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Item 7. Management’s Discussion and Analysis

2024-03-12 compared with 2023-02-14 · 26 added, 125 removed, 3 unchanged (98% of the section changed)

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 provided by operating activities was $3.5 billion in 2022 compared to $6.6 billion in 2021.

Working capital changes as described below decreased cash by $1.5 billion in the current year compared to an increase of $2.7 billion in the prior year.

Segregated investments increased approximately $1.5 billion due to increased trading activity in the Company’s futures commission and brokerage business.

Trade receivables increased $1.7 billion primarily due to higher revenues.

Inventories increased $0.3 billion due to higher inventory prices, partially offset by lower inventory volumes.

Trade payables increased $1.4 billion due to increased payables related to inventory purchases and higher costs and expenses from increased operating activity during the fourth quarter of the current year compared to the same period last year.

Payables to brokerage customers increased $0.9 billion due to increased customer trading activity in the Company’s futures commission and brokerage business.

Cash used in investing activities was $1.4 billion this year compared to $2.7 billion last year.

Capital expenditures in the current year were $1.3 billion compared to $1.2 billion in the prior year.

Net assets of businesses acquired in the prior year of $1.6 billion were related to the acquisitions of P4, Sojaprotein, and Deerland.

Proceeds from sales of assets and businesses of $0.1 billion in the current year related to the sale of certain assets compared to $0.2 billion in the prior year related to the sale of the ethanol production complex in Peoria, Illinois and certain other assets.

Cash used in financing activities was $2.5 billion this year compared to $1.1 billion last year.

Long-term debt borrowings in the current year of $0.8 billion consisted of the $750 million aggregate principal amount of 2.900% Notes due 2032.

Long-term debt borrowings in the prior year of $1.3 billion consisted of the $750 million aggregate principal amount of 2.700% Notes due 2051 issued on September 10, 2021 and 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 year to finance or refinance eligible green projects and/or eligible social projects.

Proceeds from the borrowings in the prior year were used to redeem debt and for general corporate purposes.

Long-term debt payments in the current year of $0.5 billion 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.

Long-term debt payments in the prior year of $0.5 billion consisted of the early redemption of the $500 million aggregate principal amount of 2.750% notes due 2025 in September 2021.

Net payments on short-term credit arrangements were $0.4 billion in the current year compared to $1.1 billion in the prior year.

Share repurchases in the current year were $1.5 billion compared to an insignificant amount in the prior year.

Dividends paid in the current year were $0.9 billion compared to $0.8 billion in the prior year.

At December 31, 2022, ADM had $1.0 billion of cash and cash equivalents and a current ratio, defined as current assets divided by current liabilities, of 1.5 to 1.

Included in working capital is $9.0 billion of readily marketable commodity inventories.

At December 31, 2022, the Company’s capital resources included shareholders’ equity of $24.3 billion and lines of credit, including the accounts receivable securitization programs described below, totaling $12.4 billion, of which $9.3 billion was unused.

ADM’s ratio of long-term debt to total capital (the sum of long-term debt and shareholders’ equity) was 24% and 26% at December 31, 2022 and 2021, respectively.

The Company uses this ratio as a measure of ADM’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 25% and 28% at December 31, 2022 and 2021, respectively.

Of the Company’s total lines of credit, $5.0 billion supported the commercial paper borrowing programs, against which there was $0.3 billion of commercial paper outstanding at December 31, 2022.

As of December 31, 2022, the Company had $1.0 billion of cash and cash equivalents, $0.5 billion of which is 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 $5.7 billion, the Company has asserted that these funds are indefinitely reinvested outside the U.S.

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 $2.6 billion in funding against accounts receivable transferred into the Programs and expand the Company’s access to liquidity through efficient use of its balance sheet assets (see Note 19 in Item 8 for more information and disclosures on the Programs).

As of December 31, 2022, the Company utilized $2.6 billion of its facility under the Programs.

On November 5, 2014, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2015 and ending December 31, 2019.

On August 7, 2019, the Company’s Board of Directors approved the extension of the stock repurchase program through December 31, 2024 and the repurchase of up to an additional 100,000,000 shares under the extended program.

