UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 41-0129150 |
(State or other jurisdiction of | (I. R. S. Employer |
incorporation or organization) | Identification No.) |
77 West Wacker Drive, Suite 4600 Chicago, Illinois | 60601 |
(Address of principal executive offices) | (Zip Code) |
312-634-8100 | |
(Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act: | |
Title of each class | Name of each exchange on which registered |
Common Stock, no par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth comany. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x Accelerated Filer o
Non-accelerated Filer o Smaller Reporting Company o
Emerging Growth Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
Common Stock, no par value--$23.2 billion
(Based on the closing sale price of Common Stock as reported on the New York Stock Exchange
as of June 30, 2017)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, no par value—558,839,277 shares
(February 15, 2018)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be held May 3, 2018, are incorporated by reference into Part III of this Form 10-K.
SAFE HARBOR STATEMENT
This Form 10-K contains forward-looking information that is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking information. In some cases, you can identify forward-looking statements by our use of words such as “may”, “will”, “should”, “anticipates”, “believes”, “expects”, “plans”, “future”, “intends”, “could”, “estimate”, “predict”, “potential” or “contingent”, the negative of these terms or other similar expressions. The Company’s actual results could differ materially from those discussed or implied herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-K for the year ended December 31, 2017. Among these risks are legislative acts; changes in the prices of food, feed, and other commodities, including gasoline; and macroeconomic conditions in various parts of the world. To the extent permitted under applicable law, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events.
2
Table of Contents
Item No. | Description | Page No. | |
Part I | |||
1. | |||
1A. | |||
1B. | |||
2. | |||
3. | |||
4. | |||
Part II | |||
5. | |||
6. | |||
7. | |||
7A. | |||
8. | |||
9. | |||
9A. | |||
9B. | |||
Part III | |||
10. | |||
11. | |||
12. | |||
13. | |||
14. | |||
Part IV | |||
15. | |||
16. | Form 10-K Summary | ||
3
PART I
Item 1. | BUSINESS |
Company Overview
Archer-Daniels-Midland Company (the Company) was incorporated in Delaware in 1923, successor to the Daniels Linseed Co. founded in 1902. The Company is one of the world’s leading producers of food and beverage ingredients, and other products made from oilseeds, corn, wheat, and other agricultural commodities. The Company's products include natural flavors and colors, health and nutrition products, vegetable oil, corn sweeteners, flour, animal feed, and biofuels. The Company has an extensive global grain elevator and transportation network to procure, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, as well as products derived from those inputs. The Company has significant investments in joint ventures. The Company expects to benefit from these investments, which typically aim to expand or enhance the Company’s market for its products or offer other benefits including, but not limited to, geographic or product line expansion.
The Company’s vision is to be the most admired global agribusiness and ingredients company while creating value and growing responsibly. The Company’s strategy involves expanding the volume and diversity of crops that it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. The Company desires to execute this vision and these strategies by conducting its business in accordance with its core values of operating with integrity, treating others with respect, achieving excellence, being resourceful, displaying teamwork, and being responsible.
As the world population grows, so does demand for quality foods, feed ingredients for livestock, alternative fuels, and environmentally friendly alternatives to traditional chemicals. As one of the world's leading agricultural and food ingredient processors, the Company plays a pivotal role in meeting all of these needs in sustainable ways. The Company produces the food ingredients, biofuels, and other products that manufacturers around the world use to provide wholesome food and a better life to millions of people around the globe.
Segment Descriptions
The Company’s operations are organized, managed, and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. 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. Financial information with respect to the Company’s reportable business segments is set forth in Note 17 of “Notes to Consolidated Financial Statements” included in Item 8 herein, “Financial Statements and Supplementary Data.”
Agricultural Services
The Agricultural Services segment utilizes its extensive global grain elevator and transportation networks, and port operations to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. The Agricultural Services segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. Agricultural Services’ grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include barge, ocean-going vessel, truck, rail, and container freight services. The Agricultural Services segment also includes the activities related to structured trade finance and the processing of wheat into wheat flour. In July 2017, the Company completed the acquisition of a 51% controlling interest in Industries Centers, an Israeli company specializing in the import and distribution of agricultural feed products, which is now known as ADM Israel.
The Company has a 32.2% interest in Pacificor (formerly Kalama Export Company LLC). Pacificor owns and operates a grain export elevator in Kalama, Washington and a grain export elevator in Portland, Oregon.
The Company held a 19.8% interest in GrainCorp Limited (GrainCorp), a publicly listed company on the Australian Stock Exchange, until its sale in December 2016. GrainCorp is engaged in grain receival and handling, transportation, port operations, oilseed processing, malt processing, flour processing, and grain marketing activities.
4
Item 1. | BUSINESS (Continued) |
Corn Processing
The Company’s Corn Processing segment is engaged in corn wet and dry milling and other activities, utilizing its asset base primarily located in the central part of the United States with additional facilities in China, Bulgaria, France, Morocco, Spain, and Turkey. The Corn Processing segment converts corn into sweeteners, starches, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose. Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Bioproducts also include essential amino acids such as lysine and threonine used in swine and poultry diets to optimize performance. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. The Corn Processing segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products. Other Corn Processing products include citric acids and glycols, all of which are used in various food and industrial products. The Corn Processing segment also included the activities of the Company’s Brazilian sugarcane ethanol plant and related operations until the Company completed the sale of these operations in May 2016. In February 2017, the Company acquired Crosswind Industries, Inc., an industry leader in the manufacture of contract and private label pet treats and food, as well as specialty ingredients, and an 89% controlling interest in Biopolis SL, a leading provider of microbial technology with a strong portfolio of novel food ingredients. In June 2017, the Company completed the acquisition of Chamtor SA, a French producer of wheat-based sweeteners and starches.
Hungrana Ltd., in which the Company owns a 50% interest, operates a wet corn milling plant in Hungary.
Almidones Mexicanos S.A., in which the Company has a 50% interest, operates a wet corn milling plant in Mexico.
Red Star Yeast Company, LLC produces and sells fresh and dry yeast in the United States and Canada. The Company has a 40% ownership interest in this joint venture.
Oilseeds Processing
The Oilseeds Processing segment includes global activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and industrial products industries. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. In Europe and South America, the Oilseeds Processing segment includes origination and merchandising activities as adjuncts to its oilseeds processing assets. These activities include a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport grains and oilseeds. The Oilseeds Processing segment is a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and filter markets. The Oilseeds Processing segment also included activities related to its global chocolate and cocoa businesses until the sale of these businesses in July 2015 and October 2015, respectively.
The Company has an equity interest in Wilmar International Limited (Wilmar), a Singapore publicly listed company. During the year ended December 31, 2017, the Company acquired additional shares in Wilmar, increasing its ownership interest from 23.2% to 24.9% as of December 31, 2017. Wilmar, a leading agribusiness group in Asia, is engaged in the businesses of oil palm cultivation, oilseeds crushing, edible oils refining, packaged oils and foods, sugar milling and refining, specialty fats, oleo chemicals, biodiesel and fertilizers manufacturing, and grains processing.
Stratas Foods LLC, a joint venture between the Company and ACH Jupiter, LLC, a subsidiary of Associated British Foods, procures, packages, and sells edible oils in North America. The Company has a 50% ownership interest in this joint venture.
5
Item 1. | BUSINESS (Continued) |
The Company has a 50% interest in Edible Oils Limited, a joint venture between the Company and Princes Limited to procure, package, and sell edible oils in the United Kingdom. The Company also formed a joint venture with Princes Limited in Poland to procure, package, and sell edible oils in Poland, Czech Republic, Slovakia, Hungary, and Austria.
Olenex Sarl (Olenex), a joint venture between the Company and Wilmar, produces and sells a comprehensive portfolio of edible oils and fats to customers around the globe. In addition, Olenex markets refined oils and fats from the Company's plants in the Czech Republic, Germany, the Netherlands, Poland, and the U.K. The Company has a 37.5% ownership interest in this joint venture.
The Company is a major supplier of agricultural commodity raw materials to Wilmar, Stratas Foods LLC, Edible Oils Limited, and Olenex.
Wild Flavors and Specialty Ingredients
The Wild Flavors and Specialty Ingredients (WFSI) segment engages in the manufacturing, sales, 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 WFSI segment also includes the activities related to the procurement, processing, and distribution of edible beans.
Other
Other includes the Company’s remaining operations related to futures commission merchant and insurance activities.
ADM Investor Services, Inc., a wholly owned subsidiary of the Company, is a registered futures commission merchant and a clearing member of all principal commodities exchanges in the U.S. ADM Investor Services International, Limited, a member of several commodity exchanges and clearing houses in Europe, ADMIS Hong Kong Limited, and ADMIS Singapore Pte. Limited are wholly owned subsidiaries of the Company offering broker services in Europe and Asia.
Insurance activities include Agrinational Insurance Company (Agrinational) and its subsidiaries. Agrinational, a wholly owned subsidiary of the Company, provides insurance coverage for certain property, casualty, marine, credit, and other miscellaneous risks of the Company. Agrinational also participates in certain third-party reinsurance arrangements and retained a portion of the crop insurance risk written by ADM Crop Risk Services, a wholly owned subsidiary engaged in the selling and servicing of crop insurance policies to farmers which was sold to Validus Holdings, a global group of insurance and reinsurance companies on May 1, 2017.
Corporate
Compagnie Industrielle et Financiere des Produits Amylaces SA (Luxembourg) and affiliates (CIP), in which the Company has a 43.7% interest, is a joint venture which targets investments in food, feed ingredients, and bioproducts businesses.
