds crushing, edible oils refining, packaged oils and foods, sugar milling and refining, specialty fats, oleo chemicals, biodiesel and fertilizers manufacturing, and grains processing.
The Company has a 50% interest in Stratas Foods LLC, a joint venture between ADM and ACH Jupiter, LLC, a subsidiary of Associated British Foods, that procures, packages, and sells edible oils in North America.
The Company has a 50% interest in Edible Oils Limited, a joint venture between ADM and Princes Limited to procure, package, and sell edible oils in the United Kingdom. The Company also formed a joint venture with Princes Limited in Poland to procure, package, and sell edible oils in Poland, the Czech Republic, Slovakia, Hungary, and Austria.
The Company has a 37.5% ownership interest in Olenex Sarl (Olenex), a joint venture between ADM and Wilmar, that produces and sells a comprehensive portfolio of edible oils and fats to customers around the globe. In addition, Olenex markets refined oils and fats from the Company's plants in the Czech Republic, Germany, the Netherlands, Poland, and the U.K.
The Company has a 50% interest in SoyVen, a joint venture between ADM and Cargill to provide soybean meal and oil for customers in Egypt.
The Company is a major supplier of raw materials to Wilmar, Stratas Foods LLC, Edible Oils Limited, SoyVen, and Olenex.
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Item 1. | BUSINESS (Continued) |
Carbohydrate Solutions
The Carbohydrate Solutions segment is engaged in corn and wheat wet and dry milling and other activities. The Carbohydrate Solutions segment converts corn and wheat into products and ingredients used in the food and beverage industry including sweeteners, corn and wheat starches, syrup, glucose, wheat flour, and dextrose. Dextrose and starch are used by the Carbohydrate Solutions segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Carbohydrate Solutions segment produces alcohol and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. Other Carbohydrate Solutions products include citric acids which are used in various food and industrial products.
Hungrana Ltd., in which ADM owns a 50% interest, operates a wet corn milling plant in Hungary.
Almidones Mexicanos S.A., in which ADM has a 50% interest, operates a wet corn milling plant in Mexico.
Red Star Yeast Company, LLC, a joint venture in which ADM has a 40% interest, produces and sells fresh and dry yeast in the United States and Canada.
Aston Foods and Food Ingredients, in which ADM owns a 50% interest, is a Russian-based sweeteners and starches business.
Nutrition
The Nutrition segment serves customer needs for food, beverages, health and wellness, and more. The segment engages in the manufacturing, sale, and distribution of a wide array of products from nature including plant-based proteins, natural flavor ingredients, flavor systems, natural colors, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products including probiotics, prebiotics, enzymes, and botanical extracts, and other specialty food and feed ingredients. The Nutrition segment includes the activities related to the procurement, processing, and distribution of edible beans. The Nutrition segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products and the manufacture of contract and private label pet treats and foods. In 2019, ADM completed the acquisitions of Neovia, a French-based global provider of value-added animal nutrition solutions, with 72 production facilities and a presence in 25 countries; Florida Chemical Company (FCC), one of the world’s largest producers of citrus oils and ingredients; and The Ziegler Group (Ziegler), a leading European provider of natural citrus flavor ingredients. In January 2020, ADM acquired Yerbalatina Phytoactives (Yerbalatina), a natural plant-based extracts and ingredients manufacturer.
Other
Other includes the Company’s remaining operations as described below.
ADM Investor Services, Inc., a wholly owned subsidiary of the Company, is a registered futures commission merchant and a clearing member of all principal commodities exchanges in the U.S. ADM Investor Services International, Limited, a member of several derivative and commodity exchanges and clearing houses in Europe, ADMIS Singapore Pte. Limited, a clearing member of the Singapore exchange, and ADMIS Hong Kong Limited, are wholly owned subsidiaries of ADM offering brokerage services in Europe and Asia.
Insurance activities include Agrinational Insurance Company (Agrinational) and its subsidiaries. Agrinational, a wholly owned subsidiary of ADM, provides insurance coverage for certain property, casualty, marine, credit, and other miscellaneous risks of the Company. Agrinational also participates in certain third-party reinsurance arrangements. ADM Crop Risk Services, a wholly owned subsidiary engaged in the selling and servicing of crop insurance policies to farmers, was sold on May 1, 2017 to Validus Holdings, a global group of insurance and reinsurance companies.
Corporate
In December 2019, the Company sold its 43.7% interest in Compagnie Industrielle et Financiere des Produits Amylaces SA (Luxembourg) and affiliates (CIP), a joint venture that targets investments in food, feed ingredients, and bioproducts businesses.
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Item 1. | BUSINESS (Continued) |
Methods of Distribution
The Company’s products are distributed mainly in bulk from processing plants or storage facilities directly to customers’ facilities. The Company has developed a comprehensive transportation capability to efficiently move both commodities and processed products virtually anywhere in the world. The Company owns or leases a significant portion of the trucks, trailers, railroad tank and hopper cars, river barges, towboats, and ocean-going vessels used to transport the Company’s products to its customers.
Concentration of Revenues by Product
The following products accounted for 10% or more of revenues for the following periods:
% of Revenues | |||||
Year Ended December 31 | |||||
2019 | 2018 | 2017 | |||
Soybeans | 16% | 16% | 17% | ||
Soybean Meal | 13% | 14% | 13% | ||
Corn | 12% | 12% | 10% |
Status of New Products
The Company continues to expand the size and global reach of its business through the development of new products. Acquisitions, especially in the Nutrition segment, expand the Company’s ability to unlock the potential of nature and serve customers’ evolving and expanding nutritional needs through its offering of natural flavor and ingredient products. The Company does not expect any individual new product to have a significant impact on the Company’s revenues in 2020.
Source and Availability of Raw Materials
A significant majority of the Company’s raw materials are agricultural commodities. In addition, the Company sources specific fruits, vegetables, and nuts for extracts to make flavors and colors. In any single year, the availability and price of these commodities are subject to factors such as changes in weather conditions, plantings, government programs and policies, competition, changes in global demand, changes in standards of living, and global production of similar and competitive crops. The Company’s raw materials are procured from thousands of growers, grain elevators, and wholesale merchants in North America, South America, Europe, Middle East, and Africa (EMEA), Asia, and Australia, pursuant primarily to short-term (less than one year) agreements or on a spot basis. The Company is not dependent upon any particular grower, elevator, or merchant as a source for its raw materials.
Trademarks, Brands, Recipes, and other Intellectual Property
The Company owns trademarks, brands, recipes, and other intellectual property including patents, with a net book value of $948 million as of December 31, 2019. The Company does not consider any segment of its business to be dependent upon any single or group of trademarks, brands, recipes, or other intellectual property.
Seasonality, Working Capital Needs, and Significant Customers
Since the Company is widely diversified in global agribusiness markets, there are no material seasonal fluctuations in overall global processing volumes and the sale and distribution of its products and services. There is a degree of seasonality in the growing cycles, procurement, and transportation of the Company’s principal raw materials: oilseeds, corn, wheat, and other grains.
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Item 1. | BUSINESS (Continued) |
The prices of agricultural commodities, which may fluctuate significantly and change quickly, directly affect the Company’s working capital requirements. Because the Company has a higher portion of its operations in the northern hemisphere, principally North America and Europe, relative to the southern hemisphere, primarily South America, inventory levels typically peak after the northern hemisphere fall harvest and are generally lower during the northern hemisphere summer months. Working capital requirements have historically trended with inventory levels. No material part of the Company’s business is dependent upon a single customer or very few customers. The Company has seasonal financing arrangements with farmers in certain countries around the world. Typically, advances on these financing arrangements occur during the planting season and are repaid at harvest.
Competition
The Company has significant competition in the markets in which it operates based principally on price, foreign exchange rates, quality, global supply, and alternative products, some of which are made from different raw materials than those utilized by the Company. Given the commodity-based nature of many of its businesses, the Company, on an ongoing basis, focuses on managing unit costs and improving efficiency through technology improvements, productivity enhancements, and regular evaluation of the Company’s asset portfolio.
