FMC Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. FMC is a global chemical company with Agricultural Solutions, Health and Nutrition, and Minerals segments. The interim statements are unaudited and were reviewed by the independent accountants.
Financial performance
- Q2 revenue rose 13% to $987.8, from $876.0. Gross margin was $357.6, versus $327.5; management reported gross margin excluding acquisition-related charges of $358.7, up about 10%. Gross margin percentage declined to 36% from 37%, mainly due to Agricultural Solutions product mix and foreign exchange.
- Q2 income from continuing operations was $125.9, versus $119.7. Net income attributable to FMC stockholders fell to $109.1 from $118.0; diluted EPS was $0.81 versus $0.86. Discontinued operations contributed a $12.6 loss, compared with $1.5 income a year earlier.
- First-half revenue increased 8% to $1,929.6 from $1,786.7. Income from continuing operations was $246.4 versus $257.9; net income attributable to stockholders declined to $174.7 from $248.9, and diluted EPS was $1.30 versus $1.81. The $62.7 discontinued-operations loss was a major factor.
- Q2 segment results: Agricultural Solutions revenue/profit was $531.2/$130.7 (prior year $442.6/$124.7); Health and Nutrition $207.1/$49.1 ($189.9/$44.3); Minerals $249.6/$42.8 ($244.4/$35.4). First-half segment operating profit totaled $430.4 versus $440.2: Agricultural Solutions declined to $250.8 from $288.0, while Health and Nutrition rose to $100.0 from $88.0 and Minerals to $79.6 from $64.4.
- Cash flow: First-half cash from continuing operating activities was $148.5, down from $248.0. The filing attributes the decline in part to working-capital movements, including customer advances, inventory and receivables, and to pension contributions. Continuing investing activities used $125.3, including $120.6 of capital expenditures. The Peroxygens sale generated $199.1 of investing cash; financing activities used $198.2. Cash ended at $114.4, down from $123.2 at year-end.
- Debt and liquidity: Total debt was $1,697.9 at June 30, down from $1,851.9 at December 31, 2013; short-term debt was $525.3 and long-term debt, excluding current maturities, was $1,153.7. The company reported $913.4 available under its credit facility, including the effect of commercial paper. It was in compliance with debt covenants.
- Other financial items: Q2 interest expense rose to $15.3 from $11.1; first-half expense was $28.8 versus $21.6, attributed mainly to debt associated with the Epax acquisition and higher working-capital needs. First-half dividends paid were $38.0. No shares were repurchased under the public program; $250.0 remained authorized.
Material changes and unusual items
- FMC completed the sale of FMC Peroxygens on February 28, 2014, for $199.1 cash. The transaction produced a $40.0 after-tax loss in discontinued operations for the first half, including a $49.6 reclassification of accumulated currency translation losses.
- FMC announced a planned separation into two independent public companies: Agricultural Solutions and Health and Nutrition together, and Minerals separately. The expected structure was a tax-free distribution, subject to final board approval and customary conditions. Separation costs were $13.8 in Q2 and $16.8 for the first half; estimated total completion costs were $100–$130.
- First-half adjusted after-tax earnings from continuing operations, a non-GAAP measure, were $262.6 versus $276.9. Q2 adjusted earnings were $135.7 versus $127.9. These figures exclude specified special charges, discontinued operations, and tax adjustments; they are not substitutes for GAAP results.
- Environmental reserves, net of recoveries, were $211.1 at June 30. Separately, management estimated reasonably possible environmental losses above accrued amounts of approximately $170, while noting uncertainty around actual outcomes.
Outlook, management commentary and risks
- For 2014, management expected Agricultural Solutions revenue growth in the mid- to high-single digits and operating-profit growth in the mid-single digits. It cited new products and market-share gains, partly offset by drought conditions affecting Brazilian sugarcane and currency, mix, and planned investment costs.
- Health and Nutrition full-year revenue was expected to increase in the low- to mid-teens, with operating profit growth in the mid-teens, supported by functional ingredients, new products and omega-3 sales.
- Minerals full-year revenue was expected to grow in the mid- to high-single digits and operating profit in the high-teens, reflecting lithium volumes and margins and soda ash pricing.
- Management expected 2014 capital expenditures and contract-manufacturer spending to be consistent with 2013. It projected about $35 of net environmental remediation spending, approximately $10 for environmental-control capital projects, and about $30 of environmental compliance costs not covered by reserves. It expected approximately $50 of voluntary U.S. pension contributions during 2014.
- Argentina government receivables were $56.4 at quarter-end and management then considered them recoverable. Argentina defaulted on some debt obligations on July 31, 2014; FMC said it could not yet reasonably estimate any financial-statement impact.
- Risks include pesticide regulatory reviews, particularly Brazil’s review of carbofuran; environmental matters and litigation; foreign-exchange, commodity and interest-rate exposure; and uncertainty around retained discontinued-operation liabilities. FMC said it intended to defend its products and legal positions. The filing states the known contingencies could adversely affect results or liquidity if resolved unfavorably.
Most important facts for investors to verify
- Whether the planned corporate separation received approval, its final structure and timing, and actual costs against the $100–$130 estimate.
- Whether the Argentina default affects collection or valuation of the $56.4 in government receivables.
- Cash conversion and working-capital trends, including customer advances, rebates, inventory, and receivables, alongside debt and facility availability.
- Actual segment performance versus the 2014 outlook, especially Agricultural Solutions’ currency, weather and Brazilian crop exposure.
- Developments in environmental reserves and reasonably possible exposure, including the Pocatello and Middleport disputes and discontinued-operation legal matters.
- Actual proceeds, tax effects and continuing obligations following the Peroxygens divestiture.