filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
49K characters. Original on sec.gov · Markdown
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements.
ADM is a global leader in human and animal nutrition and one of the world’s premier agricultural origination and processing companies. It is one of the world’s leading producers of ingredients for human and animal nutrition, and other products made from nature. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in 200 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. The Company also engages in the manufacturing, sale, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to efficiently connect the harvest to the home thereby generating returns for our shareholders, principally from margins earned on these activities.
The Company’s operations are organized, managed, and classified into three reportable business segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable business segments, as defined by the applicable accounting standard, and are classified as Other Business. Financial information with respect to the Company’s reportable business segments is set forth in Note 12 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements”.
The Company’s recent significant portfolio actions and announcements include:
-
the acquisition in February 2022 of Comhan, a leading South African flavor distributor;
-
the announcement in April 2022 of a growth investment in the Company’s oilseed facility in Mainz, Germany, which is expected to be completed in Q3 2023;
-
the announcement in April 2022 of a $300 million investment in Decatur, IL to expand alternative protein production and the opening of a new, state-of-the-art protein innovation center; and
-
the announcement in April 2022 of a commitment to achieve 100% deforestation-free supply chains by 2025, five years earlier than previously targeted.
Sustainability is a key driver in ADM’s expanding portfolio of environmentally responsible, plant-derived products. Consumers today increasingly expect their food and drink to come from sustainable ingredients, produced by companies that share their values, and ADM is continually finding new ways to meet those needs through its portfolio actions.
The current phase of the Company’s strategic transformation is focused on two strategic pillars: Productivity and Innovation.
The Productivity pillar includes (1) advancing the roles of the Company’s Centers of Excellence in procurement, supply chain, and operations to deliver additional efficiencies across the enterprise; (2) continued roll out of the 1ADM business transformation program and implementation of improved standardized business processes; and (3) increased use of technology, analytics, and automation at production facilities, in offices, and with customers.
Innovation activities include expansions and investments in (1) improving the customer experience, including leveraging producer relationships and enhancing the use of state-of-the-art digital technology to help customers grow; (2) sustainability-driven innovation, which encompasses the full range of products, solutions, capabilities, and commitments to serve customers’ needs; and (3) growth initiatives, including organic growth to support additional capacity and meet growing demand, and mergers and acquisitions opportunities.
ADM will support both pillars with investments in technology, which include expanding digital capabilities and investing further in product research and development. All of these efforts will continue to be strengthened by the Company’s ongoing commitment to Readiness.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Environmental and Social Responsibility
The Company’s policy to protect forests, biodiversity, and communities includes provisions that promote conservation of water resources and biodiversity in agricultural landscapes, promote solutions to reduce climate change and greenhouse gas emissions, and support agriculture as a means to advance sustainable development by reducing poverty and increasing food security. Additionally, the policy confirms ADM’s commitment to protect human rights defenders, whistleblowers, complainants, and community spokespersons; ADM’s aspiration to cooperate with all parties necessary to enable access to fair and just remediation; and the Company’s non-compliance protocol for suppliers. By the end of 2022, the Company expects to achieve full traceability of its direct and indirect sourcing throughout its soy supply chains in Brazil, Paraguay, and Argentina. ADM aims to eliminate deforestation from all of the Company’s supply chains by 2025.
In 2020, ADM announced its environmental stewardship goals, collectively called “Strive 35” – an ambitious plan to, by 2035, reduce absolute Scope 1 and 2 greenhouse gas (GHG) emissions by 25 percent from a 2019 baseline, reduce energy intensity by 15 percent, reduce water intensity by 10 percent, and achieve a 90 percent landfill diversion rate.
In 2021, ADM added 5-year interim targets to ensure the Company stays on track to meet its 2035 goals. By 2025, the Company aims to reduce absolute GHG emissions by 1.5%, reduce energy and water intensity by 6% and 5%, respectively, and achieve 87% of its waste diverted from landfill.
