Archer Daniel's Stock Rises After Accounting Probe is Completed, Removing Stock Overhang

Archer Daniels Midland Co.'s shares experienced a 4.5% surge on Tuesday following the announcement that the internal investigation into accounting practices at its nutrition business, initially disclosed in January, is substantially complete. The company reassured investors that the necessary adjustments would not significantly impact its overall financial statements, alleviating concerns and providing a positive boost to the stock.

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The accounting probe was initiated after a voluntary document request from the Securities and Exchange Commission (SEC). The revelation led to a 22% single-day decline in the stock, marking its most substantial drop ever. Archer Daniels responded by placing its Chief Financial Officer, Vikram Luther, on immediate administrative leave while investigating intersegment transactions.

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In its 10-K annual report filing with the SEC on Tuesday, Archer Daniels disclosed that the Justice Department had issued grand jury subpoenas to certain current and former employees. The company continues to cooperate with both the SEC and the Justice Department on the matter.

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Historically, Archer Daniels had disclosed in the footnotes to its financial statements that intersegment sales were recorded at amounts approximating the market. However, the investigation found that specific sales between its nutrition segment and ag services, as well as oilseeds and carbohydrate solutions, were not based on market prices.

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The company clarified that since intersegment sales occur between its reporting segments, the adjustments have no impact on the consolidated balance sheets and financial statements. Archer Daniels has developed a remediation plan addressing the identified material weakness to enhance the reliability of its financial statements.

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The nutrition segment, once considered the future of the company, produces flavors, colors, specialty ingredients, and nutritional supplements. In 2023, this segment faced challenges in the plant-based protein market, a soybean processing plant explosion affecting production, and a restructuring of the animal nutrition unit.

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CEO Juan Luciano, during a call with analysts discussing fourth-quarter earnings, outlined the company's efforts to revitalize the nutrition segment. Initiatives include simplifying the supply chain, restructuring operations, and optimizing production lines. Over 20 animal nutrition production lines were closed in 2023 to streamline operations.

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Archer Daniels reported fourth-quarter net income of $565 million, or $1.06 per share, a decline from $1.019 billion, or $1.84 per share, in the corresponding period the previous year. Adjusted for one-time items, including a 30-cent impairment and restructuring charge, earnings per share were $1.36, falling short of the $1.43 FactSet consensus. Revenue also dipped to $22.978 billion from $25.939 billion a year ago, below the $23.786 billion FactSet consensus.

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The nutrition segment reported an operating loss of $10 million in the quarter, contrasting with an income of $105 million in the same period the prior year. Looking ahead, Archer Daniels anticipates adjusted EPS for 2024 in the range of $5.25 to $6.25, while FactSet expectations stand at $5.41. The nutrition segment is projected to achieve mid-single-digit revenue growth and higher operating income compared to 2023.

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To instill confidence in investors, the board has authorized an additional $2 billion for share buybacks. Despite a 25% decline in the stock over the last 12 months, the broader market, as represented by the S&P 500, has gained 32.5%.

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