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

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 did not and is not expected to have a material impact on the Company’s consolidated financial statements.

The Company measures its performance using key financial metrics including net earnings, adjusted earnings per share (EPS), gross margins, segment operating profit, total segment operating profit, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, return on invested capital, economic value added, and operating cash flows before working capital. 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 46. 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 geopolitical developments. Due to the unpredictable nature of these and other 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.”

Market Factors Influencing Operations or Results in the Three Months Ended June 30, 2024

The Company is subject to a variety of market factors which affect the Company's operating results. In Ag Services and Oilseeds, following two years of very favorable market conditions, several headwinds in the agriculture cycle led to more normalized conditions throughout the entire value chain. Ag Services experienced slow South American farmer selling, depressed margins, low demand for North American exports along with limited trade opportunities as a carry market has contributed to slow farmer selling. Crushing saw good demand with lower North American meal exports. In Refined Products and Other, despite strong global demand for oil and biodiesel, margins were limited by oil values, particularly in North America, due to low carbon intensity feedstocks competing in the renewable diesel market. In Carbohydrate Solutions, demand for starches and sweeteners remained solid with margins remaining steady across the entire portfolio. Demand for ethanol was strong going into summer driving season. Strong ethanol export demand was due to higher mandates in certain jurisdictions and discretionary blending. Industry ethanol stocks declined and ethanol margins improved. In Nutrition, demand was softer in a few food and beverage product categories driven by shifts in consumer discretionary spend. Human Nutrition was impacted by inflation which drove lower demand and impacted sales volumes in alternative proteins. In Animal Nutrition, a soft amino acids market driven by price weakness in North America was partially compensated by a slightly improved market in Europe, Middle East, and Africa (EMEA). The global feed and feed additives market remained challenged on the demand side, with weakness in the Chinese beef and pork business and continued subdued global shrimp prices.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Earnings before income taxes decreased $536 million from $1.1 billion to $596 million due to lower pricing and execution margins as well as higher Corporate costs. Total segment operating profit (a non-GAAP measure) decreased $617 million from $1.5 billion to $925 million due primarily to lower results in Ag Services and Oilseeds, and Human Nutrition, partially offset by higher results in Carbohydrate Solutions, Other Business, and Animal Nutrition. Total segment operating profit (a non-GAAP measure) excluded asset impairment and restructuring charges totaling $7 million. Excluded from total segment operating profit (a non-GAAP measure) in the prior-year quarter was a net charge of $103 million consisting of charges totaling $114 million and a gain on the sale of certain assets of $11 million. Corporate results in the current quarter were a net charge of $418 million. Corporate results in the prior-year quarter were a net charge of $393 million and included a mark-to-market gain of $1 million on the conversion option of the exchangeable bonds issued in August 2020.

Income tax expense decreased $89 million to $115 million. The effective tax rate for the quarter ended June 30, 2024 was 19.3% compared to 18.0% for the quarter ended June 30, 2023. The increase in the rate was primarily due to the impact of discrete tax items, partially offset by the change in the geographic mix of forecasted pretax earnings.

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.

Evaluation of Disclosure Controls and Procedures

At the time of the filing of this Amendment, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of June 30, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were not effective as of June 30, 2024, due to the material weakness described below.

Internal Control Over Financial Reporting

As disclosed in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023, during the fourth quarter of 2023, in connection with the Investigation, the Company identified a material weakness in its internal control over financial reporting related to the Company’s accounting practices and procedures for segment disclosures. The material weakness resulted from inadequate controls that allowed for certain intersegment sales to be reported at amounts that were not in accordance with ASC 606, Revenue from Contracts with Customers. Specifically, the Company did not have adequate controls in place around measurement of certain intersegment sales between the Company’s reporting segments. In addition, appropriate controls were not in place for the reporting of intersegment sales and for the application of disclosure requirements within ASC 280, Segment Reporting. The absence of adequate controls with respect to the reporting of intersegment sales impacted the completeness and accuracy of the Company’s segment disclosures and review controls over projected financial information utilized in goodwill and other long-lived asset impairment tests.

Remediation Plan

The Company is 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

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023.