filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
Archer-Daniels-Midland Company
Consolidated Statements of Earnings
(Unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||
| Revenues | $ | 23,650 | $ | 18,893 | |||||||||||||||||||
| Cost of products sold | 21,753 | 17,345 | |||||||||||||||||||||
| Gross Profit | 1,897 | 1,548 | |||||||||||||||||||||
| Selling, general, and administrative expenses | 829 | 749 | |||||||||||||||||||||
| Asset impairment, exit, and restructuring costs | 1 | 59 | |||||||||||||||||||||
| Equity in earnings of unconsolidated affiliates | (204) | (125) | |||||||||||||||||||||
| Investment income | (59) | (13) | |||||||||||||||||||||
| Interest expense | 92 | 87 | |||||||||||||||||||||
| Other income – net | (33) | (33) | |||||||||||||||||||||
| Earnings Before Income Taxes | 1,271 | 824 | |||||||||||||||||||||
| Income tax expense | 207 | 131 | |||||||||||||||||||||
| Net Earnings Including Noncontrolling Interests | 1,064 | 693 | |||||||||||||||||||||
| Less: Net earnings attributable to noncontrolling interests | 10 | 4 | |||||||||||||||||||||
| Net Earnings Attributable to Controlling Interests | $ | 1,054 | $ | 689 | |||||||||||||||||||
| Average number of shares outstanding – basic | 566 | 563 | |||||||||||||||||||||
| Average number of shares outstanding – diluted | 568 | 564 | |||||||||||||||||||||
| Basic earnings per common share | $ | 1.86 | $ | 1.22 | |||||||||||||||||||
| Diluted earnings per common share | $ | 1.86 | $ | 1.22 | |||||||||||||||||||
| Dividends per common share | $ | 0.40 | $ | 0.37 |
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net earnings including noncontrolling interests | $ | 1,064 | $ | 693 | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment | 149 | 294 | |||||||||||||||||||||
| Tax effect | (31) | (56) | |||||||||||||||||||||
| Net of tax amount | 118 | 238 | |||||||||||||||||||||
| Pension and other postretirement benefit liabilities adjustment | 37 | 18 | |||||||||||||||||||||
| Tax effect | (7) | (5) | |||||||||||||||||||||
| Net of tax amount | 30 | 13 | |||||||||||||||||||||
| Deferred gain (loss) on hedging activities | 282 | 101 | |||||||||||||||||||||
| Tax effect | (47) | (25) | |||||||||||||||||||||
| Net of tax amount | 235 | 76 | |||||||||||||||||||||
| Unrealized gain (loss) on investments | (5) | (1) | |||||||||||||||||||||
| Tax effect | — | — | |||||||||||||||||||||
| Net of tax amount | (5) | (1) | |||||||||||||||||||||
| Other comprehensive income (loss) | 378 | 326 | |||||||||||||||||||||
| Comprehensive income (loss) including noncontrolling interests | 1,442 | 1,019 | |||||||||||||||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 5 | 4 | |||||||||||||||||||||
| Comprehensive income (loss) attributable to controlling interests | $ | 1,437 | $ | 1,015 |
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Balance Sheets
| (In millions) | March 31, 2022 | December 31, 2021 | |||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 1,079 | $ | 943 | |||||||
| Segregated cash and investments | 10,132 | 8,016 | |||||||||
| Trade receivables | 4,235 | 3,311 | |||||||||
| Inventories | 17,290 | 14,481 | |||||||||
| Other current assets | 7,717 | 5,158 | |||||||||
| Total Current Assets | 40,453 | 31,909 | |||||||||
| Investments and Other Assets | |||||||||||
| Investments in and advances to affiliates | 5,404 | 5,285 | |||||||||
| Goodwill and other intangible assets | 6,750 | 6,747 | |||||||||
| Right of use assets | 999 | 1,023 | |||||||||
| Other assets | 1,466 | 1,369 | |||||||||
| Total Investments and Other Assets | 14,619 | 14,424 | |||||||||
| Property, Plant, and Equipment | |||||||||||
| Land and land improvements | 552 | 554 | |||||||||
| Buildings | 5,614 | 5,597 | |||||||||
| Machinery and equipment | 19,096 | 19,112 | |||||||||
| Construction in progress | 1,086 | 960 | |||||||||
| 26,348 | 26,223 | ||||||||||
| Accumulated depreciation | (16,554) | (16,420) | |||||||||
| Net Property, Plant, and Equipment | 9,794 | 9,803 | |||||||||
| Total Assets | $ | 64,866 | $ | 56,136 | |||||||
| Liabilities, Temporary Equity, and Shareholders’ Equity | |||||||||||
| Current Liabilities | |||||||||||
| Short-term debt | $ | 3,777 | $ | 958 | |||||||
| Trade payables | 6,135 | 6,388 | |||||||||
| Payables to brokerage customers | 11,425 | 8,965 | |||||||||
| Accrued expenses and other payables | 6,363 | 4,790 | |||||||||
| Current lease liabilities | 280 | 277 | |||||||||
| Current maturities of long-term debt | 543 | 570 | |||||||||
| Total Current Liabilities | 28,523 | 21,948 | |||||||||
| Long-Term Liabilities | |||||||||||
| Long-term debt | 8,752 | 8,011 | |||||||||
| Deferred income taxes | 1,604 | 1,412 | |||||||||
| Non-current lease liabilities | 739 | 765 | |||||||||
| Other | 1,231 | 1,233 | |||||||||
| Total Long-Term Liabilities | 12,326 | 11,421 | |||||||||
| Temporary Equity - Redeemable noncontrolling interest | 262 | 259 | |||||||||
| Shareholders’ Equity | |||||||||||
| Common stock | 3,028 | 2,994 | |||||||||
| Reinvested earnings | 22,483 | 21,655 | |||||||||
| Accumulated other comprehensive income (loss) | (1,789) | (2,172) | |||||||||
| Noncontrolling interests | 33 | 31 | |||||||||
| Total Shareholders’ Equity | 23,755 | 22,508 | |||||||||
| Total Liabilities, Temporary Equity, and Shareholders’ Equity | $ | 64,866 | $ | 56,136 | |||||||
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Cash Flows
(Unaudited)
| (In millions) | Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings including noncontrolling interests | $ | 1,064 | $ | 693 | |||||||
| Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | |||||||||||
| Depreciation and amortization | 257 | 249 | |||||||||
| Asset impairment charges | 1 | 31 | |||||||||
| Deferred income taxes | 144 | (7) | |||||||||
| Equity in earnings of affiliates, net of dividends | (159) | (81) | |||||||||
| Stock compensation expense | 69 | 76 | |||||||||
| Deferred cash flow hedges | 283 | 102 | |||||||||
| Gains on sales of assets and businesses/investment revaluation | (34) | (11) | |||||||||
| Other – net | (9) | 150 | |||||||||
| Changes in operating assets and liabilities | |||||||||||
| Segregated investments | (482) | 666 | |||||||||
| Trade receivables | (937) | (515) | |||||||||
| Inventories | (2,881) | (1,138) | |||||||||
| Other current assets | (2,141) | 413 | |||||||||
| Trade payables | (245) | (441) | |||||||||
| Payables to brokerage customers | 2,501 | 561 | |||||||||
| Accrued expenses and other payables | 1,363 | (450) | |||||||||
| Total Operating Activities | (1,206) | 298 | |||||||||
| Investing Activities | |||||||||||
| Purchases of property, plant, and equipment | (217) | (174) | |||||||||
| Proceeds from sales of assets and businesses | 5 | 14 | |||||||||
| Investments in and advances to affiliates | (36) | (4) | |||||||||
| Distributions from affiliates | — | 5 | |||||||||
| Other – net | (94) | (10) | |||||||||
| Total Investing Activities | (342) | (169) | |||||||||
| Financing Activities | |||||||||||
| Long-term debt borrowings | 750 | 593 | |||||||||
| Net borrowings (payments) under short-term credit agreements | 2,824 | 729 | |||||||||
| Cash dividends | (226) | (208) | |||||||||
| Other – net | (30) | (37) | |||||||||
| Total Financing Activities | 3,318 | 1,077 | |||||||||
| Increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents | 1,770 | 1,206 | |||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents - beginning of period | 7,454 | 4,646 | |||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents - end of period | $ | 9,224 | $ | 5,852 | |||||||
| Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the consolidated balance sheets | |||||||||||
| Cash and cash equivalents | $ | 1,079 | $ | 694 | |||||||
| Restricted cash and restricted cash equivalents included in segregated cash and investments | 8,145 | 5,158 | |||||||||
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 9,224 | $ | 5,852 | |||||||
See notes to consolidated financial statements.
