FMC Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited interim results; amounts below are in U.S. dollars unless stated otherwise.
Business context
FMC reported two continuing segments: Agricultural Solutions and Lithium. FMC Health and Nutrition was classified as discontinued operations. On November 1, 2017, after quarter-end, FMC completed the acquisition of certain DuPont Crop Protection assets, sold Health and Nutrition to DuPont, and paid DuPont $1.2 billion. The acquired business was expected to join Agricultural Solutions beginning in Q4.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $646.2 million | $628.8 million | $1,899.0 million | $1,850.5 million |
| Gross margin | $265.9 million | $214.6 million | $716.5 million | $666.0 million |
| Gross margin percentage | 41% | 34% | 38% | 36% |
| Income from continuing operations | $70.9 million | $48.5 million | $164.6 million | $121.3 million |
| Net income (loss) attributable to FMC stockholders | $55.2 million | $79.7 million | $5.7 million | $193.2 million |
| Diluted EPS | $0.41 | $0.59 | $0.04 | $1.44 |
Q3 gross-margin improvement reflected lower Agricultural Solutions costs and higher Lithium prices. Q3 GAAP net income fell despite stronger continuing-operations income, principally because discontinued operations moved to a loss. Nine-month discontinued operations included a roughly $168 million Omega-3 impairment ($148 million after tax). FMC reported adjusted after-tax earnings from continuing operations of $95.4 million for Q3, versus $58.7 million, and $218.6 million for nine months, versus $169.0 million; this is a non-GAAP measure.
Segment results
- Agricultural Solutions: Q3 revenue was $551.8 million, down about 1%; segment operating profit was $118.4 million, up about 31%. India channel destocking reduced sales, while excluding India volumes, Brazilian cost benefits, and lower operating costs supported profit.
- Lithium: Q3 revenue was $94.4 million, up about 35%, and operating profit was $36.8 million versus $17.5 million. Higher prices and production and sales from new Chinese hydroxide facilities contributed to growth.
Cash flow, debt and liquidity
- Continuing-operations operating cash flow for the first nine months was $272.5 million, compared with $266.5 million. Continuing-operations investing cash outflow was $70.0 million; financing cash outflow was $244.3 million. Cash ended the period at $93.8 million, up from $64.2 million at year-end 2016.
- Total debt was $1.707 billion at September 30, 2017, down from $1.893 billion at December 31, 2016. Current debt and short-term borrowings totaled $214.2 million; long-term debt, less current portion, was $1.493 billion.
- FMC had $1.356 billion of available borrowing capacity under its revolving facility and was in compliance with debt covenants. Its four-quarter leverage ratio was 2.6 against a 3.5 maximum; interest coverage was 8.2 against a 3.5 minimum.
- After quarter-end, FMC borrowed $1.5 billion under its 2017 term loan facility to help fund the acquisition and related obligations. The loan carries floating-rate interest and includes covenants, including a maximum leverage ratio of 4.75 immediately following the acquisition.
Outlook, commentary and material risks
- 2017 Agricultural Solutions guidance was revenue of approximately $2.5–$2.6 billion and segment earnings of $465–$485 million; the stated Legacy FMC portions were $2.3–$2.4 billion and $425–$445 million, respectively.
- 2017 Lithium segment earnings guidance was raised to $124–$128 million, $6 million above the prior range. FMC said it would continue lithium capacity expansion and stated its strategic intent to spin off Lithium as a separate publicly traded company.
- European and Indian regulatory approvals for the DuPont acquisition required product divestitures. FMC expected these remedies to reduce Agricultural Solutions’ annual 2018 operating profit by approximately $15 million and was negotiating the required European divestiture.
- Environmental reserves were $383.9 million net of recorded recoveries. Estimated reasonably possible environmental losses exceeded accrued amounts by approximately $240 million. FMC said actual losses could be higher, but did not expect such obligations to materially harm liquidity or financial condition because payments may be spread over many years. A $25 million Q3 reserve increase related to remediation at Middleport.
- In Pocatello Tribal litigation, a district court found jurisdiction to require a $1.5 million annual fee; FMC appealed and the judgment was stayed. FMC said it did not consider a loss probable.
- FMC cited acquisition integration, expected synergies, revenues, costs, customer and employee retention, business disruption, transaction-related debt and tax treatment among the DuPont transaction risks. It also noted exposure to foreign exchange, commodity prices, interest rates, customer credit and seasonal working-capital movements.
- The October 2017 completion of a U.K. pension annuity buy-out was expected to produce an approximately $34 million settlement charge in Q4.
Most important facts for investors to verify
- Acquisition integration progress, financing costs, leverage and the final purchase-price allocation, which was not yet determined in this filing.
- Whether required regulatory product divestitures are completed on time and whether the projected $15 million annual 2018 profit impact changes.
- Underlying segment performance and cash conversion, especially Agricultural Solutions’ India destocking and seasonal receivables, and Lithium pricing, volumes and expansion costs.
- The development of environmental exposures beyond recorded reserves, including Middleport and the Pocatello appeal.
- Realization of guidance and the timing and feasibility of the stated Lithium spin-off intent.