FMC Corporation — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. FMC is a global chemical company with three segments: Agricultural Solutions, Health and Nutrition, and Lithium. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Revenue | $3,282.4 | $3,276.5 | Up 0.2% |
| Gross margin | $1,199.8 | $1,075.4 | Up $124.4; approximately 36.6% of revenue versus 32.8% |
| Income from continuing operations | $245.4 | $(177.9) | 2015 included substantial acquisition and restructuring charges |
| Net income attributable to FMC stockholders | $209.1 | $489.0 | Down $279.9; 2015 included a $702.1 after-tax gain from the Alkali business sale |
| Diluted EPS | $1.56 | $3.66 | Continuing-operations diluted EPS was $1.81 versus $(1.40) |
| Adjusted after-tax earnings from continuing operations, non-GAAP | $379.8 | $332.6 | Up 14%; exclude specified charges, tax adjustments, and discontinued operations |
| Cash from operating activities, continuing operations | $537.3 | $(277.1) | Improved materially; 2015 included acquisition-related hedge payments and unusually high taxes |
| Capital expenditures | $130.8 | $108.5 | Includes ongoing investment in production capacity |
Fourth-quarter revenue was $865.6, compared with $899.3 in fourth-quarter 2015. Gross margin was $337.6 versus $298.6. Net income attributable to FMC stockholders was $15.9, compared with a loss of $204.1 in the prior-year quarter.
Segment results
| Segment | 2016 revenue | 2016 operating profit | Year-over-year highlights |
|---|---|---|---|
| Agricultural Solutions | $2,274.8 | $399.9 | Revenue up about 1% year over year as reported; operating profit up about 10%. Versus pro forma 2015 results including Cheminova, revenue declined about 13% and operating profit increased about 4%. |
| Health and Nutrition | $743.5 | $191.3 | Revenue down about 5% and operating profit down about 2%; lower Omega-3 volumes were a key factor. |
| Lithium | $264.1 | $70.2 | Revenue up about 11%; operating profit rose approximately $47 million, benefiting from pricing, lower input costs, and manufacturing efficiencies. |
Debt, liquidity, and balance sheet
- Cash and cash equivalents were $64.2 at year-end, down from $78.6.
- Total debt was $1,893.0, down from $2,148.9; long-term debt, excluding current maturities, was $1,798.8. FMC repaid $150 million of its term loan during 2016; $750 million remained outstanding, maturing in 2020.
- Available borrowing capacity under the revolving credit facility was $1,376.1. The company reported compliance with its debt covenants; year-end leverage was 3.1 against a maximum of 4.25, with the maximum scheduled to tighten to 3.5 by the end of 2017.
- Current assets were $2,849.2 and current liabilities were $1,438.2. Trade receivables were $1,828.0, including long-term customer balances disclosed separately in other assets; collection and credit quality warrant attention.
- Operating cash flow from continuing operations rebounded to $537.3. Cash used in investing activities of continuing operations was $139.2, primarily including $130.8 of capital expenditures; cash used in financing activities was $377.0, largely reflecting debt repayments and dividends.
- Cash dividends paid were $88.6, or $0.66 per share declared for the year. The company repurchased $11.2 of shares under its public program and had $238.8 remaining authorized at year-end.
Material changes and unusual items
- Reported 2016 net income fell sharply from 2015 chiefly because the prior year included the $702.1 after-tax gain on the sale of FMC Alkali Chemicals. FMC reported a $33.7 loss from discontinued operations in 2016.
- Gross margin improved with better pricing and product mix, particularly in Agricultural Solutions in Brazil and North America. FMC also rationalized low-margin crop-protection products, reducing sales by approximately $175 million versus pro forma 2015.
- Cheminova integration was substantially completed by year-end 2016. Related acquisition charges were $23.4, while final integration restructuring charges were $42.3. Comparable 2015 acquisition-related charges were $290.3 and Cheminova restructuring charges were $118.3.
- Agricultural Solutions faced weak crop-protection markets, elevated channel inventories, cautious grower purchases, and regional currency pressures. Latin America sales were particularly weak; the company also cited deliberate inventory reduction and tighter credit exposure in Brazil.
- Health and Nutrition continued to face Omega-3 industry overcapacity and weak product volumes. The Rayong, Thailand microcrystalline cellulose facility was commissioned in the fourth quarter.
- Lithium demand and pricing were described as favorable. FMC announced plans to expand lithium hydroxide capacity to 30,000 metric tons by 2019 and a supply agreement for 8,000 metric tons of lithium carbonate annually beginning in mid-2018.
Outlook and principal risks
Management expected 2017 segment earnings growth in each business, lower income tax expense associated with Cheminova integration, and improved cash generation. Segment guidance was:
- Agricultural Solutions: Revenue of approximately $2.2–$2.4 billion and operating earnings of $410–$450 million. Management anticipated continued challenging North American conditions, with more favorable demand in Latin America and Europe, subject to currency and market risks.
- Health and Nutrition: Revenue of approximately $750–$790 million and earnings of $190–$200 million. Higher MCC volumes from the Thailand facility were expected to be partly offset by start-up costs.
- Lithium: Revenue of approximately $315–$355 million and operating profit of $90–$110 million. Management expected hydroxide expansion to increase volumes in the second half of 2017.
Key risks include crop-market conditions, weather, channel inventories, competition and generic products, pesticide registrations and other regulation, foreign exchange and political/economic conditions—especially in Brazil and Argentina—customer credit and collections, raw-material supply, manufacturing disruptions, and the successful execution of lithium expansion. The company also identified pension-cost sensitivity, financing and covenant risks, and environmental liabilities.
Environmental reserves were $378.1 before recoveries at year-end; estimated reasonably possible environmental losses, net of expected recoveries, exceeded recorded accruals by approximately $240. The filing says the timing and ultimate costs are uncertain. FMC disclosed approximately 8,000 pending asbestos claims and stated that future exposure beyond its reserve could not be reasonably estimated. It also disputed an EPA pesticide-labeling complaint proposing a $4.7 million penalty, but did not expect any final penalty to be material. Certain other environmental matters, including Portland Harbor, could not be reasonably estimated by the company.
Important facts for investors to verify
- Reconcile reported earnings with the non-GAAP adjusted earnings measure, particularly the effect of the 2015 Alkali divestiture gain and significant acquisition and restructuring charges.
- Track Agricultural Solutions channel inventories, Brazil customer collections and credit exposure, product rationalization, and whether segment guidance is achieved.
- Monitor lithium expansion spending, project timing, customer commitments, and whether planned capacity additions translate into expected sales and earnings.
- Review environmental reserve assumptions and developments in major site and litigation matters; disclosed possible losses exceed recorded environmental accruals.
- Assess debt reduction, leverage against tightening covenants, and liquidity needs alongside planned capital expenditures, pension contributions, dividends, and share repurchases.
- Consider the basis of comparison: the filing covers the full 2016 fiscal year, and 2015 Agricultural Solutions comparisons are affected by Cheminova’s April 2015 acquisition unless pro forma figures are used.