Methods of Distribution
The Company’s products are distributed mainly in bulk from processing plants or storage facilities directly to customers’ facilities. The Company has developed a comprehensive transportation capability to efficiently move both commodities and processed products virtually anywhere in the world. The Company owns or leases large numbers of the trucks, trailers, railroad tank and hopper cars, river barges, towboats, and ocean-going vessels used to transport the Company’s products to its customers.
6
Item 1. | BUSINESS (Continued) |
Concentration of Revenues by Product
The following products account for 10% or more of revenues for the following periods:
% of Revenues | |||||
Year Ended December 31 | |||||
2017 | 2016 | 2015 | |||
Soybeans | 17% | 17% | 16% | ||
Soybean Meal | 13% | 13% | 13% | ||
Corn | 10% | 10% | 11% | ||
Status of New Products
The Company continues to expand the size and global reach of its business through the development of new products. Acquisitions, especially in the Wild Flavors and Specialty Ingredients segment, expand the Company’s ability to serve the customers’ evolving needs through its offering of natural flavor and ingredient products. The Company does not expect any of its new products to have a significant impact on the Company’s revenues in 2018.
Source and Availability of Raw Materials
Substantially all of the Company’s raw materials are agricultural commodities. In any single year, the availability and price of these commodities are subject to factors such as changes in weather conditions, plantings, government programs and policies, competition, changes in global demand, changes in standards of living, and global production of similar and competitive crops. The Company’s raw materials are procured from thousands of growers, grain elevators, and wholesale merchants in North America, South America, EMEA, Asia, and Australia, pursuant primarily to short-term (less than one year) agreements or on a spot basis. The Company is not dependent upon any particular grower, elevator, or merchant as a source for its raw materials.
Patents, Trademarks, and Licenses
The Company owns patents, trademarks, and licenses, principally consisting of $222 million of trademarks from the Wild Flavors acquisition in 2014, but does not consider any segment of its business dependent upon any single or group of patents, trademarks or licenses.
Seasonality, Working Capital Needs, and Significant Customers
Since the Company is widely diversified in global agribusiness markets, there are no material seasonal fluctuations in overall global processing volumes and the sale and distribution of its products and services. There is a degree of seasonality in the growing cycles, procurement, and transportation of the Company’s principal raw materials: oilseeds, corn, wheat, and other grains.
The prices of agricultural commodities, which may fluctuate significantly and change quickly, directly affect the Company’s working capital requirements. Because the Company has a higher portion of its operations in the northern hemisphere, principally North America and Europe, relative to the southern hemisphere, primarily South America, inventory levels typically peak after the northern hemisphere fall harvest and are generally lower during the northern hemisphere summer months. Working capital requirements have historically trended with inventory levels. No material part of the Company’s business is dependent upon a single customer or very few customers. The Company has seasonal financing arrangements with farmers in certain countries around the world. Typically, advances on these financing arrangements occur during the planting season and are repaid at harvest.
Competition
The Company has significant competition in the markets in which it operates based principally on price, foreign exchange rates, quality, global supply, and alternative products, some of which are made from different raw materials than those utilized by the Company. Given the commodity-based nature of many of its businesses, the Company, on an ongoing basis, focuses on managing unit costs and improving efficiency through technology improvements, productivity enhancements, and regular evaluation of the Company’s asset portfolio.
7
Item 1. | BUSINESS (Continued) |
Research and Development Expenditures
The Company’s research and development expenditures are focused on responding to demand from customers’ product development or formulation needs, improving processing efficiency, and developing food, feed, fuel, and industrial products from renewable agricultural crops. Research and development expense during the years ended December 31, 2017, 2016, and 2015, net of reimbursements of government grants, was approximately $129 million, $123 million, and $122 million, respectively.
The Company’s laboratories and technical centers around the world enhance its ability to interact with customers in Europe, Asia, and South America, not only to provide flavors, but also to support the sales of other food ingredients. The acquisition of Wild Flavors in October 2014 approximately doubled the number of scientists and technicians in research and development. Since that time, additional laboratories have been added, including food & beverages applications laboratories in Sydney, Australia and Cranbury, New Jersey as well as expanded laboratories in Decatur, Illinois and Singapore.
The Company is working with the U.S. Department of Energy’s National Energy Technology Laboratory and other key academic and corporate partners on carbon sequestration projects to reduce carbon dioxide emissions from manufacturing operations. The second carbon sequestration project, the Illinois Industrial Carbon Capture & Sequestration, started carbon dioxide injection in April 2017.
The Company is continuing to invest in research to develop a broad range of sustainable materials with an objective to produce key intermediate materials that serve as a platform for producing a variety of sustainable packaging products. The key materials are derived from the Company’s starch and oilseed-based feedstocks. Conversion technologies include utilizing expertise in both fermentation and catalysis. The materials pipeline includes the development of chemicals and intermediates that are currently produced from petrochemical resources as well as new-to-the-market bio-based products. The Company’s current portfolio includes products that are in the early development phase and those that are close to pilot plant demonstration. The Company’s project with DuPont to develop sustainable packaging solutions with improved barrier properties has progressed to the construction of a demonstration semi-works plant. This facility, which will be completed in early 2018, will provide both development samples for customers as well as engineering data for a full scale plant.
The Company is also expanding its human health and nutrition portfolio with the acquisition of an 89% controlling interest in Biopolis SL (Biopolis), a leading provider of probiotics and genomic services. Biopolis provides genomic sequencing capabilities for the Company's customers as well as for its internal use. Biopolis also has high through-put biological functionality testing capabilities that can be used to discover new probiotics and nutraceuticals. In September 2017, the Company announced a collaboration with the Mayo Clinic to study gut microflora with respect to personalized nutrition.
In January 2018, the Company announced a joint development agreement with Vland Biotech to develop and commercialize enzymes for animal feed.
ADM Ventures, which was launched by the Company in October 2016, has made its first selections of high-potential, new-product development projects from its business units. ADM Ventures is also looking at several promising, early-stage start-up companies in which the Company may wish to invest.
Environmental Compliance
During the year ended December 31, 2017, $40 million was spent specifically to improve equipment, facilities, and programs for pollution control and compliance with the requirements of various environmental agencies.
There have been no material effects upon the earnings and competitive position of the Company resulting from compliance with applicable laws or regulations enacted or adopted relating to the protection of the environment.
8
Item 1. | BUSINESS (Continued) |
A number of jurisdictions where the Company has operations have implemented or are in the process of implementing carbon pricing programs or regulations to reduce greenhouse gas emissions, including, but not limited to, the U.S., Canada, Mexico, the E.U. and its member states, and China. The Company's operations located in countries with effective and applicable carbon pricing and regulatory programs currently meet their obligations in this regard with no significant impact on the earnings and competitive position of the Company. The Company’s business could be affected in the future by additional global, regional, national, and local regulation, pricing of greenhouse gas emissions or other climate change legislation, regulation or agreements. It is difficult at this time to estimate the likelihood of passage, or predict the potential impact, of any additional legislation, regulations or agreements. Potential consequences of new obligations could include increased energy, transportation, raw material, and administrative costs, and may require the Company to make additional investments in its facilities and equipment.
Number of Employees
The number of full-time employees of the Company was approximately 31,300 at December 31, 2017 and 31,800 at December 31, 2016. The net decrease in the number of full-time employees is primarily related to the reduction of certain positions within the Company's global workforce and divestitures, partially offset by acquisitions.
Financial Information About Foreign and U.S. Operations
Item 1A, “Risk Factors,” and Item 2, “Properties,” include information relating to the Company’s foreign and U.S. operations. Geographic financial information is set forth in Note 17 of “Notes to Consolidated Financial Statements” included in Item 8 herein, “Financial Statements and Supplementary Data”.
Available Information
The Company’s website is http://www.adm.com. The Company makes available, free of charge, through its website, the Company’s annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; directors’ and officers’ Forms 3, 4, and 5; and amendments to those reports, if any, as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the Securities and Exchange Commission (SEC).
In addition, the Company makes available, through its website, the Company’s Code of Conduct, Corporate Governance Guidelines, and the written charters of the Audit, Compensation/Succession, Nominating/Corporate Governance, and Executive Committees.
References to the Company's website address in this report are provided as a convenience and do not constitute, or should not be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website which contains reports, proxy and information statements, and other information regarding issuers that file information electronically with the SEC. The SEC’s website is http://www.sec.gov.
Item 1A. | RISK FACTORS |
The Company faces risks in the normal course of business and through global, regional, and local events that could have an adverse impact on its reputation, operations, and financial performance.
Management directs a Company-wide Enterprise Risk Management (ERM) Program, with oversight from the Company’s Board of Directors. The Company’s Audit Committee has the delegated risk management oversight responsibility and receives updates on the risk management processes and key risk factors on a quarterly basis.
The risk factors that follow are the main risks that the ERM program focuses on to protect and enhance shareholder value through intentional risk mitigation plans based on management-defined risk limits.
9
Item 1A. | RISK FACTORS (Continued) |
The Company, through its business unit, functional, and corporate teams, continually updates, assesses, monitors, and mitigates these and other business and compliance risks in accordance with the ERM Program and as monitored by the ERM Program team and Chief Risk Officer.
The availability and prices of the agricultural commodities and agricultural commodity products the Company procures, transports, stores, processes, and merchandises can be affected by weather conditions, disease, government programs, competition, and various other factors beyond the Company’s control and could adversely affect the Company’s operating results.
The availability and prices of agricultural commodities are subject to wide fluctuations due to changes in weather conditions, crop disease, plantings, government programs and policies, competition, changes in global demand, changes in standards of living, and global production of similar and competitive crops. The Company uses a global network of procurement, processing, and transportation assets, as well as robust communications between global commodity merchandiser teams, to continually assess price and basis opportunities. These commodity trade teams monitor commodity positions against management established limits (including a corporate wide value-at-risk metric), with robust internal reporting to ensure optimized results versus the Company’s strategic plans. Additionally, the Company depends globally on agricultural producers to ensure an adequate supply of the agricultural commodities used by the Company in its operations is maintained. These factors have historically caused volatility in the availability and prices of agricultural commodities and, consequently, in the Company’s operating results and working capital requirements. Reduced supply of agricultural commodities due to weather-related factors or other reasons could adversely affect the Company’s profitability by increasing the cost of raw materials and/or limiting the Company’s ability to procure, transport, store, process, and merchandise agricultural commodities in an efficient manner. For example, a drought in North America in 2012 reduced the availability of corn and soybean inventories while prices increased. High and volatile commodity prices can adversely affect the Company’s ability to meet its liquidity needs. Conversely, if supplies are abundant and crop production globally outpaces demand for more than one or two crop cycles, price volatility is somewhat diminished. This could result in reduced operating results due to the lack of supply chain dislocations and reduced market spread and basis opportunities.
Advances in technology, such as seed and crop protection technology, farming techniques, or speed of information flow, may reduce the significance of dislocations and arbitrage opportunities in the agricultural global markets, which may reduce the earnings potential of agricultural merchandisers and processors such as the Company.
The Company has significant competition in the markets in which it operates.
The Company faces significant competition in each of its businesses and has numerous competitors. The company competes for the acquisition of inputs such as agricultural commodities, transportation services, and other materials and supplies, as well as for workforce and talent. Additionally, competitors offer similar products and services, as well as alternative products and services, to the Company’s customers. The Company is dependent on being able to generate revenues in excess of cost of products sold in order to obtain margins, profits, and cash flows to meet or exceed its targeted financial performance measures and provide cash for operating, working capital, dividend, or capital expenditure needs. Competition impacts the Company’s ability to generate and increase its gross profit as a result of the following factors. Pricing of the Company’s products is partly dependent upon industry processing capacity, which is impacted by competitor actions to bring idled capacity on-line, build new production capacity or execute aggressive consolidation. Many of the products bought and sold by the Company are global commodities or are derived from global commodities. The markets for global commodities are highly price competitive and in many cases the commodities are subject to substitution. Significant changes in exchange rates of foreign currencies versus the U.S. dollar, particularly the currencies of major crop growing countries, could also make goods and products of these countries more competitive than U.S. products, thereby negatively impacting the competitiveness of the Company’s significant origination, processing, and export footprint, and the Company’s operating results. Improved yields in different crop growing regions may reduce the reliance on origination territories in which the Company has a significant presence. In addition, continued merger and acquisition activities resulting in further consolidations result in greater cost competitiveness and global scale of certain players in the industry that could impact the relative competitiveness of the Company, especially when acquirers are state-owned and/or backed by public funds and have profit and return objectives that may differ from publicly traded enterprises. To compete effectively, the Company focuses on improving efficiency in its production and distribution operations, developing and maintaining appropriate market share, maintaining a high level of product safety and quality, and working with customers to develop new products and tailored solutions.
10
Item 1A. | RISK FACTORS (Continued) |
Fluctuations in energy prices could adversely affect the Company’s operating results.
The Company’s operating costs and the selling prices of certain finished products are sensitive to changes in energy prices. The Company’s processing plants are powered principally by electricity, natural gas, and coal. The Company’s transportation operations are dependent upon diesel fuel and other petroleum-based products. Significant increases in the cost of these items, including any consequences of regulation or taxation of greenhouse gases, could adversely affect the Company’s production costs and operating results.
The Company has certain finished products, such as ethanol and biodiesel, which are closely related to, or may be substituted for, petroleum products, or in the case of ethanol, blended into gasoline to increase octane content. Therefore, the selling prices of ethanol and biodiesel can be impacted by the selling prices of gasoline, diesel fuel, and other octane enhancers. A significant decrease in the price of gasoline, diesel fuel, or other octane enhancers could result in a significant decrease in the selling price of the Company’s ethanol and biodiesel and could adversely affect the Company’s revenues and operating results. The Company uses derivative contracts as anticipatory hedges for both purchases of commodity inputs and sales of energy-based products in order to protect itself against these price trends and to protect and maximize processing margins.
The Company is subject to economic downturns and regional economic volatilities, which could adversely affect the Company’s operating results.
The Company conducts its business and has substantial assets located in many countries and geographic areas. While 56 percent of the Company’s processing plants and 74 percent of its procurement facilities are located in the United States, the Company also has significant operations in both developed areas (such as Western Europe, Canada, and Brazil) and emerging market areas (such as Eastern Europe, Asia, portions of South and Central America, the Middle East, and Africa). One of the Company’s strategies is to expand the global reach of its core model which may include expanding or developing its business in emerging market areas such as Asia, Eastern Europe, the Middle East, and Africa. Both developed and emerging market areas are subject to impacts of economic downturns, including decreased demand for the Company’s products, and reduced availability of credit, or declining credit quality of the Company’s suppliers, customers, and other counterparties. In addition, emerging market areas could be subject to more volatile operating conditions including, but not limited to, logistics limitations or delays, labor-related challenges, limitations or regulations affecting trade flows (such as concerning genetically modified organisms), local currency concerns, and other economic and political instability. Political fiscal instability could generate intrusive regulations in emerging markets potentially creating unanticipated assessments of taxes, fees, increased risks of corruption, etc. Economic downturns and volatile market conditions could adversely affect the Company’s operating results and ability to execute its long-term business strategies, thus reducing the Company’s overall market value. The Company mitigates this risk in many ways including country risk analysis, government relations and tax compliance activities, and active ethics compliance training requirements.
The Company is subject to numerous laws, regulations, and mandates globally which could adversely affect the Company’s operating results and forward strategy.
The Company does business globally, connecting crops and markets in more than 170 countries. The Company is required to comply with the numerous and far-reaching laws and regulations administered by United States federal, state, local, and foreign governmental authorities. The Company must comply with other general business regulations covering areas such as accounting and income taxes, anti-corruption, anti-bribery, global trade, trade sanctions, environmental, product safety, and handling and production of regulated substances. The Company frequently faces challenges from U.S. and foreign tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various tax filing positions, the Company records reserves for estimates of potential additional tax owed by the Company. As examples, the Company has received large tax assessments from tax authorities in Brazil and Argentina, challenging income tax positions taken by subsidiaries of the Company covering various prior periods. Any failure to comply with applicable laws and regulations or appropriately resolve these challenges could subject the Company to administrative, civil, and criminal remedies including fines, penalties, disgorgement, injunctions, and recalls of its products, and damage to its reputation.
The production of the Company’s products requires the use of materials which can create emissions of certain regulated substances, including greenhouse gas emissions. Although the Company has programs in place throughout the organization globally to ensure compliance with laws and regulations, failure to comply with these laws and regulations can have serious consequences, including civil, administrative, and criminal penalties as well as a negative impact on the Company’s reputation, business, cash flows, and results of operations.
11
Item 1A. | RISK FACTORS (Continued) |
In addition, changes to regulations or implementation of additional regulations, for example the imposition of regulatory restrictions on greenhouse gases or regulatory modernization of food safety laws, may require the Company to modify existing processing facilities and/or processes which could significantly increase operating costs and adversely affect operating results.
Government policies, mandates, and regulations specifically affecting the agricultural sector and related industries; regulatory policies or matters that affect a variety of businesses; taxation polices; and political instability could adversely affect the Company’s operating results.
Agricultural production and trade flows are subject to government policies, mandates, regulations, and trade agreements. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, foreign exchange rates, and import and export restrictions on agricultural commodities and commodity products, including policies related to genetically modified organisms, traceability standards, product safety and labeling, renewable fuels, and low carbon fuel mandates, can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, the availability and competitiveness of feedstocks as raw materials, the viability and volume of production of certain of the Company’s products, and industry profitability. For example, changes in government policies or regulations of ethanol and biodiesel, including but not limited to changes in the Renewable Fuel Standard program under the Energy Independence and Security Act of 2007 in the United States, can have an impact on the Company’s operating results. International trade regulations can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. Regulations of financial markets and instruments, including the Dodd-Frank Act, Consumer Protection Act, and the European Market Infrastructure Regulation, create uncertainty and may lead to additional risks and costs, and could adversely affect the Company’s futures commission merchant business and its agricultural commodity risk management practices. Future government policies may adversely affect the supply of, demand for, and prices of the Company’s products; adversely affect the Company's ability to deploy adequate hedging programs; restrict the Company’s ability to do business in its existing and target markets; and adversely affect the Company’s revenues and operating results.