The Company has acquired approximately 112.2 million shares under this program and its extension as of December 31, 2022.

As of December 31, 2022, the Company has total available liquidity of $10.3 billion comprised of cash and cash equivalents and unused lines of credit.

In 2023, the Company expects capital expenditures of $1.3 billion and additional cash outlays of approximately $1.0 billion in dividends and up to $1.0 billion in opportunistic share repurchases, subject to other strategic uses of capital and the evolution of operating cash flows and the working capital position throughout the year.

The Company’s purchase obligations as of December 31, 2022 and 2021 were $15.8 billion and $18.6 billion, respectively.

The change is primarily related to a decrease in obligations to purchase agricultural commodity inventories and other commitments.

As of December 31, 2022, the Company expects to make payments related to purchase obligations of $14.8 billion within the next twelve months.

The Company’s other material cash requirements within the next 12 months include commercial paper outstanding of $0.3 billion, current maturities of long-term debt of $0.9 billion, interest payments of $0.3 billion, operating lease payments of $0.3 billion, transition tax liability of $37 million, and pension and other postretirement plan contributions of $107 million.

The Company expects to make payments related to purchase obligations and other material cash requirements beyond the next twelve months of $16.8 billion.

The Company’s credit facilities and certain debentures require the Company to comply with specified financial and non-financial covenants including maintenance of minimum tangible net worth as well as limitations related to incurring liens, secured debt, and certain other financing arrangements.

The Company was in compliance with these covenants as of December 31, 2022.

The three major credit rating agencies have maintained the Company’s credit ratings at solid investment grade levels with stable outlooks.

Critical Accounting Policies and Estimates

The process of preparing financial statements requires management to make estimates and judgments that affect the carrying values of the Company’s assets and liabilities as well as the recognition of revenues and expenses.

These estimates and judgments are based on the Company’s historical experience and management’s knowledge and understanding of current facts and circumstances.

Certain of the Company’s accounting policies and estimates are considered critical, as these policies and estimates are important to the depiction of the Company’s financial statements and require significant or complex judgment by management.

Critical accounting estimates are those estimates made in accordance with GAAP which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on ADM’s financial condition and results of operations.

Management has discussed with the Company’s Audit Committee the development, selection, disclosure, and application of these critical accounting policies and estimates.

Following are the accounting policies and estimates management considers critical to the Company’s financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Fair Value Measurements - Inventories and Commodity Derivatives

Certain of the Company’s inventory, inventory-related payables, and commodity derivative assets and liabilities as of December 31, 2022 are valued at estimated fair values, including $9.0 billion of merchandisable agricultural commodity inventories, $1.3 billion of commodity derivative assets, $1.3 billion of commodity derivative liabilities, and $1.3 billion of inventory-related payables.

Commodity derivative assets and liabilities include forward purchase and sales contracts for agricultural commodities.

Merchandisable agricultural commodities are freely traded, have quoted market prices, and may be sold without significant additional processing.

Judgments and Uncertainties:

Management estimates fair value for its commodity-related assets and liabilities based on exchange-quoted prices, adjusted for differences in local markets.

The Company’s inventory, inventory-related payables, and commodity derivative fair value measurements are mainly based on observable market quotations without significant adjustments and are therefore reported as Level 2 within the fair value hierarchy.

Level 3 fair value measurements of approximately $3.3 billion of assets and $0.7 billion of liabilities represent fair value estimates where unobservable price components represent 10% or more of the total fair value price.

For more information concerning amounts reported as Level 3, see Note 4 in Item 8.

Sensitivity of Estimate to Change:

Changes in the market values of these inventories and commodity contracts are recognized in the statement of earnings as a component of cost of products sold.

If management used different methods or factors to estimate market value, amounts reported could differ materially.

Additionally, if market conditions change subsequent to year-end, amounts reported in future periods could differ materially.

Derivatives – Designated Hedging Activities

The Company, from time to time, uses derivative contracts designated as cash flow hedges to hedge the purchase or sales price of anticipated volumes of commodities to be purchased and processed in a future month.

See Note 5 in Item 8 for additional information.

Judgments and Uncertainties:

Assuming normal market conditions, the change in the market value of such derivative contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.

