FMC Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; interim financial statements are unaudited. FMC recast FMC Health and Nutrition (excluding Omega-3) and Omega-3 as discontinued operations following its March 31 agreement with DuPont.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $596.0 million | $606.4 million |
| Gross margin | $216.2 million; 36% | $216.0 million; 36% |
| Continuing-operations income | $45.0 million | $26.0 million |
| Continuing-operations diluted EPS | $0.33 | $0.19 |
| Net income (loss) attributable to FMC stockholders | $(124.2) million | $48.3 million |
| Operating cash flow, continuing operations | $(70.0) million | $62.3 million |
| Cash and cash equivalents, March 31 | $96.1 million | $64.3 million at March 31, 2016 |
| Total debt, March 31 | $2,007.7 million | $1,893.0 million at December 31, 2016 |
- Continuing-operations revenue declined about 2%. Agricultural Solutions revenue fell 3% to $530.4 million, while Lithium revenue rose 9% to $65.6 million.
- Segment operating profit increased to $104.6 million from $96.9 million: Agricultural Solutions contributed $83.0 million (up 1%) and Lithium $21.6 million (up $6.7 million).
- Continuing-operations income tax provision was $9.4 million, an effective rate of 17.3%, versus $20.4 million and 44.0% a year earlier.
- Continuing-operations investing cash outflow was $24.9 million, including $8.7 million of capital expenditures. Financing provided $96.5 million, including a $120.1 million increase in short-term debt; dividends paid were $22.1 million.
Material changes and unusual items
- Net loss chiefly reflects a $184.7 million Omega-3 held-for-sale impairment ($164.7 million after tax attributable to FMC stockholders), recorded in discontinued operations. Discontinued operations reported a total $168.8 million loss, compared with $22.7 million income in Q1 2016.
- Adjusted after-tax earnings from continuing operations, a non-GAAP measure, were $58.4 million versus $48.0 million. FMC cited stronger Lithium results, lower R&D spending and a lower effective tax rate.
- Research and development expense declined 18% to $28.2 million, primarily due to Agricultural Solutions registration and regulatory timing. Corporate and other expenses increased $4.9 million to $21.6 million.
- Continuing-operations operating cash flow turned negative, principally reflecting working-capital timing, including a $209.9 million reduction from customer advance payments and a $112.8 million use from other operating assets and liabilities. FMC reported collecting over $143 million in Brazil receivables during the quarter.
Outlook, transactions and risks
- For 2017, FMC forecast Agricultural Solutions revenue of approximately $2.2–$2.4 billion and segment earnings of $410–$450 million. Lithium segment earnings guidance was raised by $10 million to $100–$120 million. Guidance excludes earnings from the expected DuPont transaction.
- Under the March 31 DuPont agreement, FMC agreed to acquire specified DuPont Crop Protection assets and R&D operations, while DuPont agreed to acquire FMC Health and Nutrition excluding Omega-3. FMC is to pay DuPont $1.2 billion, subject to adjustments. Closing was expected in Q4 2017, conditional on approvals, the Dow-DuPont merger and other closing conditions.
- In May 2017, after quarter-end, FMC arranged a $1.5 billion term loan facility and amended its $1.5 billion revolving credit facility to support the transaction. The revolving facility has an option to increase to $2.25 billion. These are subsequent events, not March 31 borrowings under the new facilities.
- At March 31, FMC reported $1,247.3 million of available credit-facility funds and compliance with debt covenants; leverage was 3.2 against a maximum of 4.0, and interest coverage was 8.2 against a minimum of 3.5.
- Environmental reserves were $358.4 million net of recoveries. Estimated reasonably possible environmental losses exceeded accrued amounts by approximately $240 million; FMC said unreserved obligations could materially affect future quarterly or annual results, though it did not expect a material adverse effect on liquidity or financial condition.
- FMC expected $50–$55 million of net environmental remediation spending and approximately $40 million of voluntary U.S. pension contributions in 2017. It cautioned that transaction timing, approvals, financing, integration, indebtedness, customer or employee disruption, and environmental and tax matters could affect outcomes. FMC also continued plans to expand Lithium hydroxide operations and stated an intent to spin off Lithium as a separate public company in the future.
Important facts for investors to verify
- Progress, approvals, financing terms and closing conditions for the DuPont transaction, including the $1.2 billion payment and treatment or sale of Omega-3.
- Whether the Omega-3 impairment and discontinued-operation presentation fully capture expected disposal proceeds, costs and tax effects.
- Cash conversion and working-capital trends, especially customer advances, receivable collections and seasonal inventory requirements.
- Performance against 2017 segment guidance, including Agricultural Solutions’ weather and regional demand exposure and Lithium pricing, volume and expansion execution.
- Debt, liquidity and covenant headroom after transaction financing, and exposure to variable interest rates; 45% of debt was variable-rate at March 31.
- Environmental contingencies and remediation spending, including the approximately $240 million of reasonably possible losses above reserves.