The Company’s operating results could be affected by political instability and by changes in other governmental policies, mandates, regulations, and trade agreements including monetary, fiscal and environmental policies, laws, regulations, acquisition approvals, and other activities of governments, agencies, and similar organizations. These risks include but are not limited to changes in a country’s or region’s economic or political conditions, local labor conditions and regulations, safety and environmental regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, currency exchange fluctuations, burdensome taxes and tariffs, enforceability of legal agreements and judgments, adverse tax, administrative agency or judicial outcomes, and regulation or taxation of greenhouse gases. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities, and war, could limit the Company’s ability to transact business in these markets and could adversely affect the Company’s revenues and operating results. There has been a recent increase in populism and nationalism in various countries around the world and the concept and benefits of free trade are being challenged. The Company has benefited from the free flow of agricultural and food and feed ingredient products from the U.S. and other sources to markets around the world. Should there be an increase in tariff and restrictive trade activities around the world, the Company could be negatively impacted from its inability to enter certain markets or the price of the products being less competitive in the destination markets.
The Company’s strategy involves expanding the volume and diversity of crops it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. Government policies, including antitrust and competition law, trade restrictions, food safety regulations, sustainability requirements, traceability, and other government regulations and mandates, can impact the Company’s ability to execute this strategy successfully.
The Company is subject to industry-specific risks which could adversely affect the Company’s operating results.
The Company is subject to risks which include, but are not limited to, product safety or quality; shifting consumer preferences; federal, state, and local regulations on manufacturing or labeling; socially acceptable farming practices; environmental, health and safety regulations; and customer product liability claims. The liability which could result from certain of these risks may not always be covered by, or could exceed liability insurance related to product liability and food safety matters maintained by the Company. In addition, negative publicity caused by product liability, food safety, occupational health and safety, and environmental matters may damage the Company’s reputation. The Company has a particularly strong capability and culture around occupational health and safety and food safety. However, the occurrence of any of the matters described above could adversely affect the Company’s revenues and operating results.
12
Item 1A. | RISK FACTORS (Continued) |
Certain of the Company’s merchandised commodities and finished products are used as ingredients in livestock and poultry feed. The Company is subject to risks associated with economic, product quality, feed safety or other factors which may adversely affect the livestock and poultry businesses, including the outbreak of disease in livestock and poultry. An outbreak of disease could adversely affect demand for the Company’s products used as ingredients in livestock and poultry feed. A decrease in demand for ingredients in livestock and poultry feed could adversely affect the Company’s revenues and operating results. In addition, as the Company increases its investment in flavors and ingredients businesses, it is exposed to increased risks related to rapidly changing consumer preferences and the impacts these changes could have on the success of certain of the Company's customers.
The Company is exposed to potential business disruption, including but not limited to disruption of transportation services, supply of non-commodity raw materials used in its processing operations, and other impacts resulting from acts of terrorism or war, natural disasters, severe weather conditions, and accidents which could adversely affect the Company’s operating results.
The Company’s operations rely on dependable and efficient transportation services. A disruption in transportation services could result in difficulties supplying materials to the Company’s facilities and impair the Company’s ability to deliver products to its customers in a timely manner. The Company relies on access to navigable rivers and waterways in order to fulfill its transportation obligations more effectively. If access to these navigable waters is interrupted, the Company’s operating results could be adversely affected. In addition, if certain non-agricultural commodity raw materials, such as water or certain chemicals used in the Company’s processing operations, are not available, the Company’s business could be disrupted. Any major lack of available water for use in certain of the Company’s processing operations could have a material adverse impact on operating results. Certain factors which may impact the availability of non-agricultural commodity raw materials are out of the Company’s control including, but not limited to, disruptions resulting from weather, economic conditions, manufacturing delays or disruptions at suppliers, shortage of materials, interruption of energy supply, and unavailable or poor supplier credit conditions.
The assets and operations of the Company could be subject to extensive property damage and business disruption from various events which include, but are not limited to, acts of terrorism, for example, economic adulteration of the Company’s products, or war, natural disasters and severe weather conditions, accidents, explosions, and fires. The potential effects of these conditions could adversely affect the Company’s revenues and operating results. The Company is continuing to enhance and deploy additional food safety and security procedures and controls to appropriately mitigate the risks of any adulteration of the Company’s products in supply chain and finished products in production and distribution networks. In addition, the Company conforms to management systems, such as International Organization for Standardization (ISO) or other recognized global standards.
The Company’s business is capital-intensive in nature and the Company relies on cash generated from its operations and external financing to fund its growth and ongoing capital needs. Limitations on access to external financing could adversely affect the Company’s operating results.
The Company requires significant capital, including continuing access to credit markets, to operate its current business and fund its growth strategy. The Company’s working capital requirements, including margin requirements on open positions on futures exchanges, are directly affected by the price of agricultural commodities, which may fluctuate significantly and change quickly. The Company also requires substantial capital to maintain and upgrade its extensive network of storage facilities, processing plants, refineries, mills, ports, transportation assets and other facilities to keep pace with competitive developments, technological advances, regulations and changing safety standards in the industry. Moreover, the expansion of the Company’s business and pursuit of acquisitions or other business opportunities may require significant amounts of capital. Access to credit markets and pricing of the Company’s capital is dependent upon maintaining sufficient credit ratings from credit rating agencies. Sufficient credit ratings allow the Company to access cost competitive tier one commercial paper markets. If the Company is unable to maintain sufficiently high credit ratings, access to these commercial paper and other debt markets and costs of borrowings could be adversely affected. If the Company is unable to generate sufficient cash flow or maintain access to adequate external financing, including as a result of significant disruptions in the global credit markets, it could restrict the Company’s current operations and its growth opportunities which could adversely affect the Company’s operating results. The Company manages this risk with constant monitoring of credit/liquidity metrics, cash forecasting, and routine communications with credit rating agencies on risk management practices.
13
Item 1A. | RISK FACTORS (Continued) |
The Company’s risk management strategies may not be effective.
The Company’s business is affected by fluctuations in agricultural commodity cash prices and derivative prices, transportation costs, energy prices, interest rates, foreign currency exchange rates, and equity markets. The Company monitors position limits and counterparty risks and engages in other strategies and controls to manage these risks. The Company has a Chief Risk Officer and an established commodity merchandising governance process to ensure proper position reporting and monitoring, limit approvals, and execute training on trade compliance, commodity regulatory reporting controls, and other policies. The Company’s monitoring efforts may not be successful at detecting a significant risk exposure. If these controls and strategies are not successful in mitigating the Company’s exposure to these fluctuations, it could adversely affect the Company’s operating results.
The Company has limited control over and may not realize the expected benefits of its equity investments and joint ventures.
The Company has $5.1 billion invested in or advanced to joint ventures and investments over which the Company has limited control as to the governance and management activities of these investments. Net sales to unconsolidated affiliates during the year ended December 31, 2017 was $6.0 billion. The Company faces certain risks, including risks related to the financial strength of the investment partner; loss of revenues and cash flows to the investment partner and related gross profit; the inability to implement beneficial management strategies, including risk management and compliance monitoring, with respect to the investment’s activities; and the risk that the Company may not be able to resolve disputes with the investment partner. The Company may encounter unanticipated operating issues, financial results, or compliance and reputational risks related to these investments that may impact the Company’s revenues and operating results. The Company mitigates this risk using controls and policies related to joint venture formation, governance including board of directors representation, merger and acquisition integration management, and harmonization of joint venture policies with the Company’s policies and controls.
The Company’s information technology (IT) systems, processes, and sites may suffer interruptions, security breaches, or failures which may affect the Company’s ability to conduct its business.
The Company’s operations rely on certain key IT systems, some of which are dependent on services provided by third parties, to provide critical data connectivity, information, and services for internal and external users. These interactions include, but are not limited to, ordering and managing materials from suppliers, risk management activities, converting raw materials to finished products, inventory management, shipping products to customers, processing transactions, summarizing and reporting results of operations, human resources benefits and payroll management, complying with regulatory, legal or tax requirements, and other processes necessary to manage the business. The Company is also in the process of implementing a new enterprise resource planning (ERP) system on a worldwide basis as part of its ongoing business transformation program, which is expected to improve the efficiency and effectiveness of certain financial and business transaction processes and the underlying systems environment. Increased IT security and social engineering threats and more sophisticated computer crime, including advanced persistent threats, pose a potential risk to the security of the Company’s IT systems, networks, and services, as well as the confidentiality, availability, and integrity of the Company’s third party data. The Company has put in place security measures to prevent, detect, and mitigate cyber-based attacks and instituted control procedures for cyber security incident responses and disaster recovery plans for its critical systems. In addition, the Company monitors this risk on an ongoing basis to detect and correct any breaches and reports metrics to the highest level of management and to the Board of Directors on the quality of the Company’s data security efforts and control environment. However, if the Company’s IT systems are breached, damaged, or cease to function properly due to any number of causes, such as catastrophic events, power outages, security breaches, or cyber-based attacks, and the Company’s disaster recovery plans do not effectively mitigate the risks on a timely basis, the Company may suffer significant interruptions in its ability to manage its operations, loss of valuable data, actual or threatened legal actions, and damage to its reputation, which may adversely impact the Company’s revenues, operating results, and financial condition.
Item 1B. | UNRESOLVED STAFF COMMENTS |
The Company has no unresolved staff comments.
14
Item 2. | PROPERTIES |
The Company owns or leases, under operating leases, the following processing plants and procurement facilities:
Processing Plants | Procurement Facilities | ||||||||||||||||
Owned | Leased | Total | Owned | Leased | Total | ||||||||||||
U.S. | 145 | 6 | 151 | 288 | 79 | 367 | |||||||||||
International | 109 | 10 | 119 | 94 | 35 | 129 | |||||||||||
254 | 16 | 270 | 382 | 114 | 496 | ||||||||||||
The Company’s operations are such that most products are efficiently processed near the source of raw materials. Consequently, the Company has many plants strategically located in agricultural commodity producing areas. The annual volume of commodities processed will vary depending upon availability of raw materials and demand for finished products. The Company also owns approximately 230 warehouses and terminals primarily used as bulk storage facilities and 44 innovation centers. Warehouses, terminals, corporate, and sales offices are not included in the tables above. Processing plants and procurement facilities owned or leased by unconsolidated joint ventures are also not included in the tables above.
To enhance the efficiency of transporting large quantities of raw materials and finished products between the Company’s procurement facilities and processing plants and also the final delivery of products to its customers around the world, the Company owns approximately 1,800 barges, 12,300 rail cars, 290 trucks, 1,300 trailers, 100 boats, and 10 oceangoing vessels; and leases, under operating leases, approximately 510 barges, 16,000 rail cars, 270 trucks, 130 trailers, 10 boats, and 15 oceangoing vessels.
Agricultural Services Processing Plants | |||||||||||
Owned | Leased | ||||||||||
Merchandising & Handling | Milling & Other | Total | Milling & Other | ||||||||
North America | |||||||||||
U.S.* | 1 | 29 | 30 | — | |||||||
Barbados | — | 1 | 1 | — | |||||||
Belize | — | 1 | 1 | — | |||||||
Canada | — | 8 | 8 | — | |||||||
Grenada | — | 1 | 1 | — | |||||||
Jamaica | — | 2 | 2 | — | |||||||
Total | 1 | 42 | 43 | — | |||||||
Daily capacity | |||||||||||
Metric tons (in 1,000’s) | — | 21 | 21 | — | |||||||
Europe | |||||||||||
United Kingdom | — | 3 | 3 | 4 | |||||||
Total | — | 3 | 3 | 4 | |||||||
Daily capacity | |||||||||||
Metric tons (in 1,000’s) | — | 1 | 1 | 1 | |||||||
Grand Total | 1 | 45 | 46 | 4 | |||||||
Total daily capacity | |||||||||||
Metric tons (in 1,000’s) | — | 22 | 22 | 1 | |||||||
*The U.S. plants are located in California, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, New York, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, Washington, and Wisconsin.
15
Item 2. | PROPERTIES (Continued) |
Agricultural Services Procurement Facilities | |||||||||||||
Owned | Leased | ||||||||||||
Merchandising & Handling | Milling & Other | Total | Merchandising & Handling | Milling & Other | Total | ||||||||
North America | |||||||||||||
U.S.* | 173 | 1 | 174 | 14 | 1 | 15 | |||||||
Canada | 1 | — | 1 | — | 1 | 1 | |||||||
Dominican Republic | 1 | — | 1 | — | — | — | |||||||
Total | 175 | 1 | 176 | 14 | 2 | 16 | |||||||
Storage capacity | |||||||||||||
Metric tons (in 1,000’s) | 14,022 | — | 14,022 | 643 | 68 | 711 | |||||||
South America | |||||||||||||
Argentina | 4 | — | 4 | — | — | — | |||||||
Columbia | — | — | — | 10 | — | 10 | |||||||
Ecuador | — | — | — | 2 | — | 2 | |||||||
Total | 4 | — | 4 | 12 | — | 12 | |||||||
Storage capacity | |||||||||||||
Metric tons (in 1,000’s) | 502 | — | 502 | 396 | — | 396 | |||||||
Europe | |||||||||||||
Hungary | 1 | — | 1 | — | — | — | |||||||
Ireland | 2 | — | 2 | — | — | — | |||||||
Poland | 1 | — | 1 | — | — | — | |||||||
Romania | 10 | — | 10 | 2 | — | 2 | |||||||
Ukraine | 7 | — | 7 | — | — | — | |||||||
United Kingdom | — | — | — | — | 5 | 5 | |||||||
Total | 21 | — | 21 | 2 | 5 | 7 | |||||||
Storage capacity | |||||||||||||
Metric tons (in 1,000’s) | 1,130 | — | 1,130 | 20 | 14 | 34 | |||||||
Grand Total | 200 | 1 | 201 | 28 | 7 | 35 | |||||||
Total storage capacity | |||||||||||||
Metric tons (in 1,000’s) | 15,654 | — | 15,654 | 1,059 | 82 | 1,141 | |||||||
*The U.S. procurement facilities are located in Arkansas, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Missouri, Nebraska, New York, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, and Wisconsin.
16
Item 2. | PROPERTIES (Continued) |
Corn Processing | ||||||||||||||
Processing Plants | Procurement Facilities | |||||||||||||
Owned | Owned | |||||||||||||
Wet Milling | Dry Milling | Other | Total | Wet Milling, Dry Milling, & Other | ||||||||||
North America | ||||||||||||||
U.S.* | 5 | 3 | 28 | 36 | 6 | |||||||||
Canada | — | — | 3 | 3 | — | |||||||||
Puerto Rico | — | — | 3 | 3 | — | |||||||||
Trinidad & Tobago | — | — | 1 | 1 | — | |||||||||
Total | 5 | 3 | 35 | 43 | 6 | |||||||||
Daily/Storage capacity | ||||||||||||||
Metric tons (in 1,000’s) | 43 | 22 | 415 | 480 | 377 | |||||||||
Europe | ||||||||||||||
Bulgaria | 1 | — | — | 1 | — | |||||||||
France | — | — | 1 | 1 | — | |||||||||
Spain | — | — | 1 | 1 | — | |||||||||
Turkey | 1 | — | — | 1 | — | |||||||||
Total | 2 | — | 2 | 4 | — | |||||||||
Daily/Storage capacity | ||||||||||||||
Metric tons (in 1,000’s) | 2 | — | 1 | 3 | — | |||||||||
Asia | ||||||||||||||
China | — | — | 4 | 4 | — | |||||||||
Total | — | — | 4 | 4 | — | |||||||||
Daily/Storage capacity | ||||||||||||||
Metric tons (in 1,000’s) | — | — | 236 | 236 | — | |||||||||
Africa | ||||||||||||||
Morocco | 1 | — | — | 1 | — | |||||||||
Total | 1 | — | — | 1 | — | |||||||||
Daily/Storage capacity | ||||||||||||||
Metric tons (in 1,000’s) | — | — | — | — | — | |||||||||
Grand Total | 8 | 3 | 41 | 52 | 6 | |||||||||
Total daily/storage capacity | ||||||||||||||
Metric tons (in 1,000’s) | 45 | 22 | 652 | 719 | 377 | |||||||||
*The U.S. processing plants are located in Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Carolina, Ohio, Pennsylvania, Texas, and Washington.
* The U.S. procurement facilities are located in Illinois and Minnesota.
17
Item 2. | PROPERTIES (Continued) |
Oilseeds Processing Plants | |||||||||||||||||||||||
Owned | Leased | ||||||||||||||||||||||
Crushing & Origination | Refining, Packaging, Biodiesel & Other | Asia | Total | Crushing & Origination | Refining, Packaging, Biodiesel & Other | Asia | Total | ||||||||||||||||
North America | |||||||||||||||||||||||
U.S.* | 23 | 36 | — | 59 | — | 3 | — | 3 | |||||||||||||||
Canada | 3 | 4 | — | 7 | — | — | — | — | |||||||||||||||
Mexico | 1 | — | — | 1 | — | — | — | — | |||||||||||||||
Total | 27 | 40 | — | 67 | — | 3 | — | 3 | |||||||||||||||
Daily capacity | |||||||||||||||||||||||
Metric tons (in 1,000’s) | 57 | 21 | — | 78 | — | — | — | — | |||||||||||||||
South America | |||||||||||||||||||||||
Argentina | — | 1 | — | 1 | — | — | — | — | |||||||||||||||
Bolivia | 1 | 2 | — | 3 | — | — | — | — | |||||||||||||||
Brazil | 5 | 8 | — | 13 | 1 | — | — | 1 | |||||||||||||||
Paraguay | 1 | — | — | 1 | — | — | — | — | |||||||||||||||
Peru | — | 1 | — | 1 | — | — | — | — | |||||||||||||||
Total | 7 | 12 | — | 19 | 1 | — | — | 1 | |||||||||||||||
Daily capacity | |||||||||||||||||||||||
Metric tons (in 1,000’s) | 17 | 8 | — | 25 | 1 | — | — | 1 | |||||||||||||||
Europe | |||||||||||||||||||||||
Belgium | — | 1 | — | 1 | — | — | — | — | |||||||||||||||
Czech Republic | 1 | 1 | — | 2 | — | — | — | — | |||||||||||||||
France | — | 1 | — | 1 | — | — | — | — | |||||||||||||||
Germany | 4 | 8 | — | 12 | — | — | — | — | |||||||||||||||
Netherlands | 1 | 1 | — | 2 | — | — | — | — | |||||||||||||||
Poland | 2 | 5 | — | 7 | — | — | — | — | |||||||||||||||
Switzerland | — | 1 | — | 1 | — | — | — | — | |||||||||||||||
Ukraine | 1 | — | — | 1 | — | — | — | — | |||||||||||||||
United Kingdom | 1 | 3 | — | 4 | — | — | — | — | |||||||||||||||
Total | 10 | 21 | — | 31 | — | — | — | — | |||||||||||||||
Daily capacity | |||||||||||||||||||||||
Metric tons (in 1,000’s) | 36 | 15 | — | 51 | — | — | — | — | |||||||||||||||
Asia | |||||||||||||||||||||||
India | — | — | 2 | 2 | — | — | 1 | 1 | |||||||||||||||
Total | — | — | 2 | 2 | — | — | 1 | 1 | |||||||||||||||
Daily capacity | |||||||||||||||||||||||
Metric tons (in 1,000’s) | — | — | 1 | 1 | — | — | 1 | 1 | |||||||||||||||
Africa | |||||||||||||||||||||||
South Africa | — | 4 | — | 4 | — | — | — | — | |||||||||||||||
Total | — | 4 | — | 4 | — | — | — | — | |||||||||||||||
Daily capacity | |||||||||||||||||||||||
Metric tons (in 1,000’s) | — | 2 | — | 2 | — | — | — | — | |||||||||||||||
Grand Total | 44 | 77 | 2 | 123 | 1 | 3 | 1 | 5 | |||||||||||||||
Total daily capacity | |||||||||||||||||||||||
Metric tons (in 1,000’s) | 110 | 46 | 1 | 157 | 1 | — | 1 | 2 | |||||||||||||||
*The U.S. plants in the table above are located in Alabama, Georgia, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Carolina, Tennessee, and Texas.
18
Item 2. | PROPERTIES (Continued) |
Oilseeds Procurement Facilities | |||||||||||||||||
Owned | Leased | ||||||||||||||||
Crushing & Origination | Refining, Packaging, Biodiesel, & Other | Total | Crushing & Origination | Refining, Packaging, Biodiesel, & Other | Total | ||||||||||||
North America | |||||||||||||||||
U.S.* | 3 | 86 | 89 | — | 64 | 64 | |||||||||||
Canada | 5 | — | 5 | — | — | — | |||||||||||
Mexico | — | — | — | — | 1 | 1 | |||||||||||
Total | 8 | 86 | 94 | — | 65 | 65 | |||||||||||
Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 247 | 369 | 616 | — | 210 | 210 | |||||||||||
South America | |||||||||||||||||
Bolivia | 5 | — | 5 | — | — | — | |||||||||||
Brazil | 35 | — | 35 | — | — | — | |||||||||||
Chile | — | — | — | 1 | — | 1 | |||||||||||
Paraguay | 13 | — | 13 | 2 | — | 2 | |||||||||||
Peru | — | — | — | 2 | — | 2 | |||||||||||
Uruguay | 1 | — | 1 | 6 | — | 6 | |||||||||||
Total | 54 | — | 54 | 11 | — | 11 | |||||||||||
Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 2,173 | — | 2,173 | 354 | — | 354 | |||||||||||
Europe | |||||||||||||||||
Germany | 3 | — | 3 | — | — | — | |||||||||||
Netherlands | 1 | — | 1 | — | — | — | |||||||||||
Poland | 4 | — | 4 | — | — | — | |||||||||||
United Kingdom | — | — | — | 3 | — | 3 | |||||||||||
Total | 8 | — | 8 | 3 | — | 3 | |||||||||||
Storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 596 | — | 596 | 6 | — | 6 | |||||||||||
Grand Total | 70 | 86 | 156 | 14 | 65 | 79 | |||||||||||
Total storage capacity | |||||||||||||||||
Metric tons (in 1,000’s) | 3,016 | 369 | 3,385 | 360 | 210 | 570 | |||||||||||
*The U.S. procurement facilities are located in Alabama, Florida, Georgia, Iowa, Michigan, Mississippi, North Carolina, Oklahoma, South Carolina, Texas, and Virginia.
19
Item 2. | PROPERTIES (Continued) |
Wild Flavors and Specialty Ingredients | ||||||||
Processing Plants | Procurement Facilities | |||||||
Owned | Leased | Owned | ||||||
North America | ||||||||
U.S.* | 20 | 3 | 19 | |||||
Canada | 1 | — | — | |||||
Total | 21 | 3 | 19 | |||||
Daily/Storage capacity | ||||||||
Metric tons (in 1,000’s) | 992 | 107 | 324 | |||||
South America | ||||||||
Brazil | 3 | — | — | |||||
Total | 3 | — | — | |||||
Daily/Storage capacity | ||||||||
Metric tons (in 1,000’s) | 48 | — | — | |||||
Europe | ||||||||
Germany | 4 | 1 | . | — | ||||
Netherlands | 1 | 1 | — | |||||
Poland | 1 | — | — | |||||
Spain | 1 | — | — | |||||
Turkey | — | 1 | — | |||||
Total | 7 | 3 | — | |||||
Daily/Storage capacity | ||||||||
Metric tons (in 1,000’s) | 18 | — | — | |||||
Asia | ||||||||
China | 2 | — | — | |||||
India | — | 1 | — | |||||
Total | 2 | 1 | — | |||||
Daily/Storage capacity | ||||||||
Metric tons (in 1,000’s) | 320 | 200 | — | |||||
Grand Total | 33 | 7 | 19 | |||||
Total storage capacity | ||||||||
Metric tons (in 1,000’s) | 1,378 | 307 | 324 | |||||
*The U.S. processing plants are located in Illinois, Iowa, Kentucky, Michigan, Nebraska, North Dakota, Ohio, and Washington.
*The U.S. procurement facilities are located in Idaho, Michigan, Minnesota, North Dakota, and Wyoming.
20
Item 3. | LEGAL PROCEEDINGS |
The Company is routinely involved in a number of actual or threatened legal actions, including those involving alleged personal injuries, employment law, product liability, intellectual property, environmental issues, alleged tax liability (see Note 13 in Item 8 for information on income tax matters), and class actions. The Company also routinely receives inquiries from regulators and other government authorities relating to various aspects of its business, and at any given time, the Company has matters at various stages of resolution with the applicable government authorities. The outcomes of these matters are not within the Company's complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief, including injunctive relief, that could require significant expenditures or result in lost revenues. In accordance with applicable accounting standards, the Company records a liability in its consolidated financial statements for material loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a material loss contingency is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, disgorgement, or punitive damages; or could result in a change in business practice. See Note 20 in Item 8 for information on the Company’s legal proceedings.
Item 4. | MINE SAFETY DISCLOSURES |
None.
21
PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Common Stock Market Prices and Dividends
The Company’s common stock is listed and traded on the New York Stock Exchange. The following table sets forth, for the periods indicated, the high and low market prices of the common stock as reported on the New York Stock Exchange and common stock cash dividends declared per share.
Cash | |||||||||||
Market Price | Dividends | ||||||||||
High | Low | Per Share | |||||||||
Fiscal Year 2017-Quarter Ended | |||||||||||
December 31 | $ | 44.42 | $ | 38.59 | $ | 0.32 | |||||
September 30 | 44.26 | 40.22 | 0.32 | ||||||||
June 30 | 46.26 | 40.40 | 0.32 | ||||||||
March 31 | 47.44 | 41.74 | 0.32 | ||||||||
Fiscal Year 2016-Quarter Ended | |||||||||||
December 31 | $ | 47.88 | $ | 41.44 | $ | 0.30 | |||||
September 30 | 45.39 | 41.21 | 0.30 | ||||||||
June 30 | 44.14 | 34.55 | 0.30 | ||||||||
March 31 | 38.96 | 29.86 | 0.30 | ||||||||
The number of registered stockholders of the Company’s common stock at December 31, 2017, was 9,944.
The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition.
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Number of Shares Remaining to be Purchased Under the Program (2) | |||||||||
October 1, 2017 to October 31, 2017 | 327 | $ | 43.206 | 327 | 15,669,397 | ||||||||
November 1, 2017 to November 30, 2017 | 1,897,867 | 39.258 | 1,897,867 | 13,771,530 | |||||||||
December 1, 2017 to December 31, 2017 | 222 | 39.886 | 222 | 13,771,308 | |||||||||
Total | 1,898,416 | $ | 39.259 | 1,898,416 | 13,771,308 | ||||||||
(1) Total shares purchased represent those shares purchased in the open market as part of the Company’s publicly announced stock repurchase program described below, shares received as payment for the exercise price of stock option exercises, and shares received as payment for the withholding taxes on vested restricted stock awards. During the three-month period ended December 31, 2017, there were no shares received as payments for the minimum withholding taxes on vested restricted stock awards and for the exercise price of stock option exercises.
(2) 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.
22
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued) |
Performance Graph
The graph below compares the Company’s common stock with those of the S&P 500 Index and the S&P Consumer Staples Index. The graph assumes an initial investment of $100 on December 31, 2012 and assumes all dividends have been reinvested through December 31, 2017.
COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN
Among Archer Daniels Midland Company (ADM), the S&P 500 Index, and the S&P Consumer Staples
Copyright© Standard and Poor's, Inc.