Archer-Daniels-Midland-Company
Consolidated Statements of Shareholders’ Equity
(Unaudited)
| Common Stock | Reinvested Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (In millions, except per share amounts) | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 560 | $ | 2,994 | $ | 21,655 | $ | (2,172) | $ | 31 | $ | 22,508 | ||||||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||||||
| Net earnings | 1,054 | 10 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 383 | (5) | |||||||||||||||||||||||||||||||||
| Total comprehensive income | 1,442 | ||||||||||||||||||||||||||||||||||
| Dividends paid - $0.40 per share | (226) | (226) | |||||||||||||||||||||||||||||||||
| Stock compensation expense | 3 | 69 | 69 | ||||||||||||||||||||||||||||||||
| Stock option exercises net of taxes | — | (36) | (36) | ||||||||||||||||||||||||||||||||
| Other | — | 1 | — | (3) | (2) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 563 | $ | 3,028 | $ | 22,483 | $ | (1,789) | $ | 33 | $ | 23,755 | ||||||||||||||||||||||||
| Balance, December 31, 2020 | 556 | $ | 2,824 | $ | 19,780 | $ | (2,604) | $ | 22 | $ | 20,022 | ||||||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||||||||||||||
| Net earnings | 689 | 4 | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 326 | — | |||||||||||||||||||||||||||||||||
| Total comprehensive income | 1,019 | ||||||||||||||||||||||||||||||||||
| Dividends paid - $0.37 per share | (208) | (208) | |||||||||||||||||||||||||||||||||
| Stock compensation expense | 3 | 76 | 76 | ||||||||||||||||||||||||||||||||
| Stock option exercises net of taxes | — | (37) | (37) | ||||||||||||||||||||||||||||||||
| Other | — | (5) | — | — | (6) | (11) | |||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 559 | $ | 2,858 | $ | 20,261 | $ | (2,278) | $ | 20 | $ | 20,861 | ||||||||||||||||||||||||
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company consolidates all entities, including variable interest entities (VIEs), in which it has a controlling financial interest. For VIEs, the Company assesses whether it is the primary beneficiary as defined under the applicable accounting standard. Investments in affiliates, including VIEs through which the Company exercises significant influence but does not control the investee and is not the primary beneficiary of the investee’s activities, are carried at cost plus equity in undistributed earnings since acquisition and are adjusted, where appropriate, for basis differences between the investment balance and the underlying net assets of the investee. The Company’s portion of the results of certain affiliates and results of certain VIEs are included using the most recent available financial statements. In each case, the financial statements are within 93 days of the Company’s year end and are consistent from period to period.
Segregated Cash and Investments
The Company segregates certain cash, cash equivalents, and investment balances in accordance with regulatory requirements, commodity exchange requirements, and insurance arrangements. These balances represent deposits received from customers of the Company’s registered futures commission merchant and commodity brokerage services, cash margins and securities pledged to commodity exchange clearinghouses, and cash pledged as security under certain insurance arrangements. Segregated cash and investments also include restricted cash collateral for the various insurance programs of the Company’s captive insurance business. To the degree these segregated balances are comprised of cash and cash equivalents, they are considered restricted cash and cash equivalents on the consolidated statements of cash flows.
Receivables
The Company records receivables at net realizable value in trade receivables, other current assets, and other assets. These amounts included allowances for estimated uncollectible accounts totaling $137 million and $122 million at March 31, 2022 and December 31, 2021, respectively, to reflect any loss anticipated on the accounts receivable balances including any accrued interest receivables thereon. Long-term receivables recorded in other assets were not material to the Company’s overall receivables portfolio.
The Company recorded bad debt expense in selling, general, and administrative expenses of $22 million and $4 million in the three months ended March 31, 2022 and 2021, respectively.
Cost Method Investments
Cost method investments of $434 million and $297 million as of March 31, 2022 and December 31, 2021, respectively, were included in Other Assets in the Company’s consolidated balance sheets. Revaluation gains of $34 million in the quarter ended March 31, 2022, in connection with observable third-party transactions, were recorded in investment income in the Company's consolidated statement of earnings. There were no revaluation gains in the quarter ended March 31, 2021.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 1. Basis of Presentation (Continued)
Operations in Ukraine and Russia
ADM employs approximately 650 people in Ukraine and operates an oilseeds crushing plant, a grain port terminal, inland and river silos, and a trading office. Most of the facilities have been temporarily idled since February 24, 2022. The Company’s footprint in Russia is limited and operations have been recently scaled down to those related to the production and transport of essential food commodities and ingredients.
As a result of the recent events in Ukraine, the Company reviewed the valuation of its assets and recorded immaterial charges in the quarter ended March 31, 2022 related to receivables and inventories. As of March 31, 2022, ADM concluded that 1) receivables, net of allowances, are deemed collectible; and 2) market inventories presented as level 3 in the fair value measurements table in Note 4 are valued appropriately at the February 24, 2022 market price due to the temporary lack of a more recent market price. The temporarily idled property, plant, and equipment, which was immaterial, was not considered impaired. As the conflict in Ukraine evolves, the Company will continue to review the valuation of these assets and make any required adjustments, which are not expected to be material to the Company’s consolidated financial statements.
Note 2. Pending Accounting Standards
Through December 31, 2022, the Company has the option to adopt the amended guidance of ASC Topic 848, Reference Rate Reform, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amended guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company plans to adopt the expedients and exceptions provided by the amended guidance before the December 31, 2022 expiry date and does not expect the adoption of the amended guidance to have an impact on its consolidated financial statements.
Effective January 1, 2023, the Company will be required to adopt the amended guidance of ASC Topic 805, Business Combinations, which improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The amended guidance requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. Early adoption is permitted. The Company does not expect the adoption of this amended guidance to have a significant impact on its consolidated financial statements.
Note 3. Revenues
Revenue Recognition
The Company principally generates revenue from merchandising and transporting agricultural commodities, and manufacturing products for use in food, beverages, feed, energy, and industrial applications, and ingredients and solutions for human and animal nutrition. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product or service to a customer. The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less. The Company applies the practical expedient in paragraph 10-50-14 of ASC 606, Revenue from Contracts with Customers (Topic 606) and does not disclose information about remaining performance obligations that have original expected durations of one year or less. For transportation service contracts, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. The Company recognized revenue from transportation service contracts of $175 million and $104 million for the three months ended March 31, 2022 and 2021, respectively. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20).
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 3. Revenues (Continued)
Shipping and Handling Costs
Shipping and handling costs related to contracts with customers for the sale of goods are accounted for as a fulfillment activity and are included in cost of products sold. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
Taxes Collected from Customers and Remitted to Governmental Authorities
The Company does not include taxes assessed by governmental authorities that are (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers, in the measurement of transaction prices or as a component of revenues and cost of products sold.
Contract Liabilities
Contract liabilities relate to advance payments from customers for goods and services that the Company has yet to provide. Contract liabilities of $574 million and $581 million as of March 31, 2022 and December 31, 2021, respectively, were recorded in accrued expenses and other payables in the consolidated balance sheets. Contract liabilities recognized as revenues were $324 million and $282 million for the three months ended March 31, 2022 and 2021, respectively.
Disaggregation of Revenues
The following tables present revenue disaggregated by timing of recognition and major product lines for the three months ended March 31, 2022 and 2021.
| Three Months Ended March 31, 2022 | |||||||||||||||||
| Topic 606 Revenue | Topic 815**(1)** | Total | |||||||||||||||
| Point in Time | Over Time | Total | Revenue | Revenues | |||||||||||||
| (In millions) | |||||||||||||||||
| Ag Services and Oilseeds | |||||||||||||||||
| Ag Services | $ | 970 | $ | 175 | $ | 1,145 | $ | 10,702 | $ | 11,847 | |||||||
| Crushing | 125 | — | 125 | 3,097 | 3,222 | ||||||||||||
| Refined Products and Other | 632 | — | 632 | 2,552 | 3,184 | ||||||||||||
| Total Ag Services and Oilseeds | 1,727 | 175 | 1,902 | 16,351 | 18,253 | ||||||||||||
| Carbohydrate Solutions | |||||||||||||||||
| Starches and Sweeteners | 1,930 | — | 1,930 | 568 | 2,498 | ||||||||||||
| Vantage Corn Processors | 868 | — | 868 | — | 868 | ||||||||||||
| Total Carbohydrate Solutions | 2,798 | — | 2,798 | 568 | 3,366 | ||||||||||||
| Nutrition | |||||||||||||||||
| Human Nutrition | 958 | — | 958 | — | 958 | ||||||||||||
| Animal Nutrition | 966 | — | 966 | — | 966 | ||||||||||||
| Total Nutrition | 1,924 | — | 1,924 | — | 1,924 | ||||||||||||
| Other Business | 107 | — | 107 | — | 107 | ||||||||||||
| Total Revenues | $ | 6,556 | $ | 175 | $ | 6,731 | $ | 16,919 | $ | 23,650 |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 3. Revenues (Continued)
| Three Months Ended March 31, 2021 | |||||||||||||||||
| Topic 606 Revenue | Topic 815**(1)** | Total | |||||||||||||||
| Point in Time | Over Time | Total | Revenue | Revenues | |||||||||||||
| (In millions) | |||||||||||||||||
| Ag Services and Oilseeds | |||||||||||||||||
| Ag Services | $ | 662 | $ | 104 | $ | 766 | $ | 9,380 | $ | 10,146 | |||||||
| Crushing | 124 | — | 124 | 2,618 | 2,742 | ||||||||||||
| Refined Products and Other | 512 | — | 512 | 1,607 | 2,119 | ||||||||||||
| Total Ag Services and Oilseeds | 1,298 | 104 | 1,402 | 13,605 | 15,007 | ||||||||||||
| Carbohydrate Solutions | |||||||||||||||||
| Starches and Sweeteners | 1,361 | — | 1,361 | 384 | 1,745 | ||||||||||||
| Vantage Corn Processors | 478 | — | 478 | — | 478 | ||||||||||||
| Total Carbohydrate Solutions | 1,839 | — | 1,839 | 384 | 2,223 | ||||||||||||
| Nutrition | |||||||||||||||||
| Human Nutrition | 754 | — | 754 | — | 754 | ||||||||||||
| Animal Nutrition | 809 | — | 809 | — | 809 | ||||||||||||
| Total Nutrition | 1,563 | — | 1,563 | — | 1,563 | ||||||||||||
| Other Business | 100 | — | 100 | — | 100 | ||||||||||||
| Total Revenues | $ | 4,800 | $ | 104 | $ | 4,904 | $ | 13,989 | $ | 18,893 |
(1) Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.
Ag Services and Oilseeds
The Ag Services and Oilseeds segment generates revenue from the sale of commodities, from service fees for the transportation of goods, from the sale of products manufactured in its global processing facilities, and from its structured trade finance activities. Revenue is measured based on the consideration specified in the contract and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when a performance obligation is satisfied by transferring control over a product or providing service to a customer. For transportation service contracts, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. The amount of revenue recognized follows the contractually specified price which may include freight or other contractually specified cost components. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Carbohydrate Solutions
The Carbohydrate Solutions segment generates revenue from the sale of products manufactured at the Company’s global corn and wheat milling facilities around the world. Revenue is recognized when control over products is transferred to the customer. Products are shipped to customers from the Company’s various facilities and from its network of storage terminals. The amount of revenue recognized is based on the consideration specified in the contract which could include freight and other costs depending on the specific shipping terms of each contract. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 3. Revenues (Continued)
Nutrition
The Nutrition segment sells ingredients and solutions including plant-based proteins, natural flavors, flavor systems, natural colors, emulsifiers, soluble fiber, polyols, hydrocolloids, probiotics, prebiotics, enzymes, botanical extracts, edible beans, formula feeds, animal health and nutrition products, pet food and treats, and other specialty food and feed ingredients. Revenue is recognized when control over products is transferred to the customer. The amount of revenue recognized follows the contracted price or the mutually agreed price of the product. Freight and shipping are recognized as a component of revenue at the same time control transfers to the customer.
Other Business
Other Business includes the Company’s futures commission business whose primary sources of revenue are commissions and brokerage income generated from executing orders and clearing futures contracts and options on futures contracts on behalf of its customers. Commissions and brokerage revenue are recognized on the date the transaction is executed. Other Business also includes the Company’s captive insurance business which generates third party revenue through its proportionate share of premiums from third-party reinsurance pools. Reinsurance premiums are recognized on a straight-line basis over the period underlying the policy.
