FMC Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Figures are unaudited and in U.S. dollars; amounts are in millions except per-share data. FMC operates Agricultural Solutions, Health and Nutrition, and Lithium.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $807.7 | $830.7 | $2,416.8 | $2,377.2 |
| Gross margin | $279.5 | $220.3 | $862.2 | $776.8 |
| Gross margin percentage | 34.6% | 26.5% | 35.7% | 32.7% |
| Income from continuing operations | $82.6 | $5.4 | $210.2 | $2.4 |
| Net income attributable to FMC stockholders | $79.7 | $(2.4) | $193.2 | $693.1 |
| Diluted EPS attributable to FMC stockholders | $0.59 | $(0.02) | $1.44 | $5.18 |
| Cash from continuing operating activities | Not presented quarterly | $411.0 | $(246.8) |
Q3 operating cash flow was not separately disclosed in the filing text. Nine-month capital expenditures were $102.7, and cash dividends paid were $66.4. Cash and cash equivalents were $130.7 at September 30, 2016, compared with $78.6 at December 31, 2015.
Total debt was $1,976.5, down from $2,148.9 at year-end 2015; net debt was approximately $1,845.8. Long-term debt, less current portion, was $1,913.3. The company reported $1,383.3 of available capacity under its credit facility. It was in compliance with debt covenants: leverage was 3.4 against a maximum of 4.25, and interest coverage was 7.6 against a minimum of 3.5.
Material changes and business performance
- Q3 revenue declined 3% year over year, while gross margin improved. Management attributed stronger profitability chiefly to Agricultural Solutions pricing and mix, particularly in Brazil and North America. The reported Q3 gross margin includes no 2016 Cheminova inventory fair-value amortization; Q3 2015 included $28.8 of that expense.
- Agricultural Solutions Q3 revenue was $558.9, down about 3%, while segment operating profit rose to $90.1 from $59.4. Lower volumes, including the deliberate reduction of low-margin third-party sales in Brazil, were partly offset by improved pricing, mix, and currency.
- Health and Nutrition Q3 revenue fell about 9% to $178.9 and operating profit fell to $45.1 from $47.0. Lower volumes in Health Excipients and Omega-3 were key factors; some customer orders shifted into Q4.
- Lithium Q3 revenue increased about 22% to $69.9 and operating profit rose to $17.5 from $1.8, supported by higher prices, specialty-market demand, and lower operating costs.
- Nine-month revenue rose about 2%, but nine-month net income fell to $193.2 from $693.1. The prior-year period included a $698.8 after-tax discontinued-operations gain, principally from the 2015 sale of FMC Alkali Chemicals. Continuing-operations income improved substantially year over year.
- Nine-month operating cash flow improved to $411.0 from an outflow of $246.8. Receivables collections, accrued customer rebates, and the absence of prior-year Cheminova hedge payments contributed; customer advance payments were a significant cash use. FMC reported collecting over $500 of Brazilian receivables during the period, reducing the outstanding balance by over $200.
Outlook, commentary, and risks
- For 2016, Agricultural Solutions expected segment revenue of approximately $2.2–$2.4 billion and segment earnings of $390–$410. Health and Nutrition expected revenue of $740–$760 and segment earnings of $190–$194. Lithium raised its full-year segment earnings outlook to $65–$69, citing Q3 strength and an improved forecast. These are segment outlooks, not consolidated earnings guidance.
- Management expected challenging global crop-protection market conditions to continue through year-end. It cited strong demand and favorable pricing trends in Lithium specialty markets, announced plans to expand lithium hydroxide capacity to 30,000 metric tons by 2019, and described an announced lithium carbonate supply agreement for 8,000 metric tons annually beginning in mid-2018.
- Omega-3 faced industry overcapacity. FMC planned to commission a new microcrystalline cellulose facility in Thailand in Q4 2016. Cheminova integration and restructuring charges were expected to be completed in 2016.
- Environmental reserves, net of recorded recoveries, were $340.2. Estimated reasonably possible environmental losses exceeded accrued amounts by approximately $230; FMC said potential unreserved obligations could be material to a future quarter or year, though it did not expect them to materially affect liquidity or financial condition because they may be paid over many years. FMC could not reasonably estimate its potential exposure at the Portland Harbor Superfund site.
- Other exposures include retained liabilities from discontinued businesses, customer financing guarantees with potential future payments of $103.1, foreign exchange and commodity risks, and tax-rate volatility. Management reported that a New York appellate court remanded the Middleport matter for further proceedings; FMC’s reserve continued to reflect its recommended cleanup alternative.
- Management identified estimates involving revenue and receivables, environmental obligations, asset impairment, pensions, and income taxes as critical accounting matters. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether segment guidance was achieved, especially Agricultural Solutions’ earnings outlook and the revised Lithium outlook.
- Brazilian receivable collection quality and timing, customer credit exposure, and any further movement in customer advances or rebates.
- Environmental reserve adequacy, the potential additional exposure estimate, and developments at Portland Harbor and Middleport.
- Debt, covenant headroom, and liquidity as the maximum leverage covenant steps down; confirm availability under the revolving facility.
- Comparability of reported earnings: the 2015 Alkali Chemicals disposal gain and Cheminova acquisition, integration, and restructuring charges materially affect year-over-year comparisons.