FMC Corporation — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2018, with comparison to Q1 2017. FMC operates FMC Agricultural Solutions and FMC Lithium. Results include DuPont’s Crop Protection business, acquired November 1, 2017; FMC Health and Nutrition was sold to DuPont in November 2017 and is presented as discontinued operations. The interim financial statements received an independent accountant’s review, not an audit.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1,210.7 million | $596.0 million |
| Gross margin | $554.7 million; 45.8% of revenue | $216.2 million; 36.3% of revenue |
| Income from continuing operations | $263.1 million | $45.0 million |
| Net income (loss) attributable to FMC stockholders | $267.2 million | $(124.2) million |
| Diluted EPS | $1.96, including $1.91 from continuing operations | $(0.92), including $0.33 from continuing operations |
| Operating cash flow, continuing operations | $(61.7) million | $(70.0) million |
| Cash and cash equivalents | $359.7 million at March 31 | $283.0 million at December 31, 2017 |
| Total debt | $3,322.1 million | $3,185.6 million at December 31, 2017 |
Management reported adjusted gross margin, excluding transaction-related charges, of $584.6 million, or 48% of revenue, versus $216.2 million, or 36%, a year earlier. Adjusted after-tax earnings from continuing operations attributable to FMC stockholders, a non-GAAP measure, were $250.7 million versus $58.4 million.
Material changes versus the prior period
- Revenue rose 103%, primarily reflecting the acquired DuPont Crop Protection business. Agricultural Solutions revenue increased 109% as reported; on a pro forma combined basis, segment revenue increased approximately 13% and EBITDA increased approximately 23% year over year.
- Lithium revenue increased 57% to $102.8 million and segment EBITDA rose to $50.3 million from $25.8 million, supported by higher prices and volumes.
- Reported net income improved sharply, but comparison is affected by the prior-year $168 million pretax impairment of the Omega-3 business in discontinued operations. Q1 2018 also included a $16 million after-tax adjustment to the gain on sale of Health and Nutrition.
- Q1 2018 included an $85 million gain on sale of a European herbicide portfolio to Nufarm, recorded in restructuring and other charges (income). Transaction-related charges were $52.2 million, including $29.9 million of acquired-inventory fair-value amortization.
Cash flow, debt and liquidity
Continuing-operations operating cash outflow was $61.7 million, reflecting seasonal and acquisition-related working-capital demands, including a $347.6 million increase in trade receivables and a $189.6 million reduction in customer advance payments. Continuing-operations investing activities provided $60.1 million, including $85.0 million of portfolio-sale proceeds; capital expenditures were $24.3 million. Financing activities provided $113.9 million, principally reflecting increased short-term borrowing.
At March 31, cash was $359.7 million, including $201.3 million held by foreign subsidiaries; total debt was $3.322 billion. Short-term debt and current maturities totaled $328.9 million, including $184.4 million of commercial paper. The revolving facility had $1.158 billion of available funds. FMC reported compliance with its debt covenants, with leverage of 2.8 against a maximum of 4.75 and interest coverage of 11.5 against a minimum of 3.5. The company paid $22.3 million in dividends during the quarter; no shares were repurchased under the public program.
Outlook, commentary and risks
- Agricultural Solutions outlook: 2018 segment revenue of approximately $4.05–$4.25 billion, EBITDA of $1.16–$1.24 billion, and depreciation and amortization of approximately $145 million.
- Lithium outlook: 2018 segment EBITDA of $193–$203 million, with approximately $20 million of depreciation and amortization. FMC said it continued expansion plans and targeted an October 2018 Lithium IPO, followed by a direct distribution to FMC shareholders within six months.
- Management cited regional agricultural demand, product launches and acquisition-related cross-selling, while noting adverse weather in parts of North America, EMEA and Australia. Divestitures required by regulators for the DuPont acquisition were expected to reduce 2018 Agricultural Solutions operating profit by approximately $20 million; the European remedy was completed and the Indian divestiture was expected during 2018.
- Environmental reserves, net of recoveries, were $420.4 million. Estimated reasonably possible environmental losses exceeded accrued amounts by approximately $200 million; actual losses could be higher, although management did not expect these obligations to materially affect liquidity or financial condition because payments may extend over many years.
- Other commitments and exposures include projected 2018 net environmental remediation spending of $60–$65 million, expected voluntary U.S. pension contributions of approximately $30 million, and a $202.7 million U.S. transition tax payable over eight years. Environmental litigation developments were disclosed, including a May 1, 2018 court decision; any additional reserve impact was not reasonably estimable.
- The accounting for the 2017 Tax Act remained provisional. FMC recorded a further $0.8 million tax expense adjustment in Q1 and expected to complete its accounting after filing its 2017 U.S. tax return. Management cautioned that tax rates may vary with jurisdictional earnings, tax law, audits and other factors.
- ASC 606 adoption changed the presentation of estimated product returns, increasing both prepaid and other current assets and accrued and other liabilities by $95.9 million at March 31 relative to the balance sheet without that adjustment; management reported no opening retained-earnings catch-up.
Most important facts for investors to verify
- Separate underlying growth from the DuPont acquisition effect; assess the pro forma Agricultural Solutions comparison and the stated regulatory divestiture impact.
- Evaluate cash conversion and receivables collectability, particularly the seasonal working-capital build and long-term customer receivables of $118.3 million.
- Track debt, commercial paper use, available revolving capacity, covenant headroom and financing costs.
- Assess the sustainability of results excluding the $85 million portfolio-sale gain and the acquired-inventory amortization and other transaction costs.
- Monitor the remaining Indian regulatory divestiture, Lithium IPO/spin-off plans, environmental contingencies, and finalization of tax-reform accounting.