FMC Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Comparisons are with the corresponding 2017 periods. FMC operated Agricultural Solutions and Lithium; the DuPont Crop Protection business, acquired November 1, 2017, is included in 2018 results but not the comparable 2017 reported results.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,035.6 million | $646.2 million | $3,508.6 million | $1,899.0 million |
| Gross margin | $446.2 million; 43.1% of revenue | $265.9 million; 41.1% | $1,545.0 million; 44.0% | $716.5 million; 37.7% |
| Net income attributable to FMC stockholders | $72.8 million | $55.2 million | $469.7 million | $5.7 million |
| Diluted EPS attributable to FMC stockholders | $0.54 | $0.41 | $3.45 | $0.04 |
| Adjusted after-tax earnings from continuing operations attributable to stockholders (non-GAAP) | $134.1 million | $95.4 million | $626.8 million | $218.6 million |
| Cash from continuing operating activities | — | — | $460.9 million | $272.5 million |
- Q3: Revenue rose 60% year over year, primarily reflecting the DuPont acquisition. FMC reported gross margin of $446.2 million and segment EBITDA of $235.1 million, versus $155.1 million in Q3 2017. Net interest expense increased to $33.4 million from $18.4 million.
- Nine months: Revenue increased 85%; reported stockholder net income rose sharply from $5.7 million. The comparison is affected by the $148 million after-tax Omega-3 impairment in 2017 discontinued operations, as well as the DuPont acquisition.
- Cash and investment: Cash and equivalents were $176.5 million at September 30, down from $283.0 million at year-end 2017. Nine-month capital expenditures were $88.6 million. Cash used in financing was $485.5 million, including $401.4 million of long-term debt repayments and $66.9 million of dividends.
- Debt and liquidity: Total debt was $2,742.7 million, down from $3,185.6 million at December 31, 2017. FMC reported $1,298.3 million of available capacity under its revolving facility, no commercial-paper borrowings, and compliance with debt covenants. The reported leverage ratio was 2.4 versus a maximum of 4.5.
Material changes and business developments
- Agricultural Solutions Q3 revenue was $923.6 million and segment EBITDA was $216.2 million. On a pro forma combined basis, including DuPont in both comparison periods, Q3 revenue grew about 5%, but EBITDA declined about 9%, reflecting higher costs as a percentage of revenue and unfavorable currency effects.
- Agricultural Solutions nine-month pro forma combined revenue and EBITDA each grew about 9%. Management cited growth, cost control and synergies, partly offset by higher raw-material costs.
- Lithium Q3 revenue grew 19% to $112.0 million and EBITDA rose to $48.6 million. Nine-month revenue grew 38% to $322.7 million and EBITDA increased to $150.1 million, supported by higher volumes and prices.
- Integration and restructuring costs were significant: nine-month restructuring charges were $106.6 million and transaction-related charges were $149.1 million. The latter included $69.6 million of acquired-inventory fair-value amortization.
- Required product portfolio divestitures generated $87.2 million of gains in the first nine months. FMC recorded an immaterial impairment charge on a generic brand portfolio; its annual goodwill test found no goodwill impairment.
- FMC adopted ASC 606 in 2018 using the modified retrospective method. It made balance-sheet presentation adjustments for estimated product returns; the filing reported no retained-earnings catch-up adjustment.
Outlook, risks and contingencies
- 2018 segment outlook: Agricultural Solutions revenue of approximately $4.20–$4.26 billion and EBITDA of $1.20–$1.22 billion; Lithium EBITDA of $193–$197 million. Expected full-year depreciation and amortization was approximately $144 million for Agricultural Solutions and $19 million for Lithium.
- Management identified raw-material supply constraints and price increases, including effects from Chinese industrial-park shutdowns; unfavorable weather and seasonal order timing; foreign-exchange exposure; and ongoing acquisition integration and separation costs. Management said its diversified supply chain had helped mitigate supply impacts.
- Environmental reserves, net of recorded recoveries, totaled $406.9 million. Reasonably possible environmental losses exceeded accrued amounts by approximately $210 million; the company cautioned that actual losses could be higher, while stating that it did not expect these obligations to materially harm liquidity or financial condition.
- FMC appealed a court ruling in the Middleport matter; a separate New York court ruling permits the state to pursue reimbursement of cleanup costs, which FMC may contest. A Canadian antitrust settlement for CAD 3.25 million (approximately $2.5 million) was subject to court approval.
- The Tax Cuts and Jobs Act accounting remained provisional; FMC recorded an $18.3 million adjustment to its provisional tax expense in the first nine months and expected to finalize the accounting in Q4 2018. FMC also expected the 2019 lease-accounting adoption to materially increase reported assets and liabilities.
- After quarter-end, Livent completed its IPO on October 15, 2018; FMC retained approximately 85% ownership and intended to distribute its remaining shares on March 1, 2019. FMC received approximately $320 million of net IPO proceeds and used $150 million to repay term debt on October 31. FMC also announced a plan to repurchase $200 million of shares by year-end 2018.
Key facts for investors to verify
- How much of reported growth and earnings reflects the DuPont acquisition versus underlying organic growth, especially given the lower Q3 pro forma Agricultural Solutions EBITDA.
- Whether the 2018 segment outlook was achieved, and the extent to which raw-material inflation, weather, currency and integration costs affected results.
- Cash conversion and working-capital seasonality, including changes in customer advances, rebates, receivables and cash balances.
- Debt reduction and liquidity after the Livent IPO, together with the effects and terms of the planned Livent separation and share repurchase.
- Potential exposure from environmental matters, litigation and tax adjustments beyond amounts accrued or provisionally estimated.