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.
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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.
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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.
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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.
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