FMC Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited interim financial statements were reviewed by KPMG, not audited. FMC reported Agricultural Solutions and Lithium as continuing segments; Health and Nutrition and Omega-3 were presented as discontinued operations.
Financial results and liquidity
- Q2 revenue: $656.8 million, up 7% from $615.3 million. Continuing-operations revenue for the first half was $1,252.8 million, up 3% from $1,221.7 million.
- Profitability: Q2 gross margin was $234.4 million versus $235.4 million; gross margin rate declined to 36% from 38%. Income from continuing operations was $48.7 million versus $46.8 million; attributable to FMC stockholders, it was $48.2 million versus $45.0 million. Q2 net income attributable to stockholders was $74.7 million versus $65.2 million, including discontinued operations.
- First-half earnings: Income from continuing operations attributable to stockholders was $92.7 million versus $70.6 million. Total net loss attributable to stockholders was $49.5 million versus income of $113.5 million, primarily reflecting the Omega-3 impairment in discontinued operations.
- Cash flow: First-half operating cash flow from continuing operations was $205.0 million versus $160.1 million. Continuing investing activities used $51.2 million, including lithium-related investment; financing activities used $149.8 million. Cash rose to $113.2 million from $64.2 million.
- Debt and liquidity: Total debt was $1,784.8 million at June 30, versus $1,893.0 million at year-end; cash was $113.2 million. The $1.5 billion term loan facility intended to fund the DuPont transaction was not yet drawn. The amended $1.5 billion revolving facility had $1,364.3 million available. FMC reported compliance with debt covenants; leverage was 2.8 against a 3.75 maximum, and interest coverage was 8.0 against a 3.5 minimum.
- Margins and segments: Q2 Agricultural Solutions revenue rose 6% to $582.8 million, but segment operating profit fell 5% to $95.7 million, with price pressure partly offset by volume and currency. Lithium revenue rose 17% to $74.0 million and operating profit increased to $24.2 million from $16.5 million, principally on higher pricing.
Material changes and notable items
- FMC agreed to acquire certain DuPont Crop Protection assets and R&D operations and sell Health and Nutrition, excluding Omega-3, to DuPont. FMC agreed to pay DuPont $1.2 billion, subject to adjustments. The transactions were expected to close in Q4 2017, subject to approvals and closing conditions.
- The European Commission conditionally approved the crop-protection acquisition on July 27, 2017, requiring FMC to divest a product portfolio. FMC estimated the remedy would reduce Agricultural Solutions annual operating profit by $10–$15 million.
- FMC recorded a first-half Omega-3 impairment of approximately $171 million ($151 million after tax), driving the discontinued-operations loss. It signed an Omega-3 sale agreement with Pelagia in June and completed that sale on August 1, 2017, for $38 million.
- Q2 acquisition-related charges were $20.7 million, primarily for the planned DuPont transaction. First-half charges were $29.9 million. Q2 interest expense rose to $17.2 million from $15.2 million.
- First-half continuing cash flow benefited from working-capital movements, including receivables collections; the filing notes that collection timing, especially in Brazil, is significant. Cash was also affected by lower customer advance payments and other working-capital movements.
Guidance, commentary, and risks
- Agricultural Solutions outlook: 2017 revenue of approximately $2.3–$2.4 billion and segment earnings of $415–$445 million. Guidance excluded the pending DuPont transaction.
- Lithium outlook: 2017 segment earnings of $115–$125 million, raised by $10 million from the prior range. FMC cited pricing strength and continued investment in lithium hydroxide expansion; it stated its strategic intent to spin off Lithium as a separate publicly traded company.
- Management said Agricultural Solutions faced unfavorable pricing and product mix, while Lithium’s higher prices were partly offset by expansion costs, raw-material and energy costs, and lower volumes associated with production shifts.
- Environmental exposure: Net environmental reserves were $364.5 million. Estimated reasonably possible environmental losses exceeded accrued amounts by approximately $240 million; actual losses could be higher. FMC projected 2017 net environmental remediation spending of $50–$55 million.
- Other exposures: Risks include transaction timing, regulatory approvals, integration and financing, foreign exchange and interest rates, customer collections, pension funding, and retained environmental and legal liabilities. FMC expected approximately $40 million of voluntary U.S. pension contributions in 2017.
Important facts for investors to verify
- Whether the DuPont transactions closed on the expected terms and timing, and the actual borrowing, purchase-price adjustments, divestitures, and ongoing earnings impact.
- Whether Agricultural Solutions and Lithium achieved their respective 2017 revenue and segment-earnings guidance, including the effect of pricing, volumes, costs, and the EC remedy.
- Collections and credit quality of customer receivables, particularly long-dated balances and Brazil exposure, and the sustainability of operating cash flow.
- The final Omega-3 disposal proceeds and any resulting gain or loss relative to the recorded impairment.
- Changes in environmental contingencies, retained discontinued-operation liabilities, debt covenant headroom, and expected pension contributions.