Sensitivity of Estimate to Change:

Gains and losses arising from open and closed hedging transactions are deferred in accumulated other comprehensive income, net of applicable income taxes, and recognized as a component of cost of products sold and revenues in the statement of earnings when the hedged item is recognized in earnings.

If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in the market value of these exchange-traded futures and exchange-traded and over-the-counter (OTC) option contracts would be recorded immediately in the statement of earnings as a component of revenues and/or cost of products sold.

The Company accounts for income taxes in accordance with the applicable accounting standards.

These standards prescribe a minimum threshold a tax position is required to meet before being recognized in the consolidated financial statements.

Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law.

Changes in enacted tax rates are reflected in the tax provision as they occur.

Judgments and Uncertainties:

ADM calculates its provision for income taxes based on the statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which it operates.

The Company uses judgment in evaluating the Company’s tax positions and determining its annual tax provision.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Sensitivity of Estimate to Change:

While ADM considers all of its tax positions fully supportable, the Company faces challenges from U.S.

and foreign tax authorities regarding the amount of taxes due.

The Company recognizes a tax position in its consolidated financial statements when it is determined to be more likely than not to be sustained upon examination, based on its technical merits.

The position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

For example, the Company has received tax assessments from tax authorities in Argentina and the Netherlands, challenging income tax positions taken by subsidiaries of the Company.

The Company evaluated its tax positions for these matters and concluded, based in part upon advice from legal counsel, that it was appropriate to recognize the tax benefits of these positions that are more likely than not to be sustained upon examination, based on their technical merits (see Note 13 in Item 8 for additional information).

Business Combinations

The Company’s acquisitions are accounted for in accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations, as amended.

The consideration transferred is allocated to various assets acquired and liabilities assumed at their estimated fair values as of the acquisition date with the residual allocated to goodwill.

The Company accounts for any redeemable noncontrolling interest in temporary equity - redeemable noncontrolling interest at redemption value with periodic changes recorded in retained earnings.

Judgments and Uncertainties:

Fair values allocated to assets acquired and liabilities assumed in business combinations require management to make significant judgments, estimates, and assumptions, especially with respect to intangible assets.

Management makes estimates of fair values based upon assumptions it believes to be reasonable.

These estimates are based upon historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

The estimated fair values related to intangible assets primarily consist of customer relationships, trademarks, and developed technology which are determined primarily using discounted cash flow models.

Estimates in the discounted cash flow models include, but are not limited to, certain assumptions that form the basis of the forecasted results (e.g.

revenue growth rates, customer attrition rates, and royalty rates).

These significant assumptions are forward looking and could be affected by future economic and market conditions.

Sensitivity of Estimate to Change:

During the measurement period, which may take up to one year from the acquisition date, adjustments due to changes in the estimated fair value of assets acquired and liabilities assumed may be recorded as adjustments to the consideration transferred and related allocations.

Upon the conclusion of the measurement period or the final determination of the values of assets acquired and liabilities assumed, whichever comes first, any such adjustments are charged to the consolidated statements of earnings.

Goodwill is subject to annual impairment tests.

The Company evaluates goodwill for impairment at the reporting unit level annually on October 1 or whenever there are indicators that the carrying value may not be fully recoverable.

The Company has seven reporting units with goodwill identified at one level below the operating segment using the criteria in ASC 350, Intangibles - Goodwill and Other (Topic 350).

The Company recorded a goodwill impairment charge of $137 million related to the Animal Nutrition reporting unit that was evaluated for impairment using a quantitative assessment during the year ended December 31, 2023.

The Company utilized a third-party valuation specialist to assist management in determining the fair value of the Animal Nutrition reporting unit.

The fair value of the Animal Nutrition reporting unit was estimated based on a combination of discounted cash flows (income approach) and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and or anticipated financial metrics (market approach).

As a result of this impairment testing in the fourth quarter of 2023, the Company determined the fair value of the Animal Nutrition reporting unit was below its carrying value.

The decline in the fair value of the Animal Nutrition reporting unit was primarily driven by a higher discount rate due to changes in the underlying business performance and industry conditions as well as the macroeconomic environment, causing a decline in the projected cash flows.