In 2021, the Company announced its Scope 3 GHG reduction goal, focused upon the five most material Scope 3 categories for the Company; purchased goods and services; fuel and energy related emissions; upstream transportation and distribution; waste; and processing of solid products/goods. ADM aims to reduce its absolute Scope 3 emissions by 25% from a 2019 baseline by 2035.
Operating Performance Indicators
The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Part I Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II Item 1A “Risk Factors” on page 44.
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 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 for 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. Effective April 1, 2022, the Company changed the functional currency of its Turkish entities to the U.S. dollar which is not expected to have a material impact on the Company’s consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company measures its performance using key financial metrics including net earnings, gross margins, segment operating profit, adjusted segment operating profit, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, manufacturing expenses, selling, general, and administrative expenses, return on invested capital, and economic value added. Some of these metrics 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. For more information, see “Non-GAAP Financial Measures” on page 38. 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, global production of similar and competitive crops, and geopolitics. 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.”
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.
On February 24, 2022, Russian troops invaded Ukraine. While the Company’s Ukraine and Russian operations have historically represented less than 0.1% of consolidated revenues, the direct and indirect impacts of the ongoing military action could negatively affect ADM’s future operating results. The conflict in Ukraine has created disruptions in global supply chains and is expected to create dislocations of key agricultural commodities. The indirect impact of these dislocations on the Company’s operating results will be a function of a number of variables including supply and demand responses from the rest of the world as well as the length of the conflict and the condition of the agricultural industry and export infrastructure after the conflict ends. For more information, refer to Part II, Item 1A, “Risk Factors”.
As of March 31, 2022, ADM’s assets in Ukraine consisted primarily of current assets that were less than 1% of the Company’s total current assets. Of the total current assets in Ukraine, 79% were inventories that represented less than 2% of ADM’s total inventories.
Market Factors Influencing Operations or Results in the Three Months Ended March 31, 2022
The Company is subject to a variety of market factors which affect the Company's operating results. In Ag Services and Oilseeds, tight global stocks driven by a short crop in South America and good global demand drove commodity prices higher. The conflict in Ukraine resulted in even tighter global stocks of commodities and created high volatility which had a positive impact on South American origination prices. Global Trade results were driven by tight supply, strong destination marketing volumes and margins, and firm ocean freight rates. North American origination was negatively impacted by weather-related supply disruption. Crushing margins benefited from strong protein and renewable diesel demand and tight oilseeds stocks. Refined oil margins were driven by strong oil demand with volatile energy markets driving premiums up. In Carbohydrate Solutions, demand in starches and sweeteners was strong with margins remaining fairly steady on higher input costs. Domestic ethanol demand improved significantly from the prior year, but remained below pre-pandemic levels. Industry production of ethanol returned to pre-pandemic levels, with ethanol margins under pressure due to persistently high industry stocks. Corn milling margins benefited from strong co-product results, as prices for oil and feed products rose in line with higher underlying corn prices. Corn costs were volatile and higher, in part due to a relatively low projected corn stocks-to-use ratio and uncertainty caused by the conflict in Ukraine and other inflationary pressures. Nutrition benefited from overall strong demand in various product categories. In Human Nutrition, demand for flavors, flavor systems, specialty proteins, bioactives, and fibers was strong, but increased energy and raw material costs adversely impacted results. In Animal Nutrition, amino acids pricing and margins improved due to a tighter global supply environment. Growing demand in complete food for petfood was partially offset by weak demand in other product lines with some customers cutting products out of formulation due to increased ingredient, freight, and energy costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Net earnings attributable to controlling interests increased $0.4 billion from $0.7 billion to $1.1 billion. Segment operating profit increased $0.4 billion from $1.1 billion to $1.5 billion and included a net charge of $17 million consisting of asset impairment, restructuring, and settlement charges of $18 million and a gain on sale of assets of $1 million. Included in segment operating profit in the prior year quarter was $94 million of asset impairment, restructuring, and legal settlement charges. Adjusted segment operating profit (a non-GAAP measure) increased $0.4 billion to $1.6 billion due primarily to higher results in all businesses except in Vantage Corn Processors. Corporate results in the current quarter were a net charge of $268 million and included a mark-to-market loss of $15 million on the conversion option of the exchangeable bonds issued in August 2020. Corporate results in the prior year quarter were a net charge of $281 million and included a mark-to-market loss of $20 million on the conversion option of the exchangeable bonds issued in August 2020 and a restructuring charge of $5 million.
Income tax expense increased $76 million to $207 million. The effective tax rate for the quarter ended March 31, 2022 was 16.3% compared to 15.9% for the quarter ended March 31, 2021. The change in the rate was due primarily to changes in the geographic mix of earnings.
Analysis of Statements of Earnings
Processed volumes by product for the quarter are as follows (in metric tons):
| Three Months Ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | ||||||||||||||
| Oilseeds | 8,491 | 8,960 | (469) | ||||||||||||||
| Corn | 4,812 | 3,650 | 1,162 | ||||||||||||||
| Total | 13,303 | 12,610 | 693 |
The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. The overall decrease in oilseeds processed volumes was primarily related to decreased crush rates resulting from the decline in global demand for canola oil and the indefinite shutdown of a Ukraine facility since February 2022. The overall increase in corn was primarily related to two dry mill facilities that were idled since April 2020 and restarted in April 2021, partially offset by the sale of the Peoria, IL facility in November 2021.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Revenues by segment for the quarter are as follows:
| Three Months Ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Ag Services and Oilseeds | |||||||||||||||||
| Ag Services | $ | 11,847 | $ | 10,146 | $ | 1,701 | |||||||||||
| Crushing | 3,222 | 2,742 | 480 | ||||||||||||||
| Refined Products and Other | 3,184 | 2,119 | 1,065 | ||||||||||||||
| Total Ag Services and Oilseeds | 18,253 | 15,007 | 3,246 | ||||||||||||||
| Carbohydrate Solutions | |||||||||||||||||
| Starches and Sweeteners | 2,498 | 1,745 | 753 | ||||||||||||||
| Vantage Corn Processors | 868 | 478 | 390 | ||||||||||||||
| Total Carbohydrate Solutions | 3,366 | 2,223 | 1,143 | ||||||||||||||
| Nutrition | |||||||||||||||||
| Human Nutrition | 958 | 754 | 204 | ||||||||||||||
| Animal Nutrition | 966 | 809 | 157 | ||||||||||||||
| Total Nutrition | 1,924 | 1,563 | 361 | ||||||||||||||
| Other Business | 107 | 100 | 7 | ||||||||||||||
| Total | $ | 23,650 | $ | 18,893 | $ | 4,757 |
Revenues and cost of products sold in agricultural merchandising and processing business are significantly correlated to the underlying commodity prices and volumes. During periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins because 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 $4.8 billion to $23.7 billion due to higher sales prices ($4.6 billion) and higher sales volumes ($0.2 billion). Higher sales prices of oils, corn, soybeans, animal feeds, wheat, biodiesel, farming materials, alcohol, and flour, and higher volumes of alcohol and milled rice, were partially offset by lower sales volumes of oils and wheat. Ag Services and Oilseeds revenues increased 22% to $18.3 billion due to higher sales prices ($3.6 billion) partially offset by lower sales volumes ($0.3 billion). Carbohydrate Solutions revenues increased 51% to $3.4 billion due to higher sales prices ($0.7 billion) and higher sales volumes ($0.4 billion) despite the loss of USD-grade industrial alcohol volumes from the divested Peoria, IL facility. Nutrition revenues increased 23% to $1.9 billion due to higher sales prices ($0.3 billion) and higher sales volumes ($0.1 billion).
Cost of products sold increased $4.4 billion to $21.8 billion due principally to higher average commodity costs. Manufacturing expenses increased $0.3 billion to $1.7 billion due principally to higher energy costs, maintenance, and operating supplies.
Foreign currency translation decreased revenues and cost of products sold by $0.5 billion and $0.4 billion, respectively.