Research and Development
Research and development expense during the year ended December 31, 2019, net of reimbursements of government grants, was $154 million.
The Company’s laboratories and technical innovation centers around the world enhance its ability to interact with customers globally, not only to provide flavors, but also to support the sales of other food ingredients. The acquisition of Wild Flavors in October 2014 approximately doubled the number of scientists and technicians in research and development. Since that time, additional laboratories have been added, including food & beverages applications laboratories in Fort Collins, Colorado, and Bergamo, Italy as well as expanded laboratories in Decatur, Illinois and Shanghai, China.
The Company expanded its human health and nutrition portfolio in February 2017 with the acquisition of a controlling interest in Biopolis SL (Biopolis), a leading provider of probiotics and genomic services. Biopolis provides genomic sequencing capabilities for the Company's customers as well as for its internal use. Biopolis also has high through-put biological functionality testing capabilities that can be used to discover new probiotics and nutraceuticals. In January 2018, the Company announced a joint development agreement with Vland Biotech to develop and commercialize enzymes for animal feed. In April 2018, the Company opened its new enzyme development laboratory in Davis, California to advance the research and development of feed enzyme as well as enzymes for internal use. In August 2018, the Company further expanded its probiotics business with the acquisition of Probiotics International Limited. With the acquisition of Neovia in early 2019, ADM further expanded its R&D capabilities in Animal Nutrition, globally. In December 2019, the Company opened a new Animal Nutrition Technology Center in Decatur, Illinois, to further expand its animal nutrition capabilities to support customer innovation in pet and aqua food production in North America.
ADM Ventures, which was launched by the Company in 2016, continues to select high-potential, new product development projects from within its business units. The first internal venture funded project, a new sweetener, has been fully commercialized and is being sold in the United States by our Carbohydrate Solutions team. Through the acquisition of Neovia, ADM Ventures further expanded its equity investments in promising, early-stage start-up companies from three to six, and is looking at several others in which the Company may choose to invest.
The Company is continuing to invest in research to develop a broad range of sustainable materials with an objective to produce key intermediate materials that serve as a platform for producing a variety of sustainable packaging products. Conversion technologies include utilizing expertise in both fermentation and catalysis. The Company’s current portfolio includes products that are in the early development phase and those that are close to pilot plant demonstration. The Company’s project with DuPont to develop sustainable packaging solutions with improved barrier properties has progressed to a pilot production facility that opened in April 2018. This facility provides samples for customers as well as engineering data for a full-scale plant. In 2019, the Company announced a joint venture with LG Chem, Ltd. to develop biobased acrylic acid using ingredients from the Company's corn processing. Acrylic acid is a key element required in the manufacture of superabsorbent polymers used in a range of hygiene products, including diapers.
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Item 1. | BUSINESS (Continued) |
Environmental Compliance
During the year ended December 31, 2019, the Company spent $48 million specifically to improve equipment, facilities, and programs for pollution control and compliance with the requirements of various environmental agencies.
There have been no material effects upon the earnings and competitive position of the Company resulting from compliance with applicable laws or regulations enacted or adopted relating to the protection of the environment.
A number of jurisdictions where the Company has operations have implemented or are in the process of implementing carbon pricing programs or regulations to reduce greenhouse gas emissions including, but not limited to, the U.S., Canada, Mexico, the E.U. and its member states, and China. The Company's operations located in countries with effective and applicable carbon pricing and regulatory programs currently meet their obligations in this regard with no significant impact on the earnings and competitive position of the Company. The Company’s business could be affected in the future by additional global, regional, national, and local regulation, pricing of greenhouse gas emissions or other climate change legislation, regulation or agreements. It is difficult at this time to estimate the likelihood of passage, or predict the potential impact, of any additional legislation, regulations or agreements. Potential consequences of new obligations could include increased energy, transportation, raw material, and administrative costs, and may require the Company to make additional investments in its facilities and equipment.
Number of Employees
The number of full-time employees of the Company was approximately 38,100 at December 31, 2019 and 31,600 at December 31, 2018. The net increase in the number of full-time employees is primarily related to acquisitions net of the early retirement and reorganization initiatives.
Available Information
The Company’s website is http://www.adm.com. ADM's annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; directors’ and officers’ Forms 3, 4, and 5; and amendments to those reports, if any, are available, free of charge, through its website, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission (SEC).
The Company's Code of Conduct, Corporate Governance Guidelines, and the written charters of the Audit, Compensation/Succession, Nominating/Corporate Governance, Sustainability and Corporate Responsibility, and Executive Committees are also available through its website.
References to the Company's website address in this report are provided as a convenience and do not constitute, or should not be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
The SEC maintains a website which contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC. The SEC’s website is http://www.sec.gov.
Item 1A. | RISK FACTORS |
The Company faces risks in the normal course of business and through global, regional, and local events that could have an adverse impact on its reputation, operations, and financial performance.
Management directs a Company-wide Enterprise Risk Management (ERM) Program, with oversight from the Company’s Board of Directors. The Company’s Audit Committee has the delegated risk management oversight responsibility and receives updates on the risk management processes and key risk factors on a quarterly basis.
The Company, through its business unit, functional, and corporate teams, continually updates, assesses, monitors, and mitigates these and other business and compliance risks in accordance with the ERM Program and as monitored by the ERM Program team and Chief Risk Officer.
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Item 1A. | RISK FACTORS (Continued) |
The risk factors that follow are the main risks that the ERM Program focuses on to protect and enhance shareholder value through intentional risk mitigation plans based on management-defined risk limits.
The availability and prices of the agricultural commodities and agricultural commodity products the Company procures, transports, stores, processes, and merchandises can be affected by climate change, weather conditions, disease, government programs, competition, and various other factors beyond the Company’s control and could adversely affect the Company’s operating results.
The availability and prices of agricultural commodities are subject to wide fluctuations, including impacts from factors outside the Company's control such as changes in weather, climate, and rising sea levels, crop disease, plantings, government programs and policies, competition, and changes in global demand. The Company uses a global network of procurement, processing, and transportation assets, as well as robust communications between global commodity merchandiser teams, to continually assess price and basis opportunities. Management-established limits (including a corporate wide value-at-risk metric), with robust internal reporting, help to manage risks in pursuit of driving performance. Additionally, the Company depends globally on agricultural producers to ensure an adequate supply of the agricultural commodities.
Reduced supply of agricultural commodities could adversely affect the Company’s profitability by increasing the cost of raw materials and/or limiting the Company’s ability to procure, transport, store, process, and merchandise agricultural commodities in an efficient manner. High and volatile commodity prices can place more pressures on short-term working capital funding. Conversely, if supplies are abundant and crop production globally outpaces demand for more than one or two crop cycles, price volatility is somewhat diminished. This could result in reduced operating results due to the lack of supply chain dislocations and reduced market spread and basis opportunities.
Advances in technology, such as seed and crop protection, farming techniques, storage and logistics, and speed of information flow, may reduce the significance of dislocations and arbitrage opportunities in the agricultural global markets, which may reduce the earnings potential of agricultural merchandisers and processors such as the Company.
The Company has significant competition in the markets in which it operates.
The Company faces significant competition in each of its businesses and has numerous competitors, who can be different depending upon each of the business segments in which it participates. The Company competes for the acquisition of inputs such as agricultural commodities, transportation services, and other materials and supplies, as well as for workforce and talent. Competition impacts the Company’s ability to generate and increase its gross profit as a result of the following factors: Pricing of the Company’s products is partly dependent upon industry processing capacity, which is impacted by competitor actions to bring idled capacity on-line, build new production capacity or execute aggressive consolidation; many of the products bought and sold by the Company are global commodities or are derived from global commodities that are highly price competitive and, in many cases, subject to substitution; significant changes in exchange rates of foreign currencies versus the U.S. dollar, particularly the currencies of major crop growing countries, could also make goods and products of these countries more competitive than U.S. products; improved yields in different crop growing regions may reduce the reliance on origination territories in which the Company has a significant presence; and continued merger and acquisition activities resulting in further consolidations could result in greater cost competitiveness and global scale of certain players in the industry, especially when acquirers are state-owned and/or backed by public funds and have profit and return objectives that may differ from publicly traded enterprises. To compete effectively, the Company focuses on improving efficiency in its production and distribution operations, developing and maintaining appropriate market presence, maintaining a high level of product safety and quality, and working with customers to develop new products and tailored solutions.
