FMC Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. FMC is a global chemicals company with Agricultural Solutions, Health and Nutrition, and Lithium segments. Interim financial statements are unaudited and were reviewed by KPMG.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $810.3 million | $887.1 million | $1,609.1 million | $1,546.5 million |
| Gross margin | $301.3 million; 37% | $305.8 million; 34%* | $582.7 million | $556.5 million |
| Income from continuing operations attributable to FMC stockholders | $71.0 million | $54.1 million | $125.4 million | Loss of $8.3 million |
| Adjusted after-tax earnings from continuing operations (non-GAAP) | $92.8 million | $94.7 million | $171.2 million | $172.4 million |
| Net income attributable to FMC stockholders | $65.2 million | $742.3 million | $113.5 million | $695.5 million |
*Approximate, calculated from reported revenue and gross margin. Q2 revenue fell about 9%; management attributed the decline mainly to lower Agricultural Solutions and Health and Nutrition sales. Q2 continuing-operations diluted EPS was $0.53, versus $0.40. Prior-year net income included the after-tax gain from selling FMC Alkali Chemicals; therefore, reported net income comparisons are not representative of underlying operations.
- Segments, Q2 revenue / operating profit: Agricultural Solutions $552.0 million / $100.7 million, down 12% / 17%; Health and Nutrition $195.0 million / $44.9 million, down 6% / 11%; Lithium $63.3 million / $16.5 million, up 15% in revenue and $11.9 million in profit.
- Cash flow: First-half operating cash flow from continuing operations was $242.6 million, versus cash use of $122.5 million a year earlier. Capital expenditures were $55.2 million. Cash was $93.6 million at June 30, 2016, up from $78.6 million at year-end.
- Debt and liquidity: Total debt was $2.042 billion, down from $2.149 billion at December 31, 2015. The revolving credit facility had $1.441 billion available. FMC reported covenant compliance; trailing leverage was 3.9 against a 4.5 maximum, and interest coverage was 7.1 against a 3.5 minimum.
- Margins and costs: Q2 gross margin dollars declined about $24 million, chiefly on Agricultural Solutions volume weakness. Gross margin percentage was reported as essentially flat year over year at 37%, supported by exiting lower-margin Brazil sales. SG&A savings reflected Cheminova synergies and favorable currency effects.
Material changes and management commentary
- Agricultural Solutions faced difficult crop-protection markets, high channel inventories, weak grower economics and planned product rationalization, particularly in Brazil. Management said the business continued to benefit from Cheminova’s scale, market access and portfolio, and expected restructuring and integration charges to be completed in 2016.
- Health and Nutrition revenue and earnings were pressured by lower volumes, especially in Omega-3; management cited industry overcapacity. Naturally derived ingredients remained in demand, with focus on protecting margins through efficiency and product differentiation.
- Lithium benefited from specialty-market demand, including energy storage and electric vehicles, higher prices and lower operating costs. FMC announced plans to triple lithium hydroxide capacity to 30,000 metric tons by 2019.
- FMC reported Q2 adjusted continuing-operations earnings of $92.8 million, essentially flat with $94.7 million a year earlier. This non-GAAP measure excludes specified special items and should not be treated as a substitute for GAAP results.
Outlook, risks and contingencies
- 2016 segment outlook: Agricultural Solutions revenue of approximately $2.2–$2.4 billion and earnings of $380–$420 million; Health and Nutrition revenue of approximately $750–$800 million and earnings of $190–$196 million. Lithium earnings guidance was raised by $14 million to $58–$66 million, with management citing stronger results and an improving forecast.
- Management expected challenging global crop-protection conditions to continue through the rest of 2016. Guidance remains subject to forward-looking-statement risks and is not a guarantee of results.
- Environmental reserves, net of recoveries, were $338.4 million. Estimated reasonably possible environmental losses exceeded recorded accruals by approximately $230 million. FMC could not reasonably estimate its potential exposure at the Portland Harbor Superfund Site following the EPA’s proposed cleanup plan.
- Other exposures include retained liabilities from discontinued operations, customer vendor-financing guarantees with estimated potential payments of $142.9 million, and foreign-exchange, commodity and interest-rate risk. FMC stated that payments under guarantees were considered unlikely based on its experience.
- First-half restructuring and other charges were $24.7 million, including $9.1 million of continuing-operations environmental charges and $4.2 million related to Argentina currency devaluation. Cheminova acquisition-related charges were $12.4 million. Management said it did not expect further Argentina remeasurement charges.
- FMC expected approximately $50–$55 million of net environmental remediation spending and approximately $35 million of voluntary U.S. pension contributions during 2016. The company also noted that pension contributions could rise if interest rates or investment returns worsen.
Investor verification points
- Review Agricultural Solutions trends—especially Brazil volumes, channel inventory, product rationalization and whether cost synergies offset sales pressure.
- Compare reported GAAP earnings with adjusted earnings and account for the 2015 Alkali Chemicals divestiture gain when assessing year-over-year performance.
- Track Lithium capacity expansion, pricing, demand and progress toward the 2019 hydroxide capacity target.
- Monitor environmental exposure, including the unquantified Portland Harbor matter and the approximately $230 million of reasonably possible losses above reserves.
- Check cash generation, debt reduction, available credit and covenant headroom against the company’s seasonal working-capital needs and 2016 guidance.