FMC Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited interim financial statements. FMC is a diversified chemical company with Agricultural Solutions, Health and Nutrition, and Minerals segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,015.9 million | $957.4 million | $2,945.5 million | $2,744.1 million |
| Gross margin | $323.7 million | $304.4 million | $1,009.8 million | $985.5 million |
| Income from continuing operations | $80.6 million | $76.5 million | $327.0 million | $334.4 million |
| Net income attributable to FMC stockholders | $56.3 million | $17.9 million | $231.0 million | $266.8 million |
| Diluted EPS attributable to FMC stockholders | $0.42 | $0.13 | $1.72 | $1.95 |
- Q3 revenue increased 6%; nine-month revenue increased 7%. Gross margin was approximately 32% in Q3, broadly flat year over year. Management cited unfavorable currency and product mix in Agricultural Solutions.
- Q3 segment operating profit rose to $199.6 million from $182.9 million. Nine-month segment operating profit was $630.0 million versus $623.1 million.
- Q3 net income growth primarily reflected better results across all segments, a lower effective tax rate, and smaller discontinued-operation losses. Nine-month net income declined amid acquisition and separation costs, higher interest expense, and the Peroxygens divestiture loss.
- Adjusted after-tax earnings from continuing operations, a company-defined non-GAAP measure, were $127.5 million in Q3 versus $110.2 million; nine-month results were $390.1 million versus $387.1 million.
- Cash provided by continuing operations was $234.6 million for the nine months, down from $380.6 million. Working-capital outflows included customer advances ($174.8 million) and inventory ($78.3 million); pension contributions were $65.2 million. Capital expenditures were $172.6 million.
- Cash and cash equivalents were $124.3 million at September 30, 2014, including $118.7 million held by foreign subsidiaries. Total debt was $1,732.3 million, down from $1,851.9 million at year-end 2013. The company reported $867.1 million available under its existing credit facility, reflecting commercial-paper borrowings, and compliance with debt covenants.
- Current assets were $2,857.3 million and current liabilities were $1,741.5 million. The filing reports total equity of $1,784.3 million.
Material changes and segment trends
- Agricultural Solutions Q3 revenue rose 4% and operating profit rose 2%; nine-month operating profit fell 9%, reflecting currency, weather-related product mix, and planned sales, marketing, and R&D investment.
- Health and Nutrition Q3 revenue rose 7% and operating profit rose 6%; nine-month revenue and operating profit each rose 11%, aided by health-market volumes, product mix, pricing, and omega-3 products.
- Minerals Q3 revenue rose 11% and operating profit rose 42%; nine-month revenue rose 8% and operating profit rose 29%, driven by higher lithium volumes, soda ash pricing, and operational improvements.
- FMC completed the sale of FMC Peroxygens on February 28, 2014, for $199.1 million cash. The nine-month discontinued-operations loss included a $40.0 million after-tax divestiture loss and additional environmental and legal provisions.
- On September 8, FMC abandoned its planned separation into two public companies and announced a planned Cheminova acquisition and divestiture of FMC Alkali Chemicals. The Cheminova purchase price was approximately $1.5 billion, excluding approximately $0.3 billion of net debt; completion was expected in early 2015. In October, FMC arranged up to $2.0 billion in term financing and amended its $1.5 billion revolving facility.
Outlook, risks, and unusual items
- Management expected 2014 Agricultural Solutions revenue growth in the mid-single digits, with operating profit down mid-single digits versus 2013. Health and Nutrition revenue and earnings were expected to rise at high-single-digit rates. Minerals revenue was expected to grow mid- to high-single digits, with operating profit up in the low twenties percent. These are segment outlooks, not consolidated guidance.
- Environmental reserves were $269.0 million excluding recoveries; estimated reasonably possible environmental losses exceeded accruals by approximately $170 million net of expected recoveries. Management said potential obligations could materially affect a quarter or year, though it did not expect them to materially harm liquidity or financial condition because payments may occur over many years.
- Key environmental matters include the Pocatello Tribal litigation and FMC’s challenges to the New York Middleport cleanup remedy. The Middleport reserve was $39.8 million; additional exposure could arise if the regulator’s proposed remedy is upheld. The filing also discusses European and Canadian antitrust claims and asbestos litigation for which FMC could not reasonably estimate potential exposure.
- FMC reported $59.7 million of receivables from the Argentine government and considered them recoverable despite Argentina’s economic conditions and 2014 debt default.
- Brazilian regulators were reviewing carbofuran and other pesticides. FMC said it did not expect a material sales impact during 2014, while noting the review was ongoing.
- Q3 included $37.5 million in acquisition/divestiture-related charges, including an unrealized loss on hedging the Cheminova purchase price, and $6.8 million in costs for the abandoned separation. FMC expected no further separation costs after September 8.
Important facts for investors to verify
- Progress, final financing, purchase price and closing conditions for Cheminova, as well as execution and proceeds from the planned Alkali Chemicals divestiture.
- Whether segment outlooks were achieved, particularly Agricultural Solutions’ expected profit decline and Minerals’ projected growth.
- Environmental reserve assumptions, recoveries, reasonably possible exposure, and developments in Pocatello and Middleport proceedings.
- Cash conversion and working-capital trends, including customer advances, receivables, inventories, and rebate timing.
- Argentina government receivable collections and developments in pesticide re-registration, antitrust, and asbestos matters.