During the first three quarters of 2023, Animal Nutrition’s business performance and industry conditions gradually declined despite management’s ongoing mitigation and efficiency improvement actions.

Given Animal Nutrition’s significant excess in fair value over carrying value in prior years and the ongoing mitigation actions, the Company believed Animal Nutrition’s fair value was more likely than not greater than its carrying value as of September 30, 2023, and therefore did not conduct a quantitative evaluation of the reporting unit prior to the annual impairment testing on October 1, 2023.

However, as these conditions persisted in the fourth quarter of 2023, the Company was no longer able to conclude Animal Nutrition’s fair value more likely than not exceeded carrying value and proceeded to perform the quantitative fair value estimate as described above.

Following the recording of the impairment charge, the remaining carrying value of goodwill in the Animal Nutrition reporting unit as of December 31, 2023 was $0.9 billion.

The Company performed a sensitivity analysis for the significant assumptions used in the goodwill impairment testing analysis for the Animal Nutrition reporting unit.

The sensitivities were calculated in isolation using the income approach and keeping all other assumptions constant.

The sensitivities for revenue growth and EBITDA margins do not consider the offsetting impact of a lower discount rate assumption to reflect the reduced risk in estimated future cash flow growth used under the income approach or the related impacts on pricing multiples used under the market approach.

• A hypothetical increase to the discount rate of approximately 25 basis points would result in additional goodwill impairment of approximately $65 million;

• A hypothetical decrease in the expected annual revenue growth rate over the entire forecast period of approximately 100 basis points would result in additional goodwill impairment of approximately $60 million;

• A hypothetical decrease in the expected EBITDA margins in each year over the entire forecast period of approximately 15 basis points would result in additional goodwill impairment of approximately $60 million.

The estimated fair value of the other reporting unit evaluated for impairment using a quantitative assessment during the year ended December 31, 2023 was in excess of 198% of its carrying value, and therefore no impairment was recorded for that reporting unit.

There were goodwill impairment charges of $6 million recorded during the year ended December 31, 2021 and none during the year ended December 31, 2022.

If management used different estimates and assumptions in its impairment tests, then impairment charges recorded could differ materially.

Investments in Affiliates

The Company applies the equity method of accounting for investments over which the Company has the ability to exercise significant influence, including its 22.5% investment in Wilmar.

These investments in affiliates are carried at cost plus equity in undistributed earnings and are adjusted, where appropriate, for amortizable basis differences between the investment balance and the underlying net assets of the investee.

Judgments and Uncertainties:

The Company adopted the provisions of Topic 350, which permits, but does not require, a company to qualitatively assess indicators of a reporting unit’s fair value.

If after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value.

Critical estimates in the determination of the fair value of each reporting unit include, but are not limited to, future expected cash flows, revenue growth, and discount rates.

During the year ended December 31, 2022, the Company evaluated goodwill for impairment using a qualitative assessment in five reporting units and using a quantitative assessment in two reporting units.

Generally, the minimum ownership threshold for asserting significant influence is 20% ownership of the investee.

However, the Company considers all relevant factors in determining its ability to assert significant influence including but not limited to, ownership percentage, board membership, customer and vendor relationships, and other arrangements.

The Company also periodically compares the book value of its investment in Wilmar against its market value as determined through quoted market prices, and evaluates any potential other than temporary impairment based on the near-term prospects of Wilmar in relation to the severity and duration of the decline in fair value and the Company’s intent and ability to retain its investment in Wilmar.

Sensitivity of Estimate to Change:

The Company recorded goodwill impairment charges of $5 million and $1 million during the years ended December 31, 2021 and 2020, respectively (see Note 18 in Item 8 for more information).

There was no goodwill impairment charge recorded for the year ended December 31, 2022.

The estimated fair values of the reporting units evaluated for impairment using a quantitative assessment were substantially in excess of their carrying values.

If management used different estimates and assumptions in its impairment tests, then the Company could recognize different amounts of expense over future periods.

If management used a different accounting method for these investments, then the amount of earnings from affiliates the Company recognizes may differ.

If management used different assumptions in the evaluation of its Wilmar investment, then the amount of any impairment charges could differ materially.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis