FMC Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. FMC is now a single-segment agricultural sciences company following the March 1, 2019 distribution of Livent shares. Financial results present FMC Lithium as a discontinued operation.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,206.1 million | $1,154.4 million | $2,398.2 million | $2,262.3 million |
| Gross margin | $550.5 million | $490.4 million | $1,095.2 million | $992.9 million |
| Income from continuing operations | $194.4 million | $99.8 million | $402.0 million | $330.0 million |
| Net income attributable to FMC stockholders | $174.5 million | $129.7 million | $390.2 million | $396.9 million |
| Diluted EPS attributable to FMC stockholders | $1.32 | $0.96 | $2.94 | $2.91 |
| Adjusted EBITDA (non-GAAP) | $337.8 million | $319.6 million | $681.2 million | $649.1 million |
Margins and drivers: Q2 gross margin was about 46% of revenue, versus about 42% a year earlier; excluding transaction-related charges, gross margin percentage was about 46% in both periods. For the first half, reported gross margin percentage was about 46% versus 44%, while the comparable measure excluding transaction charges was about 46% versus 47%. Higher volume and pricing supported results; higher raw-material costs and unfavorable currency movements were offsets. Q2 revenue rose about 4%, with volume contributing approximately 5%, pricing 3%, and foreign exchange reducing growth by 4%.
Regional trends: Q2 Latin America revenue increased about 29%, supported by demand in Brazil and pricing. EMEA rose about 4%; North America fell about 2% amid extreme weather and flooding; Asia fell about 2%, including challenged Chinese rice markets and currency effects. In the first half, revenue increased about 6% overall, with volume and pricing gains partly offset by currency.
Cash flow, debt and liquidity
- Continuing-operations operating cash flow was negative $216.8 million in the first half, compared with positive $200.5 million in 2018. Management attributed the swing largely to seasonal working-capital needs, collection timing, inventory, and the prior-year comparison benefiting from unusually favorable payables and other working-capital items.
- Management expected many first-half working-capital effects to unwind in the second half, resulting in substantially higher positive cash flow.
- Cash and equivalents were $83.4 million at June 30, 2019, versus $134.4 million at year-end 2018. Total debt was $3,238.5 million, up from $2,692.7 million; short-term debt and current maturities totaled $1,094.2 million.
- FMC had $747.2 million of remaining borrowing capacity under its credit arrangements, including commercial-paper capacity. It reported compliance with debt covenants; leverage was 2.8 against a 4.3 maximum, and interest coverage was 8.8 against a 3.5 minimum.
- First-half capital expenditures were $35.5 million, with an additional $26.7 million invested in the ERP system. FMC paid $106.0 million in dividends and repurchased $200.0 million of shares under its public program.
Outlook, commentary and notable items
- FMC forecast 2019 revenue of approximately $4.5–$4.6 billion and adjusted EBITDA of $1.18–$1.22 billion. It did not provide a GAAP earnings outlook, citing unpredictability of items including restructuring, acquisition charges, and discontinued operations.
- Management described strong demand and commercial execution, especially in Latin America, while citing raw-material inflation and currency headwinds. Projected 2019 capital expenditures and contract-manufacturer spending were approximately $150 million at the midpoint.
- A March explosion led to the temporary shutdown of a Chinese industrial park containing a contract manufacturer’s plant. FMC said its alternate sourcing and global manufacturing network provided flexibility, but the reopening date was unknown.
- Environmental reserves, net of recoveries, were $514.8 million. Estimated reasonably possible environmental losses exceeded recorded accruals by approximately $190 million; FMC stated these obligations could affect future results but were not expected to materially impair liquidity or financial condition.
- FMC was named in a putative class action concerning Livent’s IPO; Livent agreed to defend and indemnify FMC. The filing also reports ongoing environmental and other retained-liability matters.
- Q2 discontinued operations were a net loss of $18.1 million, compared with income of $32.7 million a year earlier, reflecting the Livent separation and other adjustments. First-half discontinued operations included an approximately $21 million after-tax gain on the sale of a Newark, California parcel.
Important facts for investors to verify
- Whether second-half cash generation improved as management anticipated, particularly as receivables, inventory, customer advances, and seasonal working capital normalized.
- Whether 2019 revenue and adjusted EBITDA guidance was achieved, and how raw-material costs, pricing, foreign exchange, weather, and regional demand affected results.
- How short-term borrowing and total debt evolved, and whether liquidity and covenant headroom remained adequate.
- Whether the Chinese industrial-park shutdown disrupted product supply or required alternative sourcing at higher cost.
- Updates to environmental estimates, including the approximately $190 million reasonably possible exposure above recorded accruals, and developments in the Livent IPO litigation.