Note 4. Fair Value Measurements
The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.
| Fair Value Measurements at March 31, 2022 | |||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Inventories carried at market | $ | — | $ | 8,033 | $ | 3,959 | $ | 11,992 | |||||||||||||||
| Unrealized derivative gains: | |||||||||||||||||||||||
| Commodity contracts | — | 1,578 | 828 | 2,406 | |||||||||||||||||||
| Foreign currency contracts | — | 461 | — | 461 | |||||||||||||||||||
| Interest rate contracts | — | 67 | — | 67 | |||||||||||||||||||
| Cash equivalents | 419 | — | — | 419 | |||||||||||||||||||
| Segregated investments | 1,548 | — | — | 1,548 | |||||||||||||||||||
| Total Assets | $ | 1,967 | $ | 10,139 | $ | 4,787 | $ | 16,893 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Unrealized derivative losses: | |||||||||||||||||||||||
| Commodity contracts | $ | — | $ | 1,544 | $ | 1,856 | $ | 3,400 | |||||||||||||||
| Foreign currency contracts | — | 238 | — | 238 | |||||||||||||||||||
| Interest rate contracts | — | 1 | — | 1 | |||||||||||||||||||
| Debt conversion option | — | — | 30 | 30 | |||||||||||||||||||
| Inventory-related payables | — | 1,860 | 53 | 1,913 | |||||||||||||||||||
| Total Liabilities | $ | — | $ | 3,643 | $ | 1,939 | $ | 5,582 |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Fair Value Measurements (Continued)
| Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Inventories carried at market | $ | — | $ | 6,765 | $ | 3,004 | $ | 9,769 | |||||||||||||||
| Unrealized derivative gains: | |||||||||||||||||||||||
| Commodity contracts | — | 902 | 460 | 1,362 | |||||||||||||||||||
| Foreign currency contracts | — | 238 | — | 238 | |||||||||||||||||||
| Interest rate contracts | — | 46 | — | 46 | |||||||||||||||||||
| Cash equivalents | 448 | — | — | 448 | |||||||||||||||||||
| Segregated investments | 1,338 | — | — | 1,338 | |||||||||||||||||||
| Total Assets | $ | 1,786 | $ | 7,951 | $ | 3,464 | $ | 13,201 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Unrealized derivative losses: | |||||||||||||||||||||||
| Commodity contracts | $ | — | $ | 944 | $ | 815 | $ | 1,759 | |||||||||||||||
| Foreign currency contracts | — | 191 | — | 191 | |||||||||||||||||||
| Debt conversion option | — | — | 15 | 15 | |||||||||||||||||||
| Inventory-related payables | — | 859 | 106 | 965 | |||||||||||||||||||
| Total Liabilities | $ | — | $ | 1,994 | $ | 936 | $ | 2,930 |
Estimated fair values for inventories and inventory-related payables carried at market are based on exchange-quoted prices, adjusted for differences in local markets and quality, referred to as basis. Market valuations for the Company’s inventories are adjusted for location and quality (basis) because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. The basis adjustments are generally determined using the inputs from competitor and broker quotations or market transactions in either the listed or over the counter (OTC) markets and are considered observable. In some cases, the basis adjustments are unobservable because they are supported by little to no market activity. When unobservable inputs have a significant impact (more than 10%) on the measurement of fair value, the inventory is classified in Level 3. Changes in the fair value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Fair Value Measurements (Continued)
Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, energy, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in these tables. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Market valuations for the Company’s forward commodity purchase and sale contracts are adjusted for location (basis) because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. The basis adjustments are generally determined using inputs from competitor and broker quotations or market transactions in either the listed or OTC markets and are considered observable. In some cases, the basis adjustments are unobservable because they are supported by little to no market activity. When observable inputs are available for substantially the full term of the contract, it is classified in Level 2. When unobservable inputs have a significant impact (more than 10%) on the measurement of fair value, the contract is classified in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold. Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, or other (income) expense - net, depending upon the purpose of the contract. The changes in the fair value of derivatives designated as effective cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.
The Company’s cash equivalents are comprised of money market funds valued using quoted market prices and are classified in Level 1.
The Company’s segregated investments are comprised of U.S. Treasury securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.
The debt conversion option is the equity-linked embedded derivative related to the exchangeable bonds issued in August 2020. The fair value of the embedded derivative is included in long-term debt, with changes in fair value recognized as interest, and is valued with the assistance of a third-party pricing service (a level 3 measurement).
The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2022.
| Level 3 Fair Value Asset Measurements at | |||||||||||||||||
| March 31, 2022 | |||||||||||||||||
| Inventories Carried at Market | Commodity Derivative Contracts Gains | Total Assets | |||||||||||||||
| (In millions) | |||||||||||||||||
| Balance, December 31, 2021 | $ | 3,004 | $ | 460 | $ | 3,464 | |||||||||||
| Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | 647 | 633 | 1,280 | ||||||||||||||
| Purchases | 9,552 | — | 9,552 | ||||||||||||||
| Sales | (9,315) | — | (9,315) | ||||||||||||||
| Settlements | — | (276) | (276) | ||||||||||||||
| Transfers into Level 3** | 327 | 23 | 350 | ||||||||||||||
| Transfers out of Level 3 | (256) | (12) | (268) | ||||||||||||||
| Ending balance, March 31, 2022 | $ | 3,959 | $ | 828 | $ | 4,787 |
- Includes increase in unrealized gains of $1.4 billion relating to Level 3 assets still held at March 31, 2022.
** Inventories carried at market includes Ukraine inventory as discussed in Note 1.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Fair Value Measurements (Continued)
The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2022.
| Level 3 Fair Value Liability Measurements at | |||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||
| Inventory- related Payables | Commodity Derivative Contracts Losses | Debt Conversion Option | Total Liabilities | ||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 106 | $ | 815 | $ | 15 | $ | 936 | |||||||||||||||||||||
| Total increase (decrease) in net realized/unrealized losses included in cost of products sold and interest expense* | (2) | 1,376 | 15 | 1,389 | |||||||||||||||||||||||||
| Purchases | 2 | — | — | 2 | |||||||||||||||||||||||||
| Sales | (53) | — | — | (53) | |||||||||||||||||||||||||
| Settlements | — | (478) | — | (478) | |||||||||||||||||||||||||
| Transfers into Level 3 | — | 161 | — | 161 | |||||||||||||||||||||||||
| Transfers out of Level 3 | — | (18) | — | (18) | |||||||||||||||||||||||||
| Ending balance, March 31, 2022 | $ | 53 | $ | 1,856 | $ | 30 | $ | 1,939 |
- Includes increase in unrealized losses of $1.4 billion relating to Level 3 liabilities still held at March 31, 2022.
The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2021.
| Level 3 Fair Value Asset Measurements at | |||||||||||||||||
| March 31, 2021 | |||||||||||||||||
| Inventories Carried at Market | Commodity Derivative Contracts Gains | Total Assets | |||||||||||||||
| (In millions) | |||||||||||||||||
| Balance, December 31, 2020 | $ | 2,183 | $ | 859 | $ | 3,042 | |||||||||||
| Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | 730 | 243 | 973 | ||||||||||||||
| Purchases | 6,385 | — | 6,385 | ||||||||||||||
| Sales | (6,632) | — | (6,632) | ||||||||||||||
| Settlements | — | (428) | (428) | ||||||||||||||
| Transfers into Level 3 | 516 | 23 | 539 | ||||||||||||||
| Transfers out of Level 3 | (112) | (13) | (125) | ||||||||||||||
| Ending balance, March 31, 2021 | $ | 3,070 | $ | 684 | $ | 3,754 |
- Includes increase in unrealized gains of $847 million relating to Level 3 assets still held at March 31, 2021.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Fair Value Measurements (Continued)
The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2021.
| Level 3 Fair Value Liability Measurements at | |||||||||||||||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||||||||
| Inventory- related Payables | Commodity Derivative Contracts Losses | Foreign Currency Derivative Contracts Losses | Debt Conversion Option | Total Liabilities | |||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 11 | $ | 918 | $ | — | $ | 34 | $ | 963 | |||||||||||||||||||
| Total increase (decrease) in net realized/unrealized losses included in cost of products sold and interest expense* | — | 381 | — | 20 | 401 | ||||||||||||||||||||||||
| Purchases | 12 | — | — | — | 12 | ||||||||||||||||||||||||
| Sales | (2) | — | — | — | (2) | ||||||||||||||||||||||||
| Settlements | — | (566) | — | — | (566) | ||||||||||||||||||||||||
| Transfers into Level 3 | — | 54 | 11 | — | 65 | ||||||||||||||||||||||||
| Transfers out of Level 3 | — | (139) | — | — | (139) | ||||||||||||||||||||||||
| Ending balance, March 31, 2021 | $ | 21 | $ | 648 | $ | 11 | $ | 54 | $ | 734 |
- Includes increase in unrealized losses of $383 million relating to Level 3 liabilities still held at March 31, 2021.
Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold. Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.
In some cases, the price components that result in differences between exchange-traded prices and local prices for inventories and commodity purchase and sale contracts are observable based upon available quotations for these pricing components, and in some cases, the differences are unobservable. These price components primarily include transportation costs and other adjustments required due to location, quality, or other contract terms. In the table below, these other adjustments are referred to as basis. The changes in unobservable price components are determined by specific local supply and demand characteristics at each facility and the overall market. Factors such as substitute products, weather, fuel costs, contract terms, and futures prices also impact the movement of these unobservable price components.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Fair Value Measurements (Continued)
The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of March 31, 2022 and December 31, 2021. The Company’s Level 3 measurements may include basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with basis, the unobservable component as of March 31, 2022 is a weighted average 28.9% of the total price for assets and 13.9% of the total price for liabilities.
| Weighted Average % of Total Price | |||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Component Type | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||
| Inventories and Related Payables | |||||||||||||||||||||||
| Basis | 28.9 | % | 13.9 | % | 28.7 | % | 13.1 | % | |||||||||||||||
| Transportation cost | 11.4 | % | — | % | 13.0 | % | — | % | |||||||||||||||
| Commodity Derivative Contracts | |||||||||||||||||||||||
| Basis | 22.1 | % | 22.5 | % | 30.0 | % | 27.1 | % | |||||||||||||||
| Transportation cost | 9.1 | % | 2.6 | % | 8.1 | % | 0.7 | % |
In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, absent other corroborating evidence, the Company considers these price quotes as 100% unobservable and, therefore, the fair value of these items is reported in Level 3.
Note 5. Derivative Instruments and Hedging Activities
Derivatives Not Designated as Hedging Instruments
The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural product inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies. The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and forward commodity purchase or sale contracts, and inventories of certain merchandisable agricultural products, which include amounts acquired under deferred pricing contracts, are stated at fair value or market value. Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5. Derivative Instruments and Hedging Activities (Continued)
The following table sets forth the fair value of derivatives not designated as hedging instruments as of March 31, 2022 and December 31, 2021.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Foreign Currency Contracts | $ | 437 | $ | 190 | $ | 217 | $ | 116 | |||||||||||||||
| Interest Rate Contracts | 2 | 1 | — | — | |||||||||||||||||||
| Commodity Contracts | 2,280 | 3,400 | 1,276 | 1,759 | |||||||||||||||||||
| Debt Conversion Option | — | 30 | — | 15 | |||||||||||||||||||
| Total | $ | 2,719 | $ | 3,621 | $ | 1,493 | $ | 1,890 |
The following tables set forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the three months ended March 31, 2022 and 2021.
| Other expense (income) - net | |||||||||||||||||||||||||||||
| Cost of | Interest | ||||||||||||||||||||||||||||
| (In millions) | Revenues | products sold | expense | ||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||
| Consolidated Statement of Earnings | $ | 23,650 | $ | 21,753 | $ | (33) | $ | 92 | |||||||||||||||||||||
| Pre-tax gains (losses) on: | |||||||||||||||||||||||||||||
| Foreign Currency Contracts | $ | (38) | $ | 443 | $ | 23 | $ | — | |||||||||||||||||||||
| Commodity Contracts | — | (1,101) | — | — | |||||||||||||||||||||||||
| Debt Conversion Option | — | — | — | (15) | |||||||||||||||||||||||||
| Total gain (loss) recognized in earnings | $ | (38) | $ | (658) | $ | 23 | $ | (15) | $ | (688) | |||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||
| Consolidated Statement of Earnings | $ | 18,893 | $ | 17,345 | $ | (33) | $ | 87 | |||||||||||||||||||||
| Pre-tax gains (losses) on: | |||||||||||||||||||||||||||||
| Foreign Currency Contracts | $ | 30 | $ | (262) | $ | 120 | $ | — | |||||||||||||||||||||
| Commodity Contracts | — | (782) | — | — | |||||||||||||||||||||||||
| Debt Conversion Option | — | — | — | (20) | |||||||||||||||||||||||||
| Total gain (loss) recognized in earnings | $ | 30 | $ | (1,044) | $ | 120 | $ | (20) | $ | (914) | |||||||||||||||||||
Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately as a component of cost of products sold.
Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, and other (income) expense - net depending on the purpose of the contract.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5. Derivative Instruments and Hedging Activities (Continued)
Derivatives Designated as Cash Flow and Net Investment Hedging Strategies
The Company had certain derivatives designated as cash flow and net investment hedges as of March 31, 2022 and December 31, 2021.
For derivative instruments that are designated and qualify as net investment hedges, foreign exchange gains and losses related to changes in foreign currency exchange rates are deferred in AOCI until the underlying investment is divested.
The Company uses cross-currency swaps and foreign exchange forwards designated as net investment hedges to protect the Company’s investment in a foreign subsidiary against changes in foreign currency exchange rates. The Company executed USD-fixed to Euro-fixed cross-currency swaps with an aggregate notional amount of $0.8 billion and $1.2 billion as of March 31, 2022 and December 31, 2021, respectively, and foreign exchange forwards with an aggregate notional amount of $2.3 billion and $2.6 billion as of March 31, 2022 and December 31, 2021, respectively.
As of March 31, 2022 and December 31, 2021, the Company had after-tax losses of $24 million and $44 million in AOCI, respectively, related to foreign exchange gains and losses from these net investment hedge transactions. The amount is deferred in AOCI until the underlying investment is divested.
For derivative instruments that are designated and qualify as highly-effective cash flow hedges (i.e., hedging the exposure to variability in expected future cash flow that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of AOCI and as an operating activity in the statement of cash flows, and is reclassified into earnings in the same line item affected by the hedged transaction in the same period or periods during which the hedged transaction affects earnings. Hedge components excluded from the assessment of effectiveness and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period.
The Company’s structured trade finance programs use interest rate swaps designated as cash flow hedges to hedge the forecasted interest payments on certain letters of credit from banks. The terms of the interest rate swaps match the terms of the forecasted interest payments. The deferred gains and losses are recognized in revenues over the period in which the related interest payments are paid to the banks. The amounts are recorded in revenues as the related results are also recorded in revenues. As of March 31, 2022 and December 31, 2021, the Company had interest rate swaps maturing on various dates with aggregate notional amounts of $1.0 billion.
The Company also uses swap locks designated as cash flow hedges to hedge the changes in the forecasted interest payments due to changes in the benchmark rate leading up to future bond issuance dates. The terms of the swap locks match the terms of the forecasted interest payments. The deferred gains and losses will be recognized in interest expense over the period in which the related interest payments will be paid. As of March 31, 2022 and December 31, 2021, the Company executed swap locks maturing on various dates with an aggregate notional amount of $400 million.
As of March 31, 2022 and December 31, 2021, the Company had after-tax gains of $49 million and $35 million in AOCI, respectively, related to the interest rate swaps and swap locks. The Company expects to recognize amounts deferred in AOCI in its consolidated statement of earnings during the life of the debt instruments.
For each of the hedge programs described below, the derivatives are designated as cash flow hedges. The changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Once the hedged item is recognized in earnings, the gains and losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable. As of March 31, 2022 and December 31, 2021, the Company had after-tax gains of $370 million and $161 million in AOCI, respectively, related to gains and losses from these programs. The Company expects to recognize $370 million of the March 31, 2022 after-tax gains in its consolidated statement of earnings during the next 12 months.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5. Derivative Instruments and Hedging Activities (Continued)
The Company uses futures or options contracts to hedge the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn. The Company’s corn processing plants normally grind approximately 65 million bushels of corn per month. During the past 12 months, the Company hedged between 17% and 42% of its monthly grind. At March 31, 2022, the Company had designated hedges representing between 0% and 29% of its anticipated monthly grind of corn for the next 12 months.
The Company, from time to time, also uses futures, options, and swaps to hedge the sales price of certain ethanol sales contracts. The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol. During the past 12 months and as of March 31, 2022, the Company had no hedges related to ethanol sales under these programs.
The Company uses futures and options contracts to hedge the purchase price of the anticipated volumes of soybeans to be purchased and processed in a future month for certain of its U.S. soybean crush facilities, subject to certain program limits. The Company also uses futures or options contracts to hedge the sales prices of anticipated soybean meal and soybean oil sales proportionate to the soybean crushing process at these facilities, subject to certain program limits. During the past 12 months, the Company hedged between 57% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities. At March 31, 2022, the Company had designated hedges representing between 0% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities over the next 12 months.
The Company uses futures and OTC swaps to hedge the purchase price of anticipated volumes of natural gas consumption in a future month for certain of its facilities in North America and Europe, subject to certain program limits. During the past 12 months, the Company hedged between 0% and 84% of the anticipated monthly natural gas consumption at the designated facilities. At March 31, 2022, the Company had designated hedges representing between 0% and 95% of the anticipated monthly natural gas consumption over the next 12 months.
The following table sets forth the fair value of derivatives designated as hedging instruments as of March 31, 2022 and December 31, 2021.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Commodity Contracts | $ | 126 | $ | — | $ | 86 | $ | — | |||||||||||||||
| Foreign Currency Contracts | 24 | 48 | 21 | $ | 75 | ||||||||||||||||||
| Interest Rate Contracts | 65 | — | 46 | — | |||||||||||||||||||
| Total | $ | 215 | $ | 48 | $ | 153 | $ | 75 |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5. Derivative Instruments and Hedging Activities (Continued)
The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three months ended March 31, 2022 and 2021.
| Cost of products sold | |||||||||||||||||||||||||||||||||||||||||
| (In millions) | Revenues | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Earnings | $ | 23,650 | $ | 21,753 | |||||||||||||||||||||||||||||||||||||
| Effective amounts recognized in earnings | |||||||||||||||||||||||||||||||||||||||||
| Pre-tax gains (losses) on: | |||||||||||||||||||||||||||||||||||||||||
| Commodity Contracts | $ | — | $ | 98 | |||||||||||||||||||||||||||||||||||||
| Total gain (loss) recognized in earnings | $ | — | $ | 98 | $ | 98 | |||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Consolidated Statement of Earnings | $ | 18,893 | $ | 17,345 | |||||||||||||||||||||||||||||||||||||
| Effective amounts recognized in earnings | |||||||||||||||||||||||||||||||||||||||||
| Pre-tax gains (losses) on: | |||||||||||||||||||||||||||||||||||||||||
| Commodity Contracts | $ | — | $ | 89 | |||||||||||||||||||||||||||||||||||||
| Interest Contracts | (14) | — | |||||||||||||||||||||||||||||||||||||||
| Total gain (loss) recognized in earnings | $ | (14) | $ | 89 | $ | 75 |
Other Net Investment Hedging Strategies
The Company has designated €2.6 billion and €1.8 billion of its outstanding long-term debt and commercial paper borrowings at March 31, 2022 and December 31, 2021, respectively, as hedges of its net investment in a foreign subsidiary. As of March 31, 2022 and December 31, 2021, the Company had after-tax gains of $113 million and $55 million in AOCI, respectively, related to foreign exchange gains and losses from these net investment hedge transactions. The amount is deferred in AOCI until the underlying investment is divested.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 6. Other Current Assets
The following table sets forth the items in other current assets:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Unrealized gains on derivative contracts | $ | 2,934 | $ | 1,646 | |||||||
| Margin deposits and grain accounts | 1,112 | 600 | |||||||||
| Customer omnibus receivable | 1,539 | 1,179 | |||||||||
| Financing receivables - net (1) | 233 | 189 | |||||||||
| Insurance premiums receivable | 26 | 20 | |||||||||
| Prepaid expenses | 377 | 370 | |||||||||
| Biodiesel tax credit | 70 | 79 | |||||||||
| Tax receivables | 764 | 708 | |||||||||
| Non-trade receivables (2) | 421 | 285 | |||||||||
| Other current assets | 241 | 82 | |||||||||
| $ | 7,717 | $ | 5,158 | ||||||||
(1) The Company provides financing to certain suppliers, primarily Brazilian farmers, to finance a portion of the suppliers’ production costs. The amounts are reported net of allowances of $5 million and $4 million at March 31, 2022 and December 31, 2021, respectively. Interest earned on financing receivables of $4 million for the three months ended March 31, 2022 and 2021, respectively, is included in investment income in the consolidated statements of earnings.
(2) Non-trade receivables included $27 million of reinsurance recoverables as of March 31, 2022 and December 31, 2021, respectively.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 7. Accrued Expenses and Other Payables
The following table sets forth the items in accrued expenses and other payables:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Unrealized losses on derivative contracts | $ | 3,639 | $ | 1,950 | |||||||
| Accrued compensation | 332 | 445 | |||||||||
| Income tax payable | 211 | 132 | |||||||||
| Other taxes payable | 178 | 168 | |||||||||
| Insurance claims payable | 235 | 220 | |||||||||
| Contract liability | 574 | 581 | |||||||||
| Other accruals and payables | 1,194 | 1,294 | |||||||||
| $ | 6,363 | $ | 4,790 |
Note 8. Debt and Financing Arrangements
On February 28, 2022, the Company issued its first sustainability bond of $750 million aggregate principal amount of 2.900% notes due March 1, 2032. Net proceeds before expenses were $748 million. The Company expects to apply an amount equal to the net proceeds to finance or refinance eligible green projects and/or eligible social projects.
At March 31, 2022, the fair value of the Company’s long-term debt exceeded the carrying value by $1.0 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).
At March 31, 2022, the Company had lines of credit, including the accounts receivable securitization programs described below, totaling $14.3 billion, of which $8.2 billion was unused. During the quarter ended March 31, 2022, the Company expanded its combined U.S. and European commercial paper borrowing programs from $5.0 billion to $6.5 billion under the same terms, against which there was $0.7 billion commercial paper outstanding at March 31, 2022. During the quarter ended March 31, 2022, the Company also added $1.5 billion of short-term borrowings at an average interest rate of 1.64% due in September 2022.
The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $2.3 billion in funding resulting from the sale of accounts receivable with $24 million unused capacity as of March 31, 2022 (see Note 14 for more information about the Programs).
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 9. Income Taxes
The Company’s effective tax rate was 16.3% for the three months ended March 31, 2022 compared to 15.9% for the three months ended March 31, 2021. The change in the rate was primarily due to changes in the geographic mix of earnings.
The Company is subject to income taxation and routine examinations in many jurisdictions around the world and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature, and amount of deductions and the allocation of income among various tax jurisdictions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential tax owed by the Company in accordance with applicable accounting standards. Resolution of the related tax positions, through negotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions and the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period.
The Company’s subsidiary in Argentina, ADM Agro SRL (formerly ADM Argentina SA and Alfred C. Toepfer Argentina SRL), received tax assessments challenging transfer prices used to price grain exports for the tax years 1999 through 2011 and 2014. As of March 31, 2022, these assessments totaled $8 million in tax and up to $36 million in interest (adjusted for variation in currency exchange rates). The Argentine tax authorities conducted a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. The Company strongly believes that it has complied with all Argentine tax laws. To date, the Company has not received assessments for closed years subsequent to 2014. While the statute of limitations has expired for tax years 2012 and 2013, the Company cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2014, and estimates that these potential assessments could be approximately $104 million in tax and $42 million in interest (adjusted for variation in currency exchange rates as of March 31, 2022). The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. In accordance with the accounting requirements for uncertain tax positions, the Company has not recorded an uncertain tax liability for this assessment because it has concluded that it is more likely than not to prevail on the matter based upon its technical merits and because the taxing jurisdiction’s process does not provide a mechanism for settling at less than the full amount of the assessment. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2014.
In 2014, the Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., received a tax assessment from the Netherlands tax authority challenging the transfer pricing aspects of a 2009 business reorganization, which involved two of its subsidiary companies in the Netherlands. As of March 31, 2022, this assessment was $90 million in tax and $32 million in interest (adjusted for variation in currency exchange rates). On April 23, 2020, the court issued an unfavorable ruling and in October 2020, assigned a third party expert to establish a valuation by early 2021. During the second quarter of 2021, the third party expert issued a final valuation. The Company expects the court to issue a ruling on this matter in the second quarter of 2022. Subsequent appeals may take an extended period of time and could result in additional financial impacts of up to the entire amount of the assessment. The Company has carefully evaluated the underlying transactions and has concluded that the amount of gain recognized on the reorganization for tax purposes was appropriate. As of March 31, 2022, the Company has accrued its best estimate of what it believes will be the likely outcome of the litigation.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 10. Accumulated Other Comprehensive Income
The following tables set forth the changes in AOCI by component for the three months ended March 31, 2022 and the reclassifications out of AOCI for the three months ended March 31, 2022 and 2021:
| Three months ended March 31, 2022 | |||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustment | Deferred Gain (Loss) on Hedging Activities | Pension Liability Adjustment | Unrealized Gain (Loss) on Investments | Total | |||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | (2,248) | $ | 225 | $ | (147) | $ | (2) | $ | (2,172) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 31 | 380 | 6 | (5) | 412 | ||||||||||||||||||||||||
| Gain (loss) on net investment hedges | 123 | — | — | — | 123 | ||||||||||||||||||||||||
| Amounts reclassified from AOCI | — | (98) | 31 | — | (67) | ||||||||||||||||||||||||
| Tax effect | (31) | (47) | (7) | — | (85) | ||||||||||||||||||||||||
| Net of tax amount | 123 | 235 | 30 | (5) | 383 | ||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | (2,125) | $ | 460 | $ | (117) | $ | (7) | $ | (1,789) | |||||||||||||||||||
| Amount reclassified from AOCI | ||||||||||||||||||||
| Three months ended March 31, | Affected line item in the consolidated statements of earnings | |||||||||||||||||||
| Details about AOCI components | 2022 | 2021 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Deferred loss (gain) on hedging activities | ||||||||||||||||||||
| $ | — | $ | 14 | Revenues | ||||||||||||||||
| (98) | (89) | Cost of products sold | ||||||||||||||||||
| (98) | (75) | Total before tax | ||||||||||||||||||
| 19 | 21 | Tax | ||||||||||||||||||
| $ | (79) | $ | (54) | Net of tax | ||||||||||||||||
| Pension liability adjustment | ||||||||||||||||||||
| Amortization of defined benefit pension items: | ||||||||||||||||||||
| Prior service loss (credit) | $ | 8 | $ | (6) | Other (income) expense-net | |||||||||||||||
| Actuarial losses | 23 | 16 | Other (income) expense-net | |||||||||||||||||
| 31 | 10 | Total before tax | ||||||||||||||||||
| (6) | (4) | Tax | ||||||||||||||||||
| $ | 25 | $ | 6 | Net of tax | ||||||||||||||||
The Company’s accounting policy is to release the income tax effects from AOCI when the individual units of account are sold, terminated, or extinguished.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Other (Income) Expense - Net
The following table sets forth the items in other (income) expense:
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Gains on sales of assets | $ | — | $ | (11) | |||||||||||||||||||
| Other – net | (33) | (22) | |||||||||||||||||||||
| Other (Income) Expense - Net | $ | (33) | $ | (33) |
Gains on sales of assets in the three months ended March 31, 2021 consisted of gains on disposals of individually insignificant assets in the ordinary course of business.