Gross profit increased $349 million or 23%, to $1.9 billion due principally to higher results in Ag Services and Oilseeds ($182 million), Starches and Sweeteners ($106 million), Nutrition ($82 million), and Other ($13 million), partially offset by lower results in Vantage Corn Processors ($33 million). These factors are explained in the segment operating profit discussion on page 37.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, general, and administrative expenses increased $80 million to $829 million due primarily to higher IT expenses and insurance costs, increased provisions for bad debt, and amortization of intangibles from new acquisitions.
Asset impairment, exit, and restructuring costs decreased $58 million to $1 million. Charges in the current quarter were not material. Charges in the prior year quarter 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.
Equity in earnings of unconsolidated affiliates increased $79 million to $204 million due primarily to higher earnings from the Company’s investments in Wilmar, Almidones Mexicanos S.A., SoyVen, and Stratas Foods LLC.
Investment income increased $46 million to $59 million due primarily to revaluation gains of $34 million and interest income of $11 million related to a tax item in the current quarter.
Interest expense increased $5 million to $92 million due to higher debt balances and interest related to a tax item. Interest expense in the current quarter also included a $15 million mark-to-market loss adjustment related to the conversion option of the exchangeable bonds issued in August 2020, compared to a $20 million mark-to-market loss adjustment in the prior year quarter.
Other income-net of $33 million was comparable to the prior period. Income in the current quarter included the non-service components of net pension benefit income, foreign exchange gains, and other income. Income in the prior year quarter included gains on disposals of individually insignificant assets in the ordinary course of business, the non-service components of net pension benefit income, foreign exchange gains, and other income.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Segment operating profit (loss), adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the quarter are as follows:
| Three Months Ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| Segment Operating Profit (Loss) | 2022 | 2021 | Change | ||||||||||||||
| (In millions) | |||||||||||||||||
| Ag Services and Oilseeds | |||||||||||||||||
| Ag Services | $ | 258 | $ | 209 | $ | 49 | |||||||||||
| Crushing | 428 | 382 | 46 | ||||||||||||||
| Refined Products and Other | 198 | 101 | 97 | ||||||||||||||
| Wilmar | 124 | 85 | 39 | ||||||||||||||
| Total Ag Services and Oilseeds | 1,008 | 777 | 231 | ||||||||||||||
| Carbohydrate Solutions | |||||||||||||||||
| Starches and Sweeteners | 316 | 222 | 94 | ||||||||||||||
| Vantage Corn Processors | 1 | 37 | (36) | ||||||||||||||
| Total Carbohydrate Solutions | 317 | 259 | 58 | ||||||||||||||
| Nutrition | |||||||||||||||||
| Human Nutrition | 141 | 128 | 13 | ||||||||||||||
| Animal Nutrition | 48 | 26 | 22 | ||||||||||||||
| Total Nutrition | 189 | 154 | 35 | ||||||||||||||
| Other Business | 42 | 9 | 33 | ||||||||||||||
| Specified Items: | |||||||||||||||||
| Gains on sales of assets and businesses | 1 | — | 1 | ||||||||||||||
| Asset impairment, restructuring, and settlement charges | (18) | (94) | 76 | ||||||||||||||
| Total Specified Items | (17) | (94) | 77 | ||||||||||||||
| Total Segment Operating Profit | $ | 1,539 | $ | 1,105 | $ | 434 | |||||||||||
| Adjusted Segment Operating Profit(1) | $ | 1,556 | $ | 1,199 | $ | 357 | |||||||||||
| Segment Operating Profit | $ | 1,539 | $ | 1,105 | $ | 434 | |||||||||||
| Corporate | (268) | (281) | 13 | ||||||||||||||
| Earnings Before Income Taxes | $ | 1,271 | $ | 824 | $ | 447 |
(1) Adjusted segment operating profit is segment operating profit excluding the above specified items.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Ag Services and Oilseeds operating profit increased 30%. Ag Services and Oilseeds delivered substantially higher year-over-year results, effectively managing risk and executing well in a dynamic environment of robust global demand and tight supply, driven primarily by the short South American crop. Ag Services results were significantly higher versus the first quarter of 2021. Global trade results were higher, driven by strong performances in destination marketing and global ocean freight. North American origination margins and volumes were lower year-over-year, including negative timing effects. Crushing was higher year over year in a strong global margin environment driven by robust protein and vegetable oil demand. Improving margins in the quarter resulted in negative timing effects versus positive timing effects in the prior-year quarter. Refined Products and Other results were much higher than the prior-year quarter, driven by healthy refining premiums and good refined oils demand in North America, as well as strong biodiesel margins in Europe, Middle East, and Africa (EMEA) biodiesel as well as healthy refining premiums and good demand in North American refined oils. Equity earnings from Wilmar were significantly higher versus the first quarter of 2021.