23
Item 6. | SELECTED FINANCIAL DATA |
Selected Financial Data
(In millions, except ratio and per share data)
Years Ended | |||||||||||||||||||
December 31 | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Revenues | $ | 60,828 | $ | 62,346 | $ | 67,702 | $ | 81,201 | $ | 89,804 | |||||||||
Depreciation | 802 | 787 | 799 | 850 | 827 | ||||||||||||||
Net earnings attributable to controlling interests | 1,595 | 1,279 | 1,849 | 2,248 | 1,342 | ||||||||||||||
Basic earnings per common share | 2.80 | 2.18 | 2.99 | 3.44 | 2.03 | ||||||||||||||
Diluted earnings per common share | 2.79 | 2.16 | 2.98 | 3.43 | 2.02 | ||||||||||||||
Cash dividends | 730 | 701 | 687 | 624 | 501 | ||||||||||||||
Per common share | 1.28 | 1.20 | 1.12 | 0.96 | 0.76 | ||||||||||||||
Working capital | 7,355 | 7,872 | 8,324 | 10,426 | 12,872 | ||||||||||||||
Current ratio | 1.6 | 1.6 | 1.6 | 1.7 | 1.8 | ||||||||||||||
Inventories | 9,173 | 8,831 | 8,243 | 9,374 | 11,441 | ||||||||||||||
Net property, plant, and equipment | 10,138 | 9,758 | 9,853 | 9,851 | 10,069 | ||||||||||||||
Gross additions to property, plant, and equipment | 1,100 | 882 | 1,350 | 1,357 | 947 | ||||||||||||||
Total assets | 39,963 | 39,769 | 40,157 | 43,997 | 43,720 | ||||||||||||||
Long-term debt, excluding current maturities | 6,623 | 6,504 | 5,779 | 5,528 | 5,315 | ||||||||||||||
Shareholders’ equity | 18,322 | 17,181 | 17,915 | 19,630 | 20,194 | ||||||||||||||
Per common share | 32.89 | 29.98 | 30.11 | 30.82 | 30.64 | ||||||||||||||
Weighted average shares outstanding-basic | 569 | 588 | 618 | 653 | 661 | ||||||||||||||
Weighted average shares outstanding-diluted | 572 | 591 | 621 | 656 | 663 | ||||||||||||||
Significant items affecting the comparability of the financial data shown above are as follows:
• | Net earnings attributable to controlling interests for the year ended December 31, 2017 include gains totaling $22 million ($10 million after tax loss, equal to $0.02 per share) primarily related to the sale of the crop risk services business partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business; charges of $214 million ($144 million after tax, equal to $0.25 per share) consisting of asset impairments related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex, restructuring charges related to the reduction of certain positions within the Company’s global workforce, several individually insignificant asset impairments and restructuring charges, and provisions for contingent losses related to certain settlement items; a debt extinguishment charge of $11 million ($7 million after tax, equal to $0.01 per share) related to the early redemption of the Company’s $559 million notes due on March 15, 2018; and net tax benefits related to the Tax Cuts and Jobs Act and certain discrete tax adjustments totaling $366 million (equal to $0.64 per share). |
24
Item 6. | SELECTED FINANCIAL DATA (Continued) |
• | Net earnings attributable to controlling interests for the year ended December 31, 2016 include gains totaling $119 million ($100 million after tax, equal to $0.17 per share) primarily related to recovery of loss provisions and gains related to the sale of the Company’s Brazilian sugar ethanol facilities, realized contingent consideration on the sale of the Company’s equity investment in Gruma S.A. de C.V. in December 2012, and revaluation of the remaining interest to settlement value in conjunction with the acquisition of Amazon Flavors; a gain of $38 million ($24 million after tax, equal to $0.04 per share) related to a U.S. retiree medical benefit plan curtailment; charges of $117 million ($77 million after tax, equal to $0.13 per share) primarily related to legal fees and settlement, impairment of software, investments, and certain long-lived assets; a $10 million ($8 million after tax, equal to $0.02 per share) loss on sale of individually immaterial assets; and certain discrete tax adjustments totaling $24 million (equal to $0.04 per share) related to valuation allowances, deferred tax re-rates, and changes in assertion. |
• | Net earnings attributable to controlling interests for the year ended December 31, 2015 include gains totaling $530 million ($515 million after tax, equal to $0.83 per share) related primarily to the sale of the cocoa, chocolate, and lactic businesses, revaluation of the Company’s previously held investments in North Star Shipping, Minmetal, and Eaststarch C.V. in conjunction with the acquisition of the remaining interests, and the sale of a 50% interest in the Barcarena export terminal facility in Brazil to Glencore plc; long-lived asset impairment charges of $129 million ($109 million after tax, equal to $0.18 per share) related primarily to certain international Oilseeds Processing facilities, sugar ethanol facilities in Brazil, and goodwill, intangible, and property, plant, and equipment asset impairments; restructuring and exit charges of $71 million ($63 million after tax, equal to $0.10 per share) related to an international pension plan settlement, sugar ethanol facilities in Brazil, and other restructuring charges; loss provisions, settlements, and inventory writedown of $67 million ($58 million after tax, equal to $0.09 per share); certain discrete tax adjustments totaling $60 million (equal to $0.10 per share) related to valuation allowances and deferred tax re-rates; and loss on debt extinguishment of $189 million ($118 million after tax, equal to $0.19 per share) related to the cash tender offers and redemption of certain of the Company’s outstanding debentures. |
• | Net earnings attributable to controlling interests for the year ended December 31, 2014 include a gain on sale of assets related to the sale of the fertilizer business and other asset of $135 million ($89 million after tax, equal to $0.14 per share); gain of $156 million ($97 million after tax, equal to $0.15 per share) upon the Company’s effective dilution in the Pacificor (formerly Kalama Export Company) joint venture resulting from the contribution of additional assets by another member in exchange for new equity units; and loss of $102 million ($63 million after tax, equal to $0.10 per share) on Euro foreign currency derivative contracts entered into to economically hedge the Wild Flavors acquisition; asset impairment charges related to certain fixed assets of $41 million ($26 million after tax, equal to $0.04 per share) and $64 million ($41 million after tax, equal to $0.06 per share) of costs related to the relocation of the global headquarters to Chicago, Illinois, and restructuring charges related to the Wild Flavors acquisition and Toepfer integration following the acquisition of the minority interest and other restructuring charges; a charge of $98 million ($61 million after tax, equal to $0.09 per share) related to pension settlements; and certain discrete tax adjustments of $15 million (equal to $0.02 per share) related to deferred tax re-rates. |
• | Net earnings attributable to controlling interests for the year ended December 31, 2013 include other-than-temporary impairment charges of $155 million ($155 million after tax, equal to $0.23 per share) on the Company’s GrainCorp investment; asset impairment charges of $51 million ($51 million after tax, equal to $0.08 per share) related to the Company’s Brazilian sugar milling business; and other impairment charges principally for certain property, plant and equipment assets totaling $53 million ($34 million after tax, equal to $0.05 per share); realized losses on Australian dollar currency hedges of $40 million ($25 million after tax, equal to $0.04 per share) related to the proposed GrainCorp acquisition; valuation allowance on certain deferred tax assets of $82 million (equal to $0.12 per share); income tax benefit recognized in the current period of $55 million (equal to $0.08 per share) related to biodiesel blending credits earned in the prior periods; charges of $54 million ($37 million after tax, equal to $0.06 per share) related to the FCPA settlement; and other charges of $18 million ($12 million after tax, equal to $0.02 per share). |
25
Item 7. | 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 consolidated financial statements.
The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities, products, and ingredients. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in more than 170 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. 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 four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. 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. See Note 17 of Item 8 for more information about the Company’s business segments.
The Company’s recent significant portfolio actions and announcements include:
• | the acquisition in February 2017 of Crosswind Industries, Inc., an industry leader in the manufacture of contract and private label pet treats and foods, as well as specialty ingredients; |
• | the acquisition in February 2017 of an 89% controlling interest in Biopolis SL, a leading provider of microbial technology with a strong portfolio of novel food ingredients, followed later in the year by a partnership with the Mayo Clinic to explore personalized nutrition applications including the effects of prebiotics and probiotics that may improve digestive health; |
• | the construction of a new feed-premix facility in Xiangtan, China, which is expected to be completed in 2019; |
• | the sale in May 2017 of the Company's crop risk services business to Validus Holdings, a global group of insurance and reinsurance companies; |
• | the completion in May 2017 of a series of major enhancements at the Company’s export terminal in Santos, in the Brazilian state of Sao Paulo; |
• | the construction of a new flour mill in Mendota, Illinois, which is expected to be completed in 2019; |
• | the expansion of a Golden Peanut and Tree Nuts production facility in Blakely, Georgia, which is expected to be completed in 2018; |
• | the completion in June 2017 of a new silo located on the Danube River in Silistra, Bulgaria; |
• | the acquisition in June 2017 of Chamtor, a French producer of wheat-based sweeteners and starches; |
• | the acquisition in July 2017 of a 51% controlling interest in Industries Centers, an Israeli company specializing in the import and distribution of agricultural feed products, which is now known as ADM Israel; |
• | the modernization of the flour mill in Enid, Oklahoma, which is expected to be completed in 2018; |
• | the announcement in December 2017 of the sale of the Company's oilseeds operations in Bolivia to Inversiones Piuranas S.A., which is subject to regulatory approvals and is expected to close in the first half of 2018; and |
• | the announcement in January 2018 of a joint development agreement and Vland Biotech to develop and commercialize enzymes for animal feed. |
As part of the implementation of the Company’s strategic plan, the Company continues to evaluate the capital intensity of its operations and portfolio, seeking ways to reduce and redeploy capital in its efforts to reduce volatility of earnings and drive long-term returns.
Operating Performance Indicators
The Company’s agricultural services and oilseeds processing 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. Therefore, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Thus, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit.
26
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The Company’s corn processing operations and Wild Flavors and Specialty Ingredients 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. Thus, changes in revenues of these businesses may correspond to changes in margins or gross profit.
The Company has consolidated subsidiaries in more than 80 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency 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, 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.
The Company measures its performance using key financial metrics including net earnings, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. 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, and global production of similar and competitive crops. 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.”
