Archer-Daniels-Midland Co: Form 10-Q for the period ended Jun 30, 2024

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 provided by operating activities was $1.2 billion for the six months ended June 30, 2024 compared to cash provided of $0.9 billion for the same period last year. Working capital changes decreased cash by $0.5 billion for the six months ended June 30, 2024 compared to a decrease of $1.6 billion for the same period last year. Segregated investments increased $0.3 billion due to increased trading activity in the Company’s futures commission and brokerage business. Trade receivables increased $0.2 billion due to timing of sales. Inventories decreased $1.4 billion due to lower inventory prices and volumes. Trade payables decreased $1.3 billion primarily due to lower payables related to grain purchases. Brokerage payables decreased approximately $0.4 billion due to decreased trading activity in the Company’s futures commission and brokerage business.

Cash used in investing activities was $1.6 billion for the six months ended June 30, 2024 compared to $0.6 billion for the same period last year. Capital expenditures for the six months ended June 30, 2024 of $0.7 billion were comparable to the same period last year. Net assets of businesses acquired in the six months ended June 30, 2024 were $0.9 billion compared to none in the same period last year.

Cash used in financing activities was $0.7 billion for the six months ended June 30, 2024 compared to cash used of $2.1 billion for the same period last year. Long-term debt payments were immaterial for the six months ended June 30, 2024 compared to $0.7 billion for the same period last year, due to no corporate bond issues coming due in the current year period, compared to one issue coming due in the prior year period. Net borrowings on short-term credit agreements for the six months ended June 30, 2024 were $2.2 billion compared to net payments of $0.4 billion for the same period last year. Share repurchases for the six months ended June 30, 2024 were $2.3 billion compared to $1.0 billion for the same period last year. Dividends were $0.5 billion for the six months ended June 30, 2024 compared to $0.5 billion for the same period last year.

At June 30, 2024, the Company had $0.8 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 $5.7 billion of readily marketable commodity inventories. At June 30, 2024, the Company’s capital resources included shareholders’ equity of $22.2 billion and lines of credit, including the accounts receivable securitization programs described below, totaling $12.3 billion, of which $7.8 billion was unused. The Company’s ratio of long-term debt to total capital (the sum of long-term debt of $8.2 billion and shareholders’ equity of $22.2 billion in 2024 and the sum of long-term debt of $8.3 billion and shareholders’ equity of $24.1 billion in 2023) was 27% and 25% at June 30, 2024 and December 31, 2023, 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 of $2.3 billion, current maturities of long-term debt of $1 million, and long-term debt of $8.2 billion less the sum of cash and cash equivalents of $0.8 billion and short-term marketable securities of none in 2024 and the sum of short-term debt of $0.1 billion, current maturities of long-term debt of $1 million, and long-term debt of $8.3 billion less the sum of cash and cash equivalents of $1.4 billion and short-term marketable securities of none in 2023) to capital (the sum of net debt of $9.8 billion and shareholders’ equity of $22.2 billion in 2024 and the sum of net debt of $7.0 billion and shareholders' equity of $24.1 billion in 2023) was 31% and 22% at June 30, 2024 and December 31, 2023, respectively. Of the Company’s total lines of credit, $5.0 billion supported the combined U.S. and European commercial paper borrowing programs, against which there was $1.0 billion of commercial paper outstanding at June 30, 2024.

As of June 30, 2024, the Company had $0.8 billion of cash and cash equivalents, $0.5 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 $5.0 billion, the Company has asserted that these funds are indefinitely reinvested outside the U.S.

Commodities

The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, crop disease, plantings, government programs and policies, competition, changes in global demand, changes in customer preferences and standards of living, and global production of similar and competitive crops.

The fair value of the Company’s commodity position is a summation of the fair values calculated for each commodity by valuing all of the commodity positions at quoted market prices for the period, where available, or utilizing a close proxy. The Company has established metrics to monitor the amount of market risk exposure, which consist of volumetric limits and value-at-risk (VaR) limits. VaR measures the potential loss, at a 95% confidence level, that could be incurred over a one-year period. Volumetric limits are monitored daily and VaR calculations and sensitivity analysis are monitored weekly.

In addition to measuring the hypothetical loss resulting from an adverse two standard deviation move in market prices (assuming no correlations) over a one-year period using VaR, sensitivity analysis is performed measuring the potential loss in fair value resulting from a hypothetical 10% adverse change in market prices. The highest, lowest, and average weekly position together with the market risk from a hypothetical 10% adverse price change is as follows:

The change in fair value of the average position was due to the overall decrease in average quantities, partially offset by the increase in prices of certain commodities.

Remediation Plan

The Company is in the process of implementing enhancements to its internal controls to remediate the identified material weakness in its internal control over financial reporting related to the Company’s accounting practices and procedures for intersegment sales and to enhance the reliability of its financial statements with respect to the pricing and reporting of such sales. Specifically, the Company is in the process of: (i) enhancing the Company’s accounting policies with respect to the measurement of intersegment sales; (ii) improving and documenting the Company’s pricing guidelines for intersegment sales; (iii) enhancing the design and documentation of the execution of pricing and measurement controls for segment disclosure purposes and projected financial information used in impairment analyses; and (iv) increasing training for relevant personnel on the measurement of and application of relevant accounting guidance to intersegment sales.

While the Company believes these efforts will improve its internal control over financial reporting, the Company will not be able to conclude whether the steps the Company is taking will remediate the material weakness in internal control over financial reporting until a sustained period of time has passed to allow management to test the design and operational effectiveness of the new and enhanced controls.

Changes in Internal Control Over Financial Reporting

The Company is implementing a new enterprise resource planning (ERP) system on a worldwide basis, which is expected to occur in phases over the next several years. The Company did not have any further deployments of the ERP system during the quarter ended June 30, 2024.

Except for the material weakness described above and the related remediation measures that are being implemented, there have been no changes in internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the six months ended June 30, 2024, the Company completed the acquisitions of Revela, FDL, PT, and TNS. As a result of the acquisitions, the Company is in the process of reviewing the internal control structures of these businesses and, if necessary, will make appropriate changes as the Company incorporates its controls and procedures into the acquired businesses.

There were no significant changes in the Company’s risk factors during the quarter ended June 30, 2024. For further information about the Company’s risk factors, refer to Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.