Carbohydrate Solutions operating profit increased 22%. Carbohydrate Solutions delivered results that were substantially higher year-over-year. Starches and Sweeteners, including ethanol production from the wet mills, delivered much higher results versus the prior-year quarter, driven by higher corn co-product revenues and improved citric acid profits in North America; higher volumes and margins in EMEA; and higher volumes and margins in wheat milling. Sales volumes for starches and sweeteners continued their recovery. The biosolutions platform continued to deliver revenue growth as demand for plant-based products expands into more diverse applications. Vantage Corn Processors delivered solid execution margins but position losses on ethanol inventory as prices fell early in the quarter drove lower results versus the prior-year quarter, which benefited from demand for USP-grade industrial alcohol from the Peoria facility that was divested in November 2021.
Nutrition operating profit increased 23%. Nutrition delivered strong revenue growth of 23% and maintained healthy margins, driving substantially higher results. Human Nutrition delivered higher year-over-year results. Flavors continued to deliver solid revenue growth, offset by some higher costs. Strong sales growth in alternative proteins, including contribution from the Sojaprotein acquisition, and positive currency timing impacts in South America, offset some higher operating costs to help deliver better year-over-year results in Specialty Ingredients. Health and Wellness was also higher year-over-year, powered by probiotics, including contribution from the November 2021 Deerland Probiotics and Enzymes acquisition, and robust demand for fiber. Animal Nutrition profits were nearly double the prior-year quarter, due primarily to strength in amino acids, which was driven by a combination of product mix changes, improved North American demand and global supply chain disruptions.
Other Business operating profit increased $33 million, driven primarily by better performance in captive insurance, including reduced claim settlements versus the prior-year quarter.
Corporate results for the quarter are as follows:
| Three Months Ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Interest expense-net | $ | (76) | $ | (64) | $ | (12) | |||||||||||
| Unallocated corporate costs | (209) | (202) | (7) | ||||||||||||||
| Loss on sale of assets | (3) | — | (3) | ||||||||||||||
| Expenses related to acquisitions | (2) | — | (2) | ||||||||||||||
| Loss on debt conversion option | (15) | (20) | 5 | ||||||||||||||
| Restructuring adjustment (charges) | 1 | (5) | 6 | ||||||||||||||
| Other income | 36 | 10 | 26 | ||||||||||||||
| Total Corporate | $ | (268) | $ | (281) | $ | 13 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Corporate results were a net charge of $268 million in the current quarter compared to a net charge of $281 million in the prior year quarter. Interest expense-net increased $12 million due to higher debt balances and interest related to a tax item. Unallocated corporate costs increased $7 million due primarily to higher IT operating and project-related costs and higher costs in the Company’s centers of excellence, partially offset by lower incentive compensation accruals. Loss on debt conversion option was related to the mark-to-market adjustment of the conversion option of the exchangeable bonds issued in August 2020. Other income in the current quarter included the non-service components of net pension benefit income of $6 million and an investment revaluation gain of $34 million, partially offset by foreign exchange losses. Other income in the prior year quarter included the non-service components of net pension benefit income of $6 million and foreign exchange gains.
Non-GAAP Financial Measures
The Company uses adjusted earnings per share (EPS), adjusted EBITDA, and adjusted segment operating profit, non-GAAP financial measures as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of specified items. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items.
Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes, and segment operating profit, respectively, the most directly comparable amounts reported under GAAP.
The table below provides a reconciliation of diluted EPS to adjusted EPS for the three months ended March 31, 2022 and 2021.
| Three months ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| In millions | Per share | In millions | Per share | ||||||||||||||||||||
| Average number of shares outstanding - diluted | 568 | 564 | |||||||||||||||||||||
| Net earnings and reported EPS (fully diluted) | $ | 1,054 | $ | 1.86 | $ | 689 | $ | 1.22 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Losses on sales of assets and businesses - net of tax of $0 million in 2022(1) | 2 | — | — | — | |||||||||||||||||||
| Loss on debt conversion option - net of tax of $0 (1) | 15 | 0.03 | 20 | 0.04 | |||||||||||||||||||
| Asset impairment, restructuring, and settlement charges - net of tax of $3 million in 2022 and $25 million in 2021 (1) | 14 | 0.02 | 74 | 0.13 | |||||||||||||||||||
| Expenses related to acquisitions - net of tax of $1 million in 2022 (1) | 1 | — | — | — | |||||||||||||||||||
| Certain discrete tax adjustments | (4) | (0.01) | — | — | |||||||||||||||||||
| Total adjustments | 28 | 0.04 | 94 | 0.17 | |||||||||||||||||||
| Adjusted net earnings and adjusted EPS | $ | 1,082 | $ | 1.90 | $ | 783 | $ | 1.39 | |||||||||||||||
(1) Tax effected using the U.S. and other applicable tax rates.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the three months ended March 31, 2022 and 2021.
| Three months ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | Change | ||||||||||||||
| Earnings before income taxes | $ | 1,271 | $ | 824 | $ | 447 | |||||||||||
| Interest expense | 92 | 87 | 5 | ||||||||||||||
| Depreciation and amortization | 257 | 249 | 8 | ||||||||||||||
| Losses on sales of assets and businesses | 2 | — | 2 | ||||||||||||||
| Expenses related to acquisition | 2 | — | 2 | ||||||||||||||
| Asset impairment, restructuring, and settlement charges | 17 | 99 | (82) | ||||||||||||||
| Adjusted EBITDA | $ | 1,641 | $ | 1,259 | $ | 382 | |||||||||||
| Three months ended | |||||||||||||||||
| March 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | Change | ||||||||||||||
| Ag Services and Oilseeds | $ | 1,096 | $ | 871 | $ | 225 | |||||||||||
| Carbohydrate Solutions | 396 | 342 | 54 | ||||||||||||||
| Nutrition | 254 | 209 | 45 | ||||||||||||||
| Other Business | 44 | 11 | 33 | ||||||||||||||
| Corporate | (149) | (174) | 25 | ||||||||||||||
| Adjusted EBITDA | $ | 1,641 | $ | 1,259 | $ | 382 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
A Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital-intensive agricultural commodity-based business. The Company 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 $1.2 billion for the three months ended March 31, 2022 compared to cash provided of $0.3 billion for the same period last year. Working capital changes decreased cash by $2.8 billion for the three months ended March 31, 2022 compared to a decrease of $0.9 billion for the same period last year. Trade receivables increased $0.9 billion due to higher revenues. Inventories increased approximately $2.9 billion due to higher inventory prices partially offset by lower inventory volumes. Other current assets increased $2.1 billion primarily due to increases in contracts and futures gains and margin deposits and grain accounts. Brokerage payables increased approximately $2.5 billion due to increased customer trading activity in the Company’s futures commission and brokerage business. Accrued expenses and other payables increased $1.4 billion primarily due to increases in contracts and futures losses.
Cash used in investing activities was $0.3 billion for the three months ended March 31, 2022 compared to $0.2 billion for the same period last year. Capital expenditures for the three months ended March 31, 2022 of $0.2 billion were comparable to the same period last year. Other-net for the three months ended March 31, 2022 of $0.1 billion consisted of new and additional cost method equity investments.