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. In Agricultural Services, U.S. export competitiveness was strong during the first half of the year but weakened during the second half due to the large crops in South America. Overall low market volatility continued due to surplus in the global market. In Corn Processing, demand and prices for sweeteners and starches remained solid in North America while co-product prices were stable. Ethanol continues to face a challenging environment. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, U.S. industry ethanol production also remained at high levels which limited margins. Global oilseeds processing volumes remained strong, but ample supply of competing proteins and abundance of Argentine meal and oil in world markets pressured margins. Slow selling by farmers in Brazil continues to depress grain origination margins despite strong export volumes. While demand and margins for refined oil remained solid across all regions, uncertainty surrounding the U.S. biodiesel tax credit has negatively impacted biodiesel margins. Wild Flavors and Specialty Ingredients benefited from strong demand for flavor ingredients and flavor systems, but continued to be adversely affected by start-up costs and margin pressure in certain non-flavor food ingredient markets.
Net earnings attributable to controlling interests increased $0.3 billion to $1.6 billion. Segment operating profit decreased $0.2 billion to $2.5 billion. Included in segment operating profit in the current year was a net charge of $134 million consisting of a net gain on sales of assets and businesses, impairment, restructuring, and settlement charges, and corn hedge timing effects. Included in segment operating profit in the prior year was income of $81 million consisting of a net gain on sales of assets and businesses/revaluation, impairment and restructuring charges, and corn hedge timing effects. Adjusted segment operating profit increased $47 million to $2.7 billion due to solid results in Corn Processing, partially offset by weaker South American origination margins, lower soybean crush margins, and weaker results in some specialty ingredients. Corporate results were a net expense of $927 million in the current year compared to $882 million in the prior year. Corporate results in the current year included a credit of $2 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves, compared to a charge of $19 million in the prior year.
Income taxes decreased $527 million due to lower earnings before income taxes and a lower effective tax rate. The Company’s effective tax rate for 2017 decreased to 0.4% compared to 29.3% for 2016 due primarily to the estimated impact of the Tax Cuts and Jobs Act (the “Act”). Excluding the impact of the Act, the Company's effective tax rate for 2017 would have decreased from 29.3% to approximately 24.0% due primarily to the impact of changes in discrete tax items, including the favorable resolution of an uncertain tax position related to a 2014 acquisition and return to provision adjustments in the current year, partially offset by changes in the geographic mix of pre-tax earnings and the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016 (see Note 13 in Item 8 for more information).
27
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Analysis of Statements of Earnings
Processed volumes by product for the years ended December 31, 2017 and 2016 are as follows (in metric tons):
(In thousands) | 2017 | 2016 | Change | |||||
Oilseeds | 34,733 | 33,788 | 945 | |||||
Corn | 22,700 | 22,273 | 427 | |||||
Total | 57,433 | 56,061 | 1,372 | |||||
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. Processed volumes of oilseeds increased due to the strong demand environment for soybean meal and canola oil. The overall increase in corn is due to the strong demand environment for ethanol, partially offset by the production disruption in one of the Company’s plants due to a water main break in the first quarter and the reconfiguration of the Company’s Peoria, Illinois ethanol complex.
Revenues by segment for the years ended December 31, 2017 and 2016 are as follows:
(In millions) | 2017 | 2016 | Change | ||||||||
Agricultural Services | |||||||||||
Merchandising and Handling | $ | 23,127 | $ | 24,609 | $ | (1,482 | ) | ||||
Milling and Other | 2,910 | 3,060 | (150 | ) | |||||||
Transportation | 209 | 224 | (15 | ) | |||||||
Total Agricultural Services | 26,246 | 27,893 | (1,647 | ) | |||||||
Corn Processing | |||||||||||
Sweeteners and Starches | 4,253 | 4,028 | 225 | ||||||||
Bioproducts | 5,099 | 5,438 | (339 | ) | |||||||
Total Corn Processing | 9,352 | 9,466 | (114 | ) | |||||||
Oilseeds Processing | |||||||||||
Crushing and Origination | 14,091 | 13,976 | 115 | ||||||||
Refining, Packaging, Biodiesel, and Other | 8,169 | 7,880 | 289 | ||||||||
Asia | 270 | 296 | (26 | ) | |||||||
Total Oilseeds Processing | 22,530 | 22,152 | 378 | ||||||||
Wild Flavors and Specialty Ingredients | 2,313 | 2,427 | (114 | ) | |||||||
Other | 387 | 408 | (21 | ) | |||||||
Total | $ | 60,828 | $ | 62,346 | $ | (1,518 | ) | ||||
Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. In periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.
28
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Revenues decreased $1.5 billion, or 2%, to $60.8 billion due to lower sales volumes ($1.4 billion) and lower average sales prices ($0.1 billion). The decrease in sales volumes was due principally to a decrease in volumes of unprocessed commodities, in particular volumes of soybeans, corn, rapeseed, and wheat. Agricultural Services revenues decreased 6% to $26.2 billion due to lower sales volumes ($1.5 billion) and lower average sales prices ($0.1 billion). Corn Processing revenues decreased 1% to $9.4 billion due to lower sales volumes ($0.1 billion). Oilseeds Processing revenues increased 2% to $22.5 billion due to higher sales volumes ($0.3 billion). Wild Flavors and Specialty Ingredients revenues decreased 5% to $2.3 billion due to lower sales volumes ($0.1 billion).
Cost of products sold decreased $1.4 billion to $57.3 billion due principally to lower sales volumes. Included in cost of products sold is a credit of $2 million from the effect of changes in agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $19 million in the prior year. Manufacturing expenses increased $0.1 billion to $5.2 billion due to increased expenses for energy, operating and maintenance supplies, and contracted labor, and higher salaries and benefits.
Gross profit decreased $0.1 billion, or 3%, to $3.5 billion. Lower results in soybean processing ($152 million) and grain origination ($90 million) were partially offset by higher results in canola processing ($41 million), sweeteners and starches ($71 million), and animal nutrition ($53 million). These factors are explained in the segment operating profit discussion on page 31. The effect of changes in agricultural commodity prices on LIFO inventory valuation reserves had a $2 million positive impact on gross profit compared to a negative impact of $19 million in the prior year.
Selling, general, and administrative expenses of $2.0 billion were comparable to the prior year. Current year expenses included increased salaries and benefits cost related to further investments in the Company’s business transformation, IT, research and development, and innovation initiatives. Prior year expenses included expenses related to the settlement of a legal matter.
Asset impairment, exit, and restructuring costs increased $118 million to $173 million. Current year charges consisted of $63 million of asset impairments in the Corn Processing segment primarily related to the reconfiguration of the Company’s Peoria, Illinois ethanol complex, $20 million of asset impairments in the Wild Flavors and Specialty Ingredients segment primarily related to the closure of a facility, $54 million of restructuring charges in Corporate primarily related to the reduction of certain positions within the Company’s global workforce, and $36 million of several individually insignificant asset impairments and restructuring charges. Prior year charges included $11 million of software impairment in Corporate, $6 million of other-than-temporary impairment charges on the Company's investment in two available for sale equity securities in Corporate, and $17 million and $21 million of individually insignificant fixed asset impairment and restructuring charges, respectively.
Interest expense increased $37 million to $330 million primarily due to higher interest rates on short-term debt, the issuance of the $1 billion fixed-rate notes in August 2016, and interest related to an amended foreign income tax from a prior year, partially offset by the retirement of the $261 million bond that matured in April 2017. Interest expense in the prior year also included a credit of $8 million for the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations.
Equity in earnings of unconsolidated affiliates increased $164 million to $456 million primarily due to higher earnings from the Company’s investment in Wilmar resulting from the increased ownership stake in and higher results from Wilmar and improved results from the Company’s equity investment in CIP, partially offset by losses from a new equity investment and decreased earnings resulting from the disposal of an equity investment.
Other income - net decreased $110 million to $37 million. Prior year income included realized additional consideration related to the sale of the Company's equity investment in Gruma S.A.B. de C.V. in December 2012, recovery of loss provisions and gain related to the sale of the Company's Brazilian sugar ethanol facilities, a gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of Amazon Flavors, and loss on sale of other individually immaterial assets. Current period income included gains related to the sale of the crop risk services business and disposals of other individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business, changes in contingent settlement provisions, a charge related to the full redemption of the Company's $559 million notes due March 15, 2018, and foreign exchange losses.
29
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the year ended December 31, 2017 and 2016 are as follows:
Segment Operating Profit | 2017 | 2016 | Change | ||||||||
(In millions) | |||||||||||
Agricultural Services | |||||||||||
Merchandising and Handling | $ | 300 | $ | 228 | $ | 72 | |||||
Milling and Other | 199 | 226 | (27 | ) | |||||||
Transportation | 86 | 119 | (33 | ) | |||||||
Total Agricultural Services | 585 | 573 | 12 | ||||||||
Corn Processing | |||||||||||
Sweeteners and Starches | 746 | 655 | 91 | ||||||||
Bioproducts | 163 | 106 | 57 | ||||||||
Total Corn Processing | 909 | 761 | 148 | ||||||||
Oilseeds Processing | |||||||||||
Crushing and Origination | 241 | 386 | (145 | ) | |||||||
Refining, Packaging, Biodiesel, and Other | 272 | 344 | (72 | ) | |||||||
Asia | 328 | 150 | 178 | ||||||||
Total Oilseeds Processing | 841 | 880 | (39 | ) | |||||||
Wild Flavors and Specialty Ingredients | 284 | 275 | 9 | ||||||||
Other | 51 | 134 | (83 | ||||||||