In the case of the nutrition business, while maintaining efficient and cost-effective operations are important, the ability to drive innovation and come up with quality nutritional solutions for human and animal needs are key factors to remain competitive in the nutrition market.
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Item 1A. | RISK FACTORS (Continued) |
Fluctuations in energy prices could adversely affect the Company’s operating results.
The Company’s operating costs and the selling prices of certain finished products are sensitive to changes in energy prices. The Company’s processing plants are powered principally by electricity, natural gas, and coal. The Company’s transportation operations are dependent upon diesel fuel and other petroleum-based products. Significant increases in the cost of these items, including any consequences of regulation or taxation of greenhouse gases, could adversely affect the Company’s production costs and operating results.
The Company has certain finished products, such as ethanol and biodiesel, which are closely related to, or may be substituted for, petroleum products, or in the case of ethanol, blended into gasoline to increase octane content. Therefore, the selling prices of ethanol and biodiesel can be impacted by the selling prices of gasoline, diesel fuel, and other octane enhancers. A significant decrease in the price of gasoline, diesel fuel, or other octane enhancers could result in a significant decrease in the selling price of the Company’s ethanol and biodiesel. The Company uses derivative contracts as anticipatory hedges for both purchases of commodity inputs and sales of energy-based products in order to protect itself in the near term against these price trends and to protect and maximize processing margins.
The Company is subject to economic downturns and regional economic volatilities, which could adversely affect the Company’s operating results.
The Company conducts its business and has substantial assets located in many countries and geographic areas. While 44 percent of the Company’s processing plants and 57 percent of its procurement facilities are located in the United States, the Company also has significant operations in both developed areas (such as Western Europe, Canada, and Brazil) and emerging market areas. One of the Company’s strategies is to expand the global reach of its core model, which may include expanding or developing its business in emerging market areas. Both developed and emerging market areas are subject to impacts of economic downturns, including decreased demand for the Company’s products, and reduced availability of credit, or declining credit quality of the Company’s suppliers, customers, and other counterparties. In addition, emerging market areas could be subject to more volatile operating conditions including, but not limited to, logistics limitations or delays, labor-related challenges, epidemic outbreaks, limitations or regulations affecting trade flows, local currency concerns, and other economic and political instability. Political fiscal instability could generate intrusive regulations in emerging markets, potentially creating unanticipated assessments of taxes, fees, increased risks of corruption, etc. Economic downturns and volatile market conditions could adversely affect the Company’s operating results and ability to execute its long-term business strategies, although the nature of many of the Company's products (i.e. food and feed ingredients) is less sensitive to demand reductions in any economic downcycles. The Company mitigates this risk in many ways, including country risk and exposure analysis, government relations and tax compliance activities, and robust ethics compliance training requirements.
The Company is subject to numerous laws, regulations, and mandates globally which could adversely affect the Company’s operating results and forward strategy.
The Company does business globally, connecting crops and markets in more than 190 countries, and is required to comply with laws and regulations administered by the United States federal government as well as state, local, and non-U.S. governmental authorities in areas including: Accounting and income taxes, anti-corruption, anti-bribery, global trade, trade sanctions, environmental, product safety, and handling and production of regulated substances. The Company frequently faces challenges from U.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. Any failure to comply with applicable laws and regulations or appropriately resolve these challenges could subject the Company to administrative, civil, and criminal remedies, including fines, penalties, disgorgement, injunctions, and recalls of its products, and damage to its reputation. Resolution of some of these tax disputes could take many years and interest and penalties may be accruing in the meantime, thereby significantly increasing the notional amount of the exposures.
The production of the Company’s products uses materials which can create emissions of certain regulated substances, including greenhouse gas emissions. The Company has programs and policies in place (e.g., Corporate Sustainability Program, No-Deforestation Policy, Environmental Policy, etc.) to reduce its environmental footprint and to help ensure compliance with laws and regulations. Implementation of these programs and policies sometimes requires acquisition of technology at a cost to the Company. Failure to comply can have serious consequences, including civil, administrative, and criminal penalties as well as a negative impact on the Company’s reputation, business, cash flows, and results of operations.
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Item 1A. | RISK FACTORS (Continued) |
In addition, changes to regulations or implementation of additional regulations - for example, the imposition of regulatory restrictions on greenhouse gases, the implementation of IMO 2020 low sulfur fuel oil requirements for ships or regulatory modernization of food safety laws - may require the Company to modify existing processing facilities and/or processes which could significantly increase operating costs and adversely affect operating results.
Government policies, mandates, and regulations specifically affecting the agricultural sector and related industries; regulatory policies or matters that affect a variety of businesses; taxation polices; and political instability could adversely affect the Company’s operating results.
Agricultural production and trade flows are subject to government policies, mandates, regulations, and trade agreements, including taxes, tariffs, duties, subsidies, incentives, foreign exchange rates, and import and export restrictions, including policies related to genetically modified organisms, traceability standards, product safety and labeling, renewable fuels, and low carbon fuel mandates. These policies can influence the planting of certain crops; the location and size of crop production; whether unprocessed or processed commodity products are traded; the volume and types of imports and exports; the availability and competitiveness of feedstocks as raw materials; the viability and volume of production of certain of the Company’s products; and industry profitability. For example, changes in government policies or regulations of ethanol and biodiesel including, but not limited to, changes in the Renewable Fuel Standard program under the Energy Independence and Security Act of 2007 in the United States, can have an impact on the Company’s operating results. International trade regulations can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. Regulations of financial markets and instruments, including the Dodd-Frank Act, Consumer Protection Act, and the European Market Infrastructure Regulation, create uncertainty and may lead to additional risks and costs, and could adversely affect the Company’s futures commission merchant business and its agricultural commodity risk management practices. Future government policies may adversely affect the supply of, demand for, and prices of the Company’s products; adversely affect the Company's ability to deploy adequate hedging programs; restrict the Company’s ability to do business in its existing and target markets; and adversely affect the Company’s revenues and operating results.
The Company’s operating results could be affected by political instability and by changes in monetary, fiscal, trade, and environmental policies, laws, regulations, and acquisition approvals, creating risks including, but not limited to: Changes in a country’s or region’s economic or political conditions (e.g. Brexit), local labor conditions and regulations, and safety and environmental regulations; reduced protection of intellectual property rights; changes in the regulatory or legal environment; restrictions on currency exchange activities; currency exchange fluctuations; burdensome taxes and tariffs; enforceability of legal agreements and judgments; adverse tax, administrative agency or judicial outcomes; and regulation or taxation of greenhouse gases. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities, and war, could limit the Company’s ability to transact business in these markets. There has been a recent increase in populism and nationalism in various countries around the world and the concept and benefits of free trade are being challenged. The Company has benefited from the free flow of agricultural and food and feed ingredient products from the U.S. and other sources to markets around the world. Increases in tariff and restrictive trade activities around the world (e.g., the U.S.-China trade dispute, Iran sanctions) could negatively impact the Company's ability to enter certain markets or the price of products may become less competitive in those markets.
The Company’s strategy involves expanding the volume and diversity of crops it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. Government policies including, but not limited to, antitrust and competition law, trade restrictions, food safety regulations, sustainability requirements, and traceability, can impact the Company’s ability to execute this strategy successfully.
The Company is subject to industry-specific risks which could adversely affect the Company’s operating results.
The Company is subject to risks which include, but are not limited to, product safety or quality; launch of new products by other industries that can replace the functionalities of the Company's production; shifting consumer preferences; federal, state, and local regulations on manufacturing or labeling; socially acceptable farming practices; environmental, health, and safety regulations; and customer product liability claims. The liability which could result from certain of these risks may not always be covered by, or could exceed liability insurance related to product liability and food safety matters maintained by the Company. The Company has a particularly strong capability and culture around occupational health and safety and food safety; however, risks to the Company's reputation may exist due to potential negative publicity caused by product liability, food safety, occupational health and safety, and environmental matters.
12
Item 1A. | RISK FACTORS (Continued) |
Certain of the Company’s merchandised commodities and finished products are used as ingredients in livestock and poultry feed. The Company is subject to risks associated with economic, product quality, feed safety or other factors which may adversely affect the livestock and poultry businesses, including the outbreak of disease in livestock and poultry, for example African swine fever, which could adversely affect demand for the Company’s products used as ingredients in feed. In addition, as the Company increases its investment in flavors and ingredients businesses, it is exposed to increased risks related to rapidly changing consumer preferences and the impacts these changes could have on the success of certain of the Company's customers.
The Company is exposed to potential business disruption including, but not limited to, disruption of transportation services, supply of non-commodity raw materials used in its processing operations, and other impacts resulting from acts of terrorism or war, natural disasters, severe weather conditions, and accidents which could adversely affect the Company’s operating results.
The Company’s operations rely on dependable and efficient transportation services the disruption of which could result in difficulties supplying materials to the Company’s facilities and impair the Company’s ability to deliver products to its customers in a timely manner. The Company relies on access to navigable rivers and waterways in order to fulfill its transportation obligations more effectively. In addition, if certain non-agricultural commodity raw materials, such as water or certain chemicals used in the Company’s processing operations, are not available, the Company’s business could be disrupted. Any major lack of available water for use in certain of the Company’s processing operations could have a material adverse impact on operating results. Certain factors which may impact the availability of non-agricultural commodity raw materials are out of the Company’s control including, but not limited to, disruptions resulting from weather, high river water conditions, economic conditions, manufacturing delays or disruptions at suppliers, shortage of materials, interruption of energy supply, and unavailable or poor supplier credit conditions.
The assets and operations of the Company could be subject to extensive property damage and business disruption from various events which include, but are not limited to, acts of terrorism (for example, purposeful adulteration of the Company’s products), war, natural disasters, severe weather conditions, accidents, explosions, and fires. The Company is continuing to enhance and deploy additional food safety and security procedures and controls to appropriately mitigate the risks of any adulteration of the Company’s products in the supply chain and finished products in production and distribution networks. In addition, the Company conforms to management systems, such as International Organization for Standardization (ISO) or other recognized global standards.
The Company’s business is capital-intensive in nature and the Company relies on cash generated from its operations and external financing to fund its growth and ongoing capital needs. Limitations on access to external financing could adversely affect the Company’s operating results.
The Company requires significant capital, including continuing access to credit markets, to operate its current business and fund its growth strategy. The Company’s working capital requirements, including margin requirements on open positions on futures exchanges, are directly affected by the price of agricultural commodities, which may fluctuate significantly and change quickly. The Company also requires substantial capital to maintain and upgrade its extensive network of storage facilities, processing plants, refineries, mills, ports, transportation assets, and other facilities to keep pace with competitive developments, technological advances, regulations, and changing safety standards in the industry. Moreover, the expansion of the Company’s business and pursuit of acquisitions or other business opportunities may require significant amounts of capital. Access to credit markets and pricing of the Company’s capital is dependent upon maintaining sufficient credit ratings from credit rating agencies. Sufficient credit ratings allow the Company to access cost competitive tier one commercial paper markets. If the Company is unable to maintain sufficiently high credit ratings, access to these commercial paper and other debt markets and costs of borrowings could be adversely affected. If the Company is unable to generate sufficient cash flow or maintain access to adequate external financing, including as a result of significant disruptions in the global credit markets, it could restrict the Company’s current operations and its growth opportunities. The Company manages this risk with constant monitoring of credit/liquidity metrics, cash forecasting, and routine communications with credit rating agencies on risk management practices.
LIBOR (London Interbank Offered rate) has been the subject of recent proposals for international reform and it is anticipated LIBOR will be discontinued or modified by the end of 2021. The Company's variable rate debt, credit facilities, certain derivative agreements, and commercial agreements may use LIBOR as a benchmark for establishing interest rates. While it is not possible to predict the consequences of discontinuation or modification of LIBOR at this time, the Company's financing costs could be adversely or positively impacted. Although the Company does not expect that a transition from LIBOR will have a material adverse impact on its financing costs, the Company continues to monitor developments.
13
Item 1A. | RISK FACTORS (Continued) |
The Company’s risk management strategies may not be effective.
The Company has a Chief Risk Officer who oversees the ERM Program and regularly reports to the Board of Directors on the myriad of risks facing the Company and the Company's strategies for mitigating the risks. The Company’s business is affected by fluctuations in agricultural commodity cash prices and derivative prices, transportation costs, energy prices, interest rates, foreign currency exchange rates, and equity markets. The Company monitors position limits and counterparty risks and engages in other strategies and controls to manage these risks. The Company regularly reports its aggregate commodity risk exposures to the Board of Directors through the ERM process. The Company has an established commodity merchandising governance process that ensures proper position reporting and monitoring, limits approvals, and executes training on trade compliance, commodity regulatory reporting controls, and other policies. The Company’s risk monitoring efforts may not be successful at detecting a significant risk exposure. If these controls and strategies are not successful in mitigating the Company’s exposure to these fluctuations, it could adversely affect the Company’s operating results.
The Company has limited control over and may not realize the expected benefits of its equity investments and joint ventures.
The Company has $5.1 billion invested in or advanced to joint ventures and investments over which the Company has limited control as to the governance and management activities. Net sales to unconsolidated affiliates during the year ended December 31, 2019 was $4.9 billion. Risks related to these investments may include: The financial strength of the investment partner; loss of revenues and cash flows to the investment partner and related gross profit; the inability to implement beneficial management strategies, including risk management and compliance monitoring, with respect to the investment’s activities; and the risk that the Company may not be able to resolve disputes with the partners. The Company may encounter unanticipated operating issues, financial results, or compliance and reputational risks related to these investments. The Company mitigates this risk using controls and policies related to joint venture formation, governance (including board of directors’ representation), merger and acquisition integration management, and harmonization of joint venture policies with the Company’s policies and controls.
The Company’s information technology (IT) systems, processes, and sites may suffer interruptions, security breaches, or failures which may affect the Company’s ability to conduct its business.
The Company’s operations rely on certain key IT systems, some of which are dependent on services provided by third parties, to provide critical data connectivity, information, and services for internal and external users. These interactions include, but are not limited to: Ordering and managing materials from suppliers; risk management activities; converting raw materials to finished products; inventory management; shipping products to customers; processing transactions; summarizing and reporting results of operations; human resources benefits and payroll management; and complying with regulatory, legal or tax requirements. The Company is also in the process of implementing a new enterprise resource planning (ERP) system on a worldwide basis as part of its ongoing business transformation program, which is expected to improve the efficiency and effectiveness of certain financial and business transaction processes and the underlying systems environment. This will allow the Company to mitigate the risk of instability in aging legacy systems. Increased IT security and social engineering threats and more sophisticated computer crime, including advanced persistent threats, pose a potential risk to the security of the Company’s IT systems, networks, and services, as well as the confidentiality, availability, and integrity of the Company’s third party data. The Company is subject to a variety of laws and regulations in the United States and other jurisdictions regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Compliance with and interpretation of data privacy regulations, including the European Union General Data Protection Regulation implemented in 2018, continues to evolve and any violation could subject the Company to legal claims, regulatory penalties, and damage to its reputation. The Company has put in place security measures to prevent, detect, and mitigate cyber-based attacks, and has instituted control procedures for cyber security incident responses and disaster recovery plans for its critical systems. In addition, the Company monitors this risk on an ongoing basis to detect and correct any breaches, and reports metrics on the quality of the Company’s data security efforts and control environment to the highest level of management and to the Board of Directors. However, if the Company’s IT systems are breached, damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and the Company’s disaster recovery plans do not effectively mitigate the risks on a timely basis, the Company may suffer significant interruptions in its ability to manage its operations, loss of valuable data, actual or threatened legal actions, and damage to its reputation, which may adversely impact the Company’s revenues, operating results, and financial condition.
14
Item 1A. | RISK FACTORS (Continued) |
The Company may fail to realize the benefits or experience delays in the execution of its growth strategy, encompassing organic and inorganic initiatives, outside the U.S. and in businesses where the Company does not currently have a large presence.
As the Company executes its growth strategy, through both organic and inorganic growth, it may encounter risks which could result in increased costs, decreased revenues, and delayed synergies. Recent investments outside the U.S. include Neovia, certain assets of Brazil-based Algar Agro, Protexin, Ziegler, Rodelle, Inc., and Yerbalatina. Growth in new geographies outside the U.S. can expose the Company to volatile economic, political, and regulatory risks that may negatively impact its operations and ability to achieve its growth strategy. Expanding businesses where the Company has limited presence may expose the Company to risks related to the inability to identify an appropriate partner or target and favorable terms, inability to retain/hire strategic talent, or integration risks that may require significant management resources that would have otherwise been available for ongoing growth or operational initiatives. Acquisitions may involve unanticipated delays, costs, and other problems. Due diligence performed prior to the acquisition may not identify a material liability or issue that could impact the Company's reputation or adversely affect results of operations resulting in a reduction of the anticipated acquisition benefits. Additionally, acquisitions may involve integration risks such as: internal control effectiveness, system integration risks, the risk of impairment charges related to goodwill and other intangibles, ability to retain acquired employees, and other unanticipated risks.
Item 1B. | UNRESOLVED STAFF COMMENTS |
The Company has no unresolved staff comments.
Item 2. | PROPERTIES |
The Company owns or leases, under operating leases, the following processing plants and procurement facilities:
Processing Plants | Procurement Facilities | ||||||||||||||||
Owned | Leased | Total | Owned | Leased | Total | ||||||||||||
U.S. | 150 | 4 | 154 | 221 | 53 | 274 | |||||||||||
International | 169 | 24 | 193 | 92 | 116 | 208 | |||||||||||
319 | 28 | 347 | 313 | 169 | 482 |
The Company’s operations are such that most products are efficiently processed near the source of raw materials. Consequently, the Company has many plants strategically located in agricultural commodity producing areas. The annual volume of commodities processed will vary depending upon availability of raw materials and demand for finished products. The Company also owns approximately 230 warehouses and terminals primarily used as bulk storage facilities and 55 innovation centers. Warehouses, terminals, corporate, and sales offices are not included in the tables above. Processing plants and procurement facilities owned or leased by unconsolidated joint ventures are also not included in the tables above.
To enhance the efficiency of transporting large quantities of raw materials and finished products between the Company’s procurement facilities and processing plants and also the final delivery of products to its customers around the world, the Company owns approximately 1,900 barges, 11,900 rail cars, 330 trucks, 1,300 trailers, 90 boats, and 7 oceangoing vessels; and leases, under operating leases, approximately 610 barges, 16,900 rail cars, 320 trucks, 280 trailers, 40 boats, and 19 oceangoing vessels.
15
Item 2. | PROPERTIES (Continued) |
Ag Services and Oilseeds Processing Facilities | |||||||||||||||||
Owned | Leased | ||||||||||||||||
Refined | Refined | ||||||||||||||||
Ag | Products | Ag | Products | ||||||||||||||
Services | Crushing | and Other | Total | Services | Crushing | and Other | Total | ||||||||||
North America | |||||||||||||||||
U.S.* | 1 | 24 | 33 | 58 | — | — | 2 | 2 | |||||||||
Canada | — | 3 | 4 | 7 | — | — | — | — | |||||||||
Mexico | — | 1 | — | 1 | — | — | — | — | |||||||||
Total | 1 | 28 | 37 | 66 | — | — | 2 | 2 | |||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 1 | 63 | 24 | 88 | — | — | — | — | |||||||||
South America | |||||||||||||||||
Argentina | — | — | 1 | 1 | — | — | — | — | |||||||||
Brazil | — | 7 | 12 | 19 | — | 1 | — | 1 | |||||||||
Paraguay | — | 1 | — | 1 | — | — | — | — | |||||||||
Peru | — | — | 1 | 1 | — | — | — | — | |||||||||
Total | — | 8 | 14 | 22 | — | 1 | — | 1 | |||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | — | 19 | 9 | 28 | — | 1 | — | 1 | |||||||||
Europe | |||||||||||||||||
Belgium | — | — | 1 | 1 | — | — | — | — | |||||||||
Czech Republic | — | 1 | 1 | 2 | — | — | — | — | |||||||||
Germany | — | 4 | 8 | 12 | — | — | — | — | |||||||||
Netherlands | — | 1 | 1 | 2 | — | — | — | — | |||||||||
Poland | — | 2 | 5 | 7 | — | — | — | — | |||||||||
Ukraine | — | 1 | — | 1 | — | — | — | — | |||||||||
United Kingdom | — | 1 | 3 | 4 | — | — | — | — | |||||||||
Total | — | 10 | 19 | 29 | — | — | — | — | |||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | — | 36 | 14 | 50 | — | — | — | — | |||||||||
Australia | |||||||||||||||||
Australia | — | — | — | — | 1 | — | — | 1 | |||||||||
Total | — | — | — | — | 1 | — | — | 1 | |||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000's) | — | — | — | — | — | — | — | — | |||||||||
Asia | |||||||||||||||||
India | — | — | 2 | 2 | — | — | 1 | 1 | |||||||||
Total | — | — | 2 | 2 | — | — | 1 | 1 | |||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000's) | — | — | 1 | 1 | — | — | 1 | 1 | |||||||||
Africa | |||||||||||||||||
South Africa | — | — | 3 | 3 | — | — | 1 | 1 | |||||||||
Total | — | — | 3 | 3 | — | — | 1 | 1 | |||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000's) | — | — | 2 | 2 | — | — | — | — | |||||||||
Grand Total | 1 | 46 | 75 | 122 | 1 | 1 | 4 | 6 | |||||||||
Total daily/storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 1 | 118 | 50 | 169 | — | 1 | 1 | 2 |
*The U.S. processing plants are located in Alabama, California, Georgia, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Carolina, Tennessee, and Texas.
16
Item 2. | PROPERTIES (Continued) |
Ag Services and Oilseeds Procurement Facilities | |||||||||||||||||
Owned | Leased | ||||||||||||||||
Refined | Refined | ||||||||||||||||
Ag | Products | Ag | Products | ||||||||||||||
Services | Crushing | and Other | Total | Services | Crushing | and Other | Total | ||||||||||
North America | |||||||||||||||||
U.S.* | 137 | 3 | 58 | 198 | 17 | — | 34 | 51 | |||||||||
Canada | 1 | 5 | — | 6 | — | — | — | — | |||||||||
Dominican Republic | 1 | — | — | 1 | — | — | — | — | |||||||||
Total | 139 | 8 | 58 | 205 | 17 | — | 34 | 51 | |||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 12,153 | 263 | 224 | 12,640 | 786 | — | 104 | 890 | |||||||||
South America | |||||||||||||||||
Argentina | 3 | — | — | 3 | 1 | — | — | 1 | |||||||||
Brazil | 39 | 1 | — | 40 | 1 | — | — | 1 | |||||||||
Colombia | — | — | — | — | 9 | — | — | 9 | |||||||||
Ecuador | — | — | — | — | 2 | — | — | 2 | |||||||||
Paraguay | 13 | — | — | 13 | 2 | — | — | 2 | |||||||||
Peru | — | — | — | — | 2 | — | — | 2 | |||||||||
Uruguay | 1 | — | — | 1 | 6 | — | — | 6 | |||||||||
Total | 56 | 1 | — | 57 | 23 | — | — | 23 | |||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 2,471 | 60 | — | 2,531 | 851 | — | — | 851 | |||||||||
Europe | |||||||||||||||||
Germany | 2 | 1 | — | 3 | — | — | — | — | |||||||||
Hungary | — | — | — | — | 7 | — | — | 7 | |||||||||
Ireland | 1 | — | — | 1 | 2 | — | — | 2 | |||||||||
Netherlands | 1 | 1 | — | 2 | — | — | — | — | |||||||||
Poland | — | 4 | — | 4 | — | 3 | — | 3 | |||||||||
Romania | 11 | — | — | 11 | 3 | — | — | 3 | |||||||||
Russian Federation | — | — | — | — | 12 | — | — | 12 | |||||||||
Spain | — | — | — | — | 4 | — | — | 4 | |||||||||
Turkey | 1 | — | — | 1 | — | — | — | — | |||||||||
Ukraine | 6 | — | — | 6 | — | — | — | — | |||||||||
United Kingdom | — | — | — | — | — | 3 | — | 3 | |||||||||
Total | 22 | 6 | — | 28 | 28 | 6 | — | 34 | |||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 1,265 | 428 | — | 1,693 | 353 | 14 | — | 367 | |||||||||
Asia | |||||||||||||||||
China | — | — | — | — | — | — | 1 | 1 | |||||||||
Korea | — | — | — | — | 1 | — | — | 1 | |||||||||
India | — | — | — | — | — | 51 | — | 51 | |||||||||
Total | — | — | — | — | 1 | 51 | 1 | 53 | |||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000's) | — | — | — | — | — | 80 | 35 | 115 | |||||||||
Grand Total | 217 | 15 | 58 | 290 | 69 | 57 | 35 | 161 | |||||||||
Total daily/storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 15,889 | 751 | 224 | 16,864 | 1,990 | 94 | 139 | 2,223 |
*The U.S. procurement facilities are located in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, and Texas.
17
Item 2. | PROPERTIES (Continued) |
Carbohydrate Solutions Processing Plants | |||||||||||
Owned | Leased | ||||||||||
Starches & Sweeteners | Bioproducts | Total | Starches & Sweeteners | ||||||||
North America | |||||||||||
U.S.* | 35 | 3 | 38 | — | |||||||
Canada | 8 | — | 8 | — | |||||||
Barbados | 1 | — | 1 | — | |||||||
Belize | 1 | — | 1 | 1 | |||||||
Grenada | 1 | — | 1 | — | |||||||
Jamaica | 2 | — | 2 | — | |||||||
Total | 48 | 3 | 51 | 1 | |||||||
Daily capacity | |||||||||||
Metric tons (in 1,000’s) | 69 | 24 | 93 | 3 | |||||||
Europe | |||||||||||
Bulgaria | 1 | — | 1 | — | |||||||
France | 1 | — | 1 | — | |||||||
Turkey | 1 | — | 1 | — | |||||||
United Kingdom | 3 | — | 3 | 4 | |||||||
Total | 6 | — | 6 | 4 | |||||||
Daily capacity | |||||||||||
Metric tons (in 1,000’s) | 5 | — | 5 | 1 | |||||||
Asia | |||||||||||
China | 1 | — | 1 | — | |||||||
Total | 1 | — | 1 | — | |||||||
Daily capacity | |||||||||||
Metric tons (in 1,000’s) | — | — | — | — | |||||||
Africa | |||||||||||
Morocco | 1 | — | 1 | — | |||||||
Total | 1 | — | 1 | — | |||||||
Daily capacity | |||||||||||
Metric tons (in 1,000’s) | — | — | — | — | |||||||
Grand Total | 56 | 3 | 59 | 5 | |||||||
Total daily capacity | |||||||||||
Metric tons (in 1,000’s) | 74 | 24 | 98 | 4 |
*The U.S. processing plants are located in California, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, New York, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.
18
Item 2. | PROPERTIES (Continued) |
Carbohydrate Solutions Procurement Facilities | |||||||||||||||||
Owned | Leased | ||||||||||||||||
Starches & Sweeteners | Bioproducts | Total | Starches & Sweeteners | Bioproducts | Total | ||||||||||||
North America | |||||||||||||||||
U.S.* | 4 | — | 4 | 1 | — | 1 | |||||||||||
Canada | — | — | — | 2 | — | 2 | |||||||||||
Total | 4 | — | 4 | 3 | — | 3 | |||||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 362 | — | 362 | 154 | — | 154 | |||||||||||
Europe | |||||||||||||||||
United Kingdom | — | — | — | 4 | — | 4 | |||||||||||
Total | — | — | — | 4 | — | 4 | |||||||||||
Daily/Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | — | — | — | 19 | — | 19 | |||||||||||
Grand Total | 4 | — | 4 | 7 | — | 7 | |||||||||||
Total daily/storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 362 | — | 362 | 173 | — | 173 |
*The U.S. procurement facilities are located in Iowa, Minnesota, Oklahoma, and Texas.
Nutrition Processing Plants | |||||||||||||||||
Owned | Leased | ||||||||||||||||
WFSI | Animal Nutrition | Total | WFSI | Animal Nutrition | Total | ||||||||||||
North America | |||||||||||||||||
U.S.* | 27 | 27 | 54 | 1 | 1 | 2 | |||||||||||
Canada | 1 | 4 | 5 | — | — | — | |||||||||||
Mexico | — | 12 | 12 | — | — | — | |||||||||||
Puerto Rico | — | 2 | 2 | — | 1 | 1 | |||||||||||
Trinidad & Tobago | — | 1 | 1 | — | — | — | |||||||||||
Total | 28 | 46 | 74 | 1 | 2 | 3 | |||||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 74 | 10 | 84 | — | 49 | 49 | |||||||||||
South America | |||||||||||||||||
Brazil | 1 | 11 | 12 | 1 | 3 | 4 | |||||||||||
Colombia | — | 1 | 1 | — | — | — | |||||||||||
Ecuador | — | 1 | 1 | — | — | — | |||||||||||
Total | 1 | 13 | 14 | 1 | 3 | 4 | |||||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000’s) | — | — | — | — | — | — | |||||||||||
19
Item 2. | PROPERTIES (Continued) |
Nutrition Processing Plants | |||||||||||||||||
Owned | Leased | ||||||||||||||||
WFSI | Animal Nutrition | Total | WFSI | Animal Nutrition | Total | ||||||||||||
Europe | |||||||||||||||||
Belgium | — | 1 | 1 | — | — | — | |||||||||||
Germany | 6 | — | 6 | 2 | — | 2 | |||||||||||
France | 1 | 12 | 13 | — | 1 | 1 | |||||||||||
Italy | — | 1 | 1 | — | — | — | |||||||||||
Netherlands | 1 | 1 | 2 | 1 | — | 1 | |||||||||||
Poland | 1 | 1 | 2 | — | — | — | |||||||||||
Portugal | — | 1 | 1 | — | — | — | |||||||||||
Spain | 2 | 1 | 3 | — | — | — | |||||||||||
Switzerland | — | 1 | 1 | — | — | — | |||||||||||
Turkey | — | — | — | 1 | — | 1 | |||||||||||
United Kingdom | 1 | — | 1 | — | — | — | |||||||||||
Total | 12 | 19 | 31 | 4 | 1 | 5 | |||||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 1 | — | 1 | 2 | — | 2 | |||||||||||
Africa | |||||||||||||||||
Algeria | — | 1 | 1 | — | — | — | |||||||||||
Madagascar | — | — | — | 1 | — | 1 | |||||||||||
Nigeria | — | 1 | 1 | — | — | — | |||||||||||
South Africa | — | 2 | 2 | — | — | — | |||||||||||
Total | — | 4 | 4 | 1 | — | 1 | |||||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000’s) | — | — | — | — | — | — | |||||||||||
Asia | |||||||||||||||||
China | 1 | 7 | 8 | 1 | — | 1 | |||||||||||
India | — | 1 | 1 | 1 | — | 1 | |||||||||||
Indonesia | — | 2 | 2 | — | — | — | |||||||||||
Philippines | — | — | — | — | 2 | 2 | |||||||||||
Vietnam | — | 4 | 4 | — | — | — | |||||||||||
Total | 1 | 14 | 15 | 2 | 2 | 4 | |||||||||||
Daily capacity | |||||||||||||||||
Metric tons (in 1,000’s) | — | — | — | — | — | — | |||||||||||
Grand Total | 42 | 96 | 138 | 9 | 8 | 17 | |||||||||||
Total daily capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 75 | 10 | 85 | 2 | 49 | 51 |
*The U.S. processing plants are located in Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, New Jersey, North Dakota, Ohio, Pennsylvania, Texas, and Washington.
20
Item 2. | PROPERTIES (Continued) |
Nutrition Procurement Facilities | |||||||||||
Owned | Leased | ||||||||||
WFSI | Animal Nutrition | Total | WFSI | ||||||||
North America | |||||||||||
U.S.* | 19 | — | 19 | 1 | |||||||
Total | 19 | — | 19 | 1 | |||||||
Daily/Storage capacity | |||||||||||
Metric tons (in 1,000’s) | 316 | — | 316 | 2 | |||||||
Grand Total | 19 | — | 19 | 1 | |||||||
Total daily/storage capacity | |||||||||||
Metric tons (in 1,000’s) | 316 | — | 316 | 2 |
*The U.S. procurement facilities are located in Idaho, Illinois, Michigan, Minnesota, North Dakota, and Wyoming.
Item 3. | LEGAL PROCEEDINGS |
The Company is routinely involved in a number of actual or threatened legal actions, including those involving alleged personal injuries, employment law, product liability, intellectual property, environmental issues, alleged tax liability (see Note 13 in Item 8 for information on income tax matters), and class actions. The Company also routinely receives inquiries from regulators and other government authorities relating to various aspects of its business, and at any given time, the Company has matters at various stages of resolution. The outcomes of these matters are not within the Company's complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief, including injunctive relief, that could require significant expenditures or result in lost revenues. In accordance with applicable accounting standards, the Company records a liability in its consolidated financial statements for material loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a material loss contingency is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, disgorgement, or punitive damages; or could result in a change in business practice. See Note 20 in Item 8 for information on the Company’s legal proceedings.
Item 4. | MINE SAFETY DISCLOSURES |
None.
21
PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Common Stock Market
The Company’s common stock is listed and traded on the New York Stock Exchange under the trading symbol “ADM”.
The number of registered stockholders of the Company’s common stock at December 31, 2019, was 9,148.
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Number of Shares Remaining to be Purchased Under the Program (2) | |||||||||
October 1, 2019 to October 31, 2019 | 194 | $ | 40.375 | 151 | 108,315,391 | ||||||||
November 1, 2019 to November 30, 2019 | 287 | 42.487 | 217 | 108,315,174 | |||||||||
December 1, 2019 to December 31, 2019 | 253 | 44.068 | 253 | 108,314,921 | |||||||||
Total | 734 | $ | 42.473 | 621 | 108,314,921 |
(1) Total shares purchased represent those shares purchased in the open market as part of the Company’s publicly announced stock repurchase program described below, shares received as payment for the exercise price of stock option exercises, and shares received as payment for the withholding taxes on vested restricted stock awards. During the three-month period ended December 31, 2019, there were 113 shares received as payments for the exercise price of stock option exercises.
(2) 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.
22
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued) |
Performance Graph
The graph below compares the Company’s common stock with those of the S&P 500 Index and the S&P Consumer Staples Index. The graph assumes an initial investment of $100 on December 31, 2014 and assumes all dividends have been reinvested through December 31, 2019.
COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN
Among Archer Daniels Midland Company (ADM), the S&P 500 Index, and the S&P Consumer Staples Index

Index Data: Copyright© Standard and Poor's, Inc.
23
Item 6. | SELECTED FINANCIAL DATA |
Selected Financial Data
(In millions, except ratio and per share data)
Years Ended | |||||||||||||||||||
December 31 | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Revenues | $ | 64,656 | $ | 64,341 | $ | 60,828 | $ | 62,346 | $ | 67,702 | |||||||||
Depreciation | 827 | 812 | 802 | 787 | 799 | ||||||||||||||
Net earnings attributable to controlling interests | 1,379 | 1,810 | 1,595 | 1,279 | 1,849 | ||||||||||||||
Basic earnings per common share | 2.45 | 3.21 | 2.80 | 2.18 | 2.99 | ||||||||||||||
Diluted earnings per common share | 2.44 | 3.19 | 2.79 | 2.16 | 2.98 | ||||||||||||||
Cash dividends | 789 | 758 | 730 | 701 | 687 | ||||||||||||||
Per common share | 1.40 | 1.34 | 1.28 | 1.20 | 1.12 | ||||||||||||||
Working capital | 7,613 | 8,812 | 7,355 | 7,872 | 8,324 | ||||||||||||||
Current ratio | 1.6 | 1.7 | 1.6 | 1.6 | 1.6 | ||||||||||||||
Inventories | 9,170 | 8,813 | 9,173 | 8,831 | 8,243 | ||||||||||||||
Net property, plant, and equipment | 10,106 | 9,953 | 10,138 | 9,758 | 9,853 | ||||||||||||||
Gross additions to property, plant, and equipment | 817 | 845 | 1,100 | 882 | 1,350 | ||||||||||||||
Total assets | 43,997 | 40,833 | 39,963 | 39,769 | 40,157 | ||||||||||||||
Long-term debt, excluding current maturities | 7,672 | 7,698 | 6,623 | 6,504 | 5,779 | ||||||||||||||
Shareholders’ equity | 19,225 | 18,996 | 18,322 | 17,181 | 17,915 | ||||||||||||||
Per common share | 34.52 | 33.98 | 32.89 | 29.98 | 30.11 | ||||||||||||||
Weighted average shares outstanding-basic | 563 | 564 | 569 | 588 | 618 | ||||||||||||||
Weighted average shares outstanding-diluted | 565 | 567 | 572 | 591 | 621 |
Significant items affecting the comparability of the financial data shown above are as follows:
• | Net earnings attributable to controlling interests for the year ended December 31, 2019 included a net loss of $89 million ($124 million after tax, equal to $0.22 per share) related to the loss on sale of an equity investment partially offset by gains on sale of certain assets and a step-up gain on an equity investment; charges of $305 million ($249 million after tax, equal to $0.44 per share) consisting of restructuring and pension settlement and remeasurement charges primarily related to early retirement and reorganization initiatives in Corporate and impairments related to certain long-lived assets; expenses of $17 million ($11 million after tax, equal to $0.02 per share) primarily related to the Neovia acquisition; and tax expense adjustments related to certain discrete items totaling $39 million (equal to $0.07 per share). |
24
Item 6. | SELECTED FINANCIAL DATA (Continued) |
• | Net earnings attributable to controlling interests for the year ended December 31, 2018 included net gains totaling $13 million ($13 million after tax, equal to $0.02 per share) related to the sale of businesses and assets; charges of $292 million ($226 million after tax, equal to $0.40 per share) consisting of a non-cash pension settlement charge related to the purchase of a group annuity contract that irrevocably transferred the future benefit obligations and annuity administration for certain retirees under the Company's ADM Retirement Plan, charges related to a discontinued software project, a long-term receivable, an equity investment, certain long-lived assets, and several individually insignificant asset impairment charges, restructuring charges in Corporate primarily related to the reorganization of IT services and several individually insignificant restructuring charges, and other settlement charges; charges of $8 million ($6 million after tax, equal to $0.01 per share) related to acquisition expenses and net losses on foreign currency derivative contracts to economically hedge certain acquisitions; and net tax benefits due to changes in the provisional transition tax amount related to the enactment of the Tax Cuts and Jobs Act and certain discrete items totaling $33 million (equal to $0.06 per share). |
• | Net earnings attributable to controlling interests for the year ended December 31, 2017 included gains totaling $22 million ($10 million after tax loss, equal to $0.02 per share) primarily related to the sale of the crop risk services business partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business; charges of $214 million ($144 million after tax, equal to $0.25 per share) consisting of asset impairments related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex, restructuring charges related to the reduction of certain positions within the Company’s global workforce, several individually insignificant asset impairments and restructuring charges, and provisions for contingent losses related to certain settlement items; a debt extinguishment charge of $11 million ($7 million after tax, equal to $0.01 per share) related to the early redemption of the Company’s $559 million notes due on March 15, 2018; and net tax benefits related to the Tax Cuts and Jobs Act and certain discrete tax adjustments totaling $366 million (equal to $0.64 per share). |
• | Net earnings attributable to controlling interests for the year ended December 31, 2016 included gains totaling $119 million ($100 million after tax, equal to $0.17 per share) primarily related to recovery of loss provisions and gains related to the sale of the Company’s Brazilian sugar ethanol facilities, realized contingent consideration on the sale of the Company’s equity investment in Gruma S.A. de C.V. in December 2012, and revaluation of the remaining interest to settlement value in conjunction with the acquisition of Amazon Flavors; a gain of $38 million ($24 million after tax, equal to $0.04 per share) related to a U.S. retiree medical benefit plan curtailment; charges of $117 million ($77 million after tax, equal to $0.13 per share) primarily related to legal fees and settlement, impairment of software, investments, and certain long-lived assets; a $10 million ($8 million after tax, equal to $0.02 per share) loss on sale of individually immaterial assets; and certain discrete tax adjustments totaling $24 million (equal to $0.04 per share) related to valuation allowances, deferred tax re-rates, and changes in assertion. |
• | Net earnings attributable to controlling interests for the year ended December 31, 2015 included gains totaling $530 million ($515 million after tax, equal to $0.83 per share) related primarily to the sale of the cocoa, chocolate, and lactic businesses, revaluation of the Company’s previously held investments in North Star Shipping, Minmetal, and Eaststarch C.V. in conjunction with the acquisition of the remaining interests, and the sale of a 50% interest in the Barcarena export terminal facility in Brazil to Glencore plc; long-lived asset impairment charges of $129 million ($109 million after tax, equal to $0.18 per share) related primarily to certain international Oilseeds Processing facilities, sugar ethanol facilities in Brazil, and goodwill, intangible, and property, plant, and equipment asset impairments; restructuring and exit charges of $71 million ($63 million after tax, equal to $0.10 per share) related to an international pension plan settlement, sugar ethanol facilities in Brazil, and other restructuring charges; loss provisions, settlements, and inventory writedown of $67 million ($58 million after tax, equal to $0.09 per share); certain discrete tax adjustments totaling $60 million (equal to $0.10 per share) related to valuation allowances and deferred tax re-rates; and loss on debt extinguishment of $189 million ($118 million after tax, equal to $0.19 per share) related to the cash tender offers and redemption of certain of the Company’s outstanding debentures. |
25
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Company Overview
This MD&A should be read in conjunction with the accompanying 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.
Effective July 1, 2019, the Company changed its segment reporting to reflect the creation of the combined Ag Services and Oilseeds segment. The former Origination and Oilseeds businesses were merged into a combined Ag Services and Oilseeds segment which enables the Company to better respond to market changes by integrating the supply and value chains and risk management, while delivering significant simplification and efficiency to the day-to-day business. As part of the Company’s efforts for a streamlined management structure, the combined segment is led by the former President of Oilseeds expanding his role to President of Ag Services and Oilseeds.
Prior period results have been reclassified to conform to the current period segment presentation.
The Company’s operations are organized, managed, and classified into 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 February 2019 of Neovia, a French-based global provider 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 by InVivo Group in the Gleadell Agriculture Ltd. joint venture in the United Kingdom; |
• | the acquisition in March 2019 of FCC, one of the world’s largest producers of citrus oils and ingredients; |
• | the formal launch in March 2019 of GrainBridge LLC, a 50% joint venture 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 May 2019 of Ziegler, a leading European provider of natural citrus flavor ingredients; |
• | the sale in December 2019 of its equity investment in CIP; and |
• | the acquisition in January 2020 of Yerbalatina, a natural plant-based extracts and ingredients manufacturer in Brazil. |
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
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 outside the United States, the local currency is the functional currency except certain significant subsidiaries in Switzerland where Euro is the functional currency, and Brazil and Argentina where U.S. dollar is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil and Argentina, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require 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 the U.S. dollar.
The Company measures its performance using key financial metrics including net earnings, gross margins, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, trade policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
27
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 December 31, 2019
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 with China. Handling volumes in North 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 the U.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 in North America while co-product prices were stable. Although ethanol demand remained steady in North America, margins were severely pressured as U.S. industry ethanol production and stocks remained at high levels and U.S. exports to China ceased during the trade dispute. The severe weather conditions in North 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 in Asia Pacific, which also resulted in pricing pressures in the global lysine market.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
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 of U.S. tax credits, including the 2018 and 2019 biodiesel tax credit and the railroad maintenance tax credit, signed into law in December 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 December 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 the Columbus, Nebraska corn processing plant due to flooding and production issues in the Decatur, Illinois corn complex.
28
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Revenues by segment for the years ended December 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 $0.8 billion.
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
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 $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. 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 certain U.S. salaried retirees under the Company's ADM 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
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 ended December 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
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 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 certain U.S. salaried retirees under the Company's ADM 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
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 the SEC, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of 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 December 31, 2019 and 2018.
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 | $ | 1,982 | $ | 3.50 |
(1) Tax effected using the Company’s U.S. tax rate.
(2) Tax effected using the applicable tax rates.
(3) Includes tax adjustments related to the U.S. Tax Cuts and Jobs Act and other discrete items.
33
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 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
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 December 31, 2018
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 of U.S. soybeans. In Ag Services and Oilseeds, strong demand for feedstuffs in light of weather conditions in Northern 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 in Argentina 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 in North America while co-product prices were stable. U.S. ethanol industry production remained at high levels. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, 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 December 31, 2018 Compared to Year Ended December 31, 2017
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 the U.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 December 31, 2018 and 2017 are as follows (in metric tons):
(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 in North America due to the reduced soybean crop in Argentina. The overall decrease in corn is primarily related to decreased current year processing after the reconfiguration of the Company’s Peoria, Illinois ethanol complex in the third quarter of fiscal 2017 and production issues in the Decatur, Illinois corn complex in 2018.
35
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Revenues by segment for the years ended December 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 $0.4 billion.
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
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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's Peoria, 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 $34 million to $364 million primarily due to higher interest rates on short-term debt and higher borrowings.
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 certain U.S. salaried retirees under the Company's ADM 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 due March 15, 2018, and foreign exchange losses.
37
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 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
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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
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 the SEC, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of 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 December 31, 2018 and 2017.
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) | $ | 1,810 | $ | 3.19 | $ | 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 $66 million in 2018 and $70 million in 2017) (2) | 226 | 0.40 | 144 | 0.25 | |||||||||
Expenses related to acquisitions (net of tax of $2 million) (2) | 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 | $ | 1,389 | $ | 2.43 |
(1) Tax effected using the Company’s U.S. effective tax rate.
(2) Tax effected using the U.S. and other applicable tax rates.
(3) Includes tax adjustments related to the U.S. Tax Cuts and Jobs Act of 2017.
40
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 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
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 of ADM’s control, to fund its working capital needs and capital expenditures. The primary source of funds to finance ADM’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 both U.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 $7.7 billion and $7.8 billion in 2019 and 2018, respectively, was offset by the same amounts of net consideration received for beneficial interest obtained for selling trade receivables.
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 of December 31, 2018) aggregate principal amount of 1.000% Notes issued on September 12, 2018 and the December 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 in June 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.
At December 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. At December 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% at December 31, 2019 and December 31, 2018. The Company uses this ratio as a measure of ADM’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% at December 31, 2018 to 29% at December 31, 2019 due to acquisitions. Of the Company’s total lines of credit, $5.0 billion supported the combined U.S. and European commercial paper borrowing programs, against which there was $1.0 billion of U.S. and European commercial paper outstanding at December 31, 2019.
As of December 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 its U.S. operations and unused and available U.S. credit capacity of $4.3 billion, the Company has asserted that these funds are indefinitely reinvested outside the U.S.
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Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 $0.9 billion to $1.0 billion and additional cash outlays of approximately $0.8 billion in dividends and $0.1 billion in share repurchases.
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 of December 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 of December 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 |