Cash provided by financing activities was $3.3 billion for the three months ended March 31, 2022 compared to $1.1 billion for the same period last year. Long-term debt borrowings for the three months ended March 31, 2022 of $0.8 billion consisted of the $750 million aggregate principal amount of 2.900% notes due 2032, compared to long-term debt borrowings for the same period last year of $0.6 billion which consisted of the €0.5 billion aggregate principal amount of fixed-to-floating rate senior notes due 2022 issued in a private placement on March 25, 2021. The Company expects to apply an amount equal to the proceeds from the borrowings in the current period to finance or refinance eligible green projects and/or eligible social projects. Proceeds from the borrowings in the prior period were used for general corporate purposes. Net borrowings from short-term credit agreements for the three months ended March 31, 2022 were $2.8 billion compared to $0.7 billion for the same period last year. Proceeds from short-term borrowings were used to fund working capital needs. Dividends of $0.2 billion for the three months ended March 31, 2022 were comparable to the same period last year.
At March 31, 2022, the Company had $1.1 billion of cash and cash equivalents and a current ratio, defined as current assets divided by current liabilities, of 1.4 to 1. Included in working capital was $12.0 billion of readily marketable commodity inventories. At March 31, 2022, the Company’s capital resources included shareholders’ equity of $23.8 billion and lines of credit, including the accounts receivable securitization programs described below, totaling $14.3 billion, of which $8.2 billion was unused. The Company’s ratio of long-term debt to total capital (the sum of the Company’s long-term debt and shareholders’ equity) was 27% and 26% at March 31, 2022 and December 31, 2021, respectively. The Company uses this ratio as a measure of the Company’s long-term indebtedness and an indicator of financial flexibility. The Company’s ratio of net debt (the sum of short-term debt, current maturities of long-term debt, and long-term debt less the sum of cash and cash equivalents and short-term marketable securities) to capital (the sum of net debt and shareholders’ equity) was 34% and 28% at March 31, 2022 and December 31, 2021, respectively. Of the Company’s total lines of credit, $6.5 billion supported the combined U.S. and European commercial paper borrowing programs, against which there was $0.7 billion commercial paper outstanding at March 31, 2022.
As of March 31, 2022, the Company had $1.1 billion of cash and cash equivalents, $0.4 billion of which was 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 $6.5 billion, the Company has asserted that these funds are indefinitely reinvested outside the U.S.
ITEM 2. 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 $2.3 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 14 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information and disclosures on the Programs). As of March 31, 2022, the Company had $24 million unused capacity of its facility under the Programs.
As of March 31, 2022, the Company has total available liquidity of $9.3 billion comprised of cash and cash equivalents and unused lines of credit.
For the three months ended March 31, 2022, the Company spent approximately $0.2 billion in capital expenditures and $0.2 billion in dividends. The Company has a stock repurchase program. Under the program, the Company has 104.5 million shares remaining as of March 31, 2022 that may be repurchased until December 31, 2024.
In 2022, the Company expects total capital expenditures of $1.3 billion and additional cash outlays of approximately $0.9 billion in dividends and up to $150 million in share repurchases, subject to other strategic uses of capital and the evolution of operating cash flows and the working capital position throughout the year.
Contractual Obligations and Commercial Commitments
The Company’s purchase obligations as of March 31, 2022 and December 31, 2021 were $22.9 billion and $18.6 billion, respectively. The increase is primarily related to obligations to purchase agricultural commodity inventories at higher prices. As of March 31, 2022, the Company expects to make payments related to purchase obligations of $21.8 billion within the next twelve months. There were no other material changes in the Company’s contractual obligations during the quarter ended March 31, 2022.
Off Balance Sheet Arrangements
There were no material changes in the Company’s off balance sheet arrangements during the quarter ended March 31, 2022.
Critical Accounting Policies
There were no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2022.
Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK