FMC Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. FMC is a global chemicals company operating in Agricultural Solutions, Health and Nutrition, and Lithium. FMC Alkali Chemicals was reported as a discontinued operation following its sale.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $887.1 million | $794.9 million | $1,546.5 million | $1,551.8 million |
| Gross margin | $305.8 million | $316.1 million | $556.5 million | $609.1 million |
| Income (loss) from continuing operations | $58.1 million | $98.0 million | $(3.0) million | $195.0 million |
| Net income attributable to FMC stockholders | $742.3 million | $109.1 million | $695.5 million | $174.7 million |
| Operating cash flow, continuing operations | Not separately reported for Q2 | $(122.5) million | $92.2 million |
- Q2 revenue rose 12%, driven primarily by Agricultural Solutions and the Cheminova acquisition. First-half revenue was approximately flat.
- Q2 reported gross margin was 34.5% of revenue versus 39.8% a year earlier. Management reported gross margin excluding acquisition-related charges of approximately $325 million, or 37% of revenue, versus $317 million, or 40%, citing lower Brazilian volumes and unfavorable currency.
- Q2 diluted EPS was $5.52, including $5.12 from discontinued operations; continuing-operations diluted EPS was $0.40. First-half diluted EPS was $5.21, while continuing-operations diluted EPS was a loss of $0.06.
- First-half operating cash flow from continuing operations turned negative, reflecting acquisition-related hedge payments and working-capital movements, including lower customer advances and accounts payable. Cash and equivalents were $477.5 million at June 30, up from $109.5 million at year-end.
- Total debt was $2.319 billion, up from $1.679 billion at year-end. Long-term debt was $2.051 billion; available borrowing capacity under the credit facility was $1.315 billion. FMC reported compliance with debt covenants.
Material changes and business developments
- FMC completed the sale of Alkali Chemicals to Tronox on April 1 for $1.653 billion, producing approximately $1.202 billion in after-tax cash proceeds and a $697.8 million after-tax gain. The sale materially boosted reported net income and cash from discontinued-operations investing activities.
- FMC acquired Cheminova on April 21 for $1.2 billion, excluding assumed net debt and hedge-related costs. Cheminova contributed approximately $217 million in post-acquisition revenue and $27 million in pretax continuing income. Acquisition accounting and integration costs remain subject to estimates; the purchase-price allocation was preliminary.
- Cheminova-related acquisition charges were $40.3 million in Q2 and $231.0 million in the first half, including a first-half $172.1 million loss on purchase-price hedges. First-half interest expense increased to $38.7 million from $24.8 million.
- Agricultural Solutions’ reported Q2 segment revenue increased 18%, but operating profit fell 7%. On a pro forma combined basis, Q2 revenue declined 23% and operating profit declined 30%, mainly from lower volumes and unfavorable currency; excluding foreign-exchange effects, management said operating profit increased 5%.
- Health and Nutrition Q2 revenue was approximately flat and operating profit increased 3%. Lithium revenue declined 3% and operating profit declined 39%, with currency pressure, including from the Argentine peso.
Outlook, risks and contingencies
- Agricultural Solutions full-year 2015 revenue guidance was $2.5–$2.7 billion and segment earnings guidance was $520–$550 million. Management cited confidence in second-half earnings growth and Cheminova integration benefits despite currency headwinds and difficult markets.
- Health and Nutrition expected full-year revenue to decline by a low-single-digit percentage, primarily due to currency, and earnings to increase by a mid-single-digit percentage. Lithium expected full-year reported segment earnings of $15–$25 million; management anticipated continued strong specialty-lithium demand but ongoing effects from Argentina’s economic conditions.
- Environmental reserves were $281 million net of expected recoveries. Estimated reasonably possible environmental losses exceeded accrued amounts by approximately $210 million; the company said unreserved liabilities could be material to future quarterly or annual results, though it did not expect a material adverse effect on liquidity or financial condition.
- FMC disclosed $179.9 million of potential guarantee payments, including $108.6 million of Tronox-related guarantees; it reported release from those Tronox guarantee obligations after quarter-end, as of July 27, 2015.
- A European competition-law lawsuit involving the discontinued Peroxygens business remained unresolved; FMC said it could not reasonably estimate potential exposure and intended to defend the matter.
- Key stated risks include agricultural market and weather conditions, foreign exchange—especially Brazil and Argentina—regulatory and environmental obligations, customer credit and collections, and successful integration and realization of Cheminova synergies. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the Alkali sale gain and other discontinued-operation items; assess reported results alongside the company’s non-GAAP adjusted earnings measure.
- Track Agricultural Solutions’ pro forma revenue, operating profit, currency exposure, Brazil conditions, and delivery against full-year guidance and expected Cheminova synergies.
- Review cash conversion and working-capital trends, including customer advances, receivables, inventory, and acquisition-related cash payments.
- Monitor debt, floating-rate exposure, covenant headroom, and the timing and effect of further debt repayment using divestiture proceeds.
- Follow updates to Cheminova’s preliminary purchase-price allocation, integration charges, environmental exposure, and retained or indemnified liabilities.