Other - net included the non-service components of net pension benefit income of $6 million, foreign exchange gains, and other income in the three months ended March 31, 2022 and 2021.
Note 12. Segment Information
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 segments, as defined by the applicable accounting standard*,* and are classified as Other Business.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses. Also included in operating profit for each segment is equity in earnings of affiliates based on the equity method of accounting. Specified items included in total segment operating profit and certain corporate items are not allocated to the Company’s individual business segments because operating performance of each business segment is evaluated by management exclusive of these items. Corporate results principally include unallocated corporate expenses and interest expense net of interest income. Corporate results also include revaluation gains and losses on cost method investments and the share of the results of equity investments in early-stage start-up companies that ADM Ventures has investments in.
For more information about the Company’s business segments, refer to Note 17 of “Notes to Consolidated Financial Statements” included in Item 8, “Financial Statements and Supplementary Data” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 12. Segment Information (Continued)
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Gross revenues | |||||||||||||||||||||||
| Ag Services and Oilseeds | $ | 19,132 | $ | 15,939 | |||||||||||||||||||
| Carbohydrate Solutions | 4,180 | 2,634 | |||||||||||||||||||||
| Nutrition | 1,966 | 1,624 | |||||||||||||||||||||
| Other Business | 107 | 100 | |||||||||||||||||||||
| Intersegment elimination | (1,735) | (1,404) | |||||||||||||||||||||
| Total gross revenues | $ | 23,650 | $ | 18,893 | |||||||||||||||||||
| Intersegment sales | |||||||||||||||||||||||
| Ag Services and Oilseeds | $ | 879 | $ | 932 | |||||||||||||||||||
| Carbohydrate Solutions | 814 | 411 | |||||||||||||||||||||
| Nutrition | 42 | 61 | |||||||||||||||||||||
| Total intersegment sales | $ | 1,735 | $ | 1,404 | |||||||||||||||||||
| Revenues from external customers | |||||||||||||||||||||||
| Ag Services and Oilseeds | |||||||||||||||||||||||
| Ag Services | $ | 11,847 | $ | 10,146 | |||||||||||||||||||
| Crushing | 3,222 | 2,742 | |||||||||||||||||||||
| Refined Products and Other | 3,184 | 2,119 | |||||||||||||||||||||
| Total Ag Services and Oilseeds | 18,253 | 15,007 | |||||||||||||||||||||
| Carbohydrate Solutions | |||||||||||||||||||||||
| Starches and Sweeteners | 2,498 | 1,745 | |||||||||||||||||||||
| Vantage Corn Processors | 868 | 478 | |||||||||||||||||||||
| Total Carbohydrate Solutions | 3,366 | 2,223 | |||||||||||||||||||||
| Nutrition | |||||||||||||||||||||||
| Human Nutrition | 958 | 754 | |||||||||||||||||||||
| Animal Nutrition | 966 | 809 | |||||||||||||||||||||
| Total Nutrition | 1,924 | 1,563 | |||||||||||||||||||||
| Other Business | 107 | 100 | |||||||||||||||||||||
| Total revenues from external customers | $ | 23,650 | $ | 18,893 | |||||||||||||||||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 12. Segment Information (Continued)
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Segment operating profit | |||||||||||||||||||||||
| Ag Services and Oilseeds | $ | 1,008 | $ | 777 | |||||||||||||||||||
| Carbohydrate Solutions | 317 | 259 | |||||||||||||||||||||
| Nutrition | 189 | 154 | |||||||||||||||||||||
| Other Business | 42 | 9 | |||||||||||||||||||||
| Specified Items: | |||||||||||||||||||||||
| Gains on sales of assets and businesses | 1 | — | |||||||||||||||||||||
| Impairment, restructuring, and settlement charges(1) | (18) | (94) | |||||||||||||||||||||
| Total segment operating profit | 1,539 | 1,105 | |||||||||||||||||||||
| Corporate | (268) | (281) | |||||||||||||||||||||
| Earnings before income taxes | $ | 1,271 | $ | 824 | |||||||||||||||||||
(1) Current charges related to the impairment of certain Ukraine assets partially offset by an insurance settlement. Prior quarter charges were related to the impairment of certain long-lived assets, restructuring, and a legal settlement.
Note 13. Asset Impairment, Exit, and Restructuring Costs
Asset impairment, exit, and restructuring costs in the three months ended March 31, 2022 consisted of immaterial charges.
Asset impairment, exit, and restructuring costs in the three months ended March 31, 2021 consisted of $31 million of impairments related to certain long-lived assets and $23 million of restructuring charges, presented as specified items within segment operating profit, and $5 million of restructuring charges in Corporate.
Note 14. Sale of Accounts Receivable
The Company has an accounts receivable securitization program (the “First Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “First Purchasers”). Under the First Program, certain U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Receivables, LLC (“ADM Receivables”). ADM Receivables transfers certain of the purchased accounts receivable to each of the First Purchasers together with a security interest in all of its right, title, and interest in the remaining purchased accounts receivable. In exchange, ADM Receivables receives a cash payment of up to $1.6 billion for the accounts receivable transferred. The First Program terminates on May 18, 2022, unless extended.
The Company also has an accounts receivable securitization program (the “Second Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Second Purchasers”). Under the Second Program, certain non-U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Ireland Receivables Company (ADM Ireland Receivables). ADM Ireland Receivables transfers certain of the purchased accounts receivable to each of the Second Purchasers together with a security interest in all of its right, title, and interest in the remaining purchased accounts receivable. In exchange, ADM Ireland Receivables receives a cash payment of up to $0.7 billion (€0.6 billion) for the accounts receivables transferred. The Second Program terminates on February 16, 2023, unless extended.
Under the First and Second Programs (collectively, the “Programs”), ADM Receivables and ADM Ireland Receivables use the cash proceeds from the transfer of receivables to the First Purchasers and Second Purchasers (collectively, the “Purchasers”) and other consideration, as applicable, to finance the purchase of receivables from the Company and the ADM subsidiaries originating the receivables. The Company accounts for these transfers as sales. The Company acts as a servicer for the transferred receivables. At March 31, 2022 and December 31, 2021, the Company did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions, and its cost of servicing the receivables sold.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 14. Sale of Accounts Receivable (Continued)
As of March 31, 2022 and December 31, 2021, the fair value of trade receivables transferred to the Purchasers under the Programs and derecognized from the Company’s consolidated balance sheets was $2.3 billion and $2.2 billion, respectively. Total receivables sold were $14.3 billion and $12.1 billion for the three months ended March 31, 2022 and 2021, respectively. Cash collections from customers on receivables sold were $13.7 billion and $10.5 billion for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, receivables pledged as collateral to the Purchasers were $0.8 billion and $0.5 billion, respectively.
Transfers of receivables under the Programs resulted in an expense for the loss on sale of $5 million and $4 million for the three months ended March 31, 2022 and 2021, respectively, which is classified as selling, general, and administrative expenses in the consolidated statements of earnings.
All cash flows under the Programs are classified as operating activities because the cash received from the Purchasers upon both the sale and collection of the receivables is not subject to significant interest rate risk given the short-term nature of the Company’s trade receivables.
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