FMC Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited and were reviewed by KPMG. Comparisons are with Q1 2014 unless otherwise noted. FMC reported Agricultural Solutions, Health and Nutrition, and Lithium as continuing segments; Alkali Chemicals was classified as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $659.4 million | $756.9 million |
| Gross margin | $250.7 million; 38% of revenue | $293.0 million; 39% of revenue |
| Operating profit before listed special items | $123.0 million | $160.2 million |
| Continuing operations income (loss), attributable to FMC stockholders | $(62.4) million | $93.8 million |
| Net income (loss), attributable to FMC stockholders | $(46.8) million; $(0.35) per diluted share | $65.6 million; $0.49 per diluted share |
| Adjusted after-tax earnings from continuing operations (non-GAAP) | $83.8 million | $105.0 million |
| Operating cash flow, continuing operations | $(304.9) million | $(106.0) million |
| Cash and cash equivalents | $105.2 million | $109.5 million at Dec. 31, 2014 |
| Total debt | $2,058.2 million | $1,678.6 million at Dec. 31, 2014 |
| Total current assets / liabilities | $3,329.6 million / $2,015.6 million | $2,934.4 million / $1,910.4 million at Dec. 31, 2014 |
Q1 revenue declined 13%. The company recorded $190.7 million in Cheminova-related acquisition charges, including a $180.1 million loss on purchase-price currency hedges; this was a major driver of the GAAP loss. The tax benefit on continuing operations was $49.1 million, with a reported effective tax rate of 44.6%; excluding discrete items, the estimated rate was 26.4%.
Operating cash use worsened year over year, reflecting the loss from continuing operations and working-capital movements, including a $165.9 million reduction in customer advances, a $50.0 million inventory increase, and Cheminova hedge-related payments. Financing activities provided $364.8 million, mainly from increased short-term borrowing. Capital expenditures were $36.9 million.
Segments and material changes
- Agricultural Solutions: Revenue was $392.4 million, down 16%; operating profit was $81.8 million, down 32%. Lower Brazilian volumes, pricing, and adverse currency movements weighed on results. Latin American revenue fell 44%; North American revenue was down 1%.
- Health and Nutrition: Revenue was $211.0 million, down 7%, mainly from foreign exchange and lower alginate volumes. Operating profit was essentially flat at $51.0 million.
- Lithium: Revenue was $56.0 million, down 12%, mainly due to lower butyllithium volumes and currency effects. Operating profit fell 17% to $5.5 million.
- Discontinued operations: Alkali Chemicals generated Q1 revenue of $194.0 million and net income of $18.6 million attributable to FMC stockholders. Discontinued operations overall produced $15.6 million of income versus a $28.2 million loss in Q1 2014; the prior-year period included a $40.0 million after-tax loss on the Peroxygens divestiture.
Outlook, transactions, and risks
- Management expected global crop-protection markets to decline by mid-single digits in 2015. It anticipated Agricultural Solutions full-year segment earnings growth of high-single-digit to low-double-digit percent, citing Cheminova contributions and synergies, weed resistance, and market-share gains.
- Management expected Health and Nutrition operating profit to rise by a mid-single-digit percentage in 2015. Lithium revenue was expected to be relatively flat, with operating profit forecast in a $15 million to $25 million range.
- FMC completed the sale of Alkali Chemicals on April 1, 2015, for approximately $1.6 billion pretax ($1.2 billion after tax). FMC completed its Cheminova acquisition on April 21, 2015, for approximately $1.2 billion, excluding assumed net debt and hedge-related costs. It borrowed $1.65 billion under a term loan facility after quarter-end to fund the acquisition and related costs. Purchase-price allocation and pro forma combined financial information were not yet complete.
- At March 31, FMC had $905.6 million of short-term debt, including $865.1 million of commercial paper, and $534.8 million of available credit-facility capacity. FMC was in compliance with debt covenants; its reported leverage ratio was 3.2 against a 3.5 maximum before the acquisition. Following the acquisition, the maximum leverage covenant increased to 4.5, subject to step-down provisions.
- Environmental reserves, net of recoveries, totaled $282.0 million. Estimated reasonably possible environmental losses exceeded recorded accruals by approximately $210 million; the company cautioned actual losses could be higher, though it did not expect these obligations to materially impair liquidity or financial condition.
- Other important risks include currency and agricultural-market volatility, adverse weather, regulation, customer credit and collections, environmental and legal liabilities, and successful integration and realization of Cheminova synergies. The company expected approximately $60 million of net environmental remediation spending and approximately $65 million in voluntary U.S. pension contributions during 2015.
Key investor verification points
- Assess underlying earnings apart from the $190.7 million acquisition-related charges, while noting that adjusted earnings are a non-GAAP measure and do not replace GAAP results.
- Track Agricultural Solutions performance, particularly Brazil, foreign-exchange effects, and the assumptions behind management’s 2015 market and earnings outlook.
- Review post-quarter financing, debt maturities, covenant headroom, and the use of Alkali Chemicals sale proceeds to fund the Cheminova acquisition.
- Monitor Cheminova purchase accounting, integration costs, expected synergies, and subsequent pro forma disclosures.
- Evaluate the uncertainty around environmental contingencies and the adequacy of recorded reserves versus the estimated $210 million of reasonably possible losses above accruals.
- Understand the drivers of negative operating cash flow, including customer advances, inventory, and hedge settlements, and whether working capital normalizes in subsequent quarters.