FMC Corporation 10-Q Summary: Period Ended June 30, 1998
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, and the six-month period ended June 30, 1998. FMC Corporation operates primarily in three segments: Machinery and Equipment, Industrial Chemicals, and Performance Chemicals. The Defense Systems segment was sold in October 1997 and is reported as a discontinued operation. The financial statements reflect the adoption of new accounting standards effective January 1, 1998.
Key Financial Metrics
| Metric (in millions) | Q2 1998 | Q2 1997 | 6M 1998 | 6M 1997 |
|---|---|---|---|---|
| Total Revenue | $1,155.1 | $1,152.9 | $2,194.1 | $2,155.3 |
| Net Income | $67.6 | $72.7 | $58.3 | $112.7 |
| Diluted EPS (Net Income) | $1.89 | $1.90 | $1.63 | $2.95 |
| Operating Cash Flow (6M) | $45.7 (1998) vs $271.0 (1997) | |||
| Total Debt | $1,464.3 (June 30, 1998) | |||
| Cash and Equivalents | $70.0 (June 30, 1998) | |||
| Inventory | $592.2 (June 30, 1998) |
Profitability: Income from continuing operations before taxes was $91.2 million for Q2 1998 and $127.4 million for the six months ended June 30, 1998. The effective tax rate for continuing operations was 26% for both the quarter and the six-month period.
Material Changes vs. Prior Period
- Accounting Change: Net income for the six months ended June 30, 1998, includes a $36.1 million after-tax charge (cumulative effect of a change in accounting principle) due to the adoption of SOP No. 98-5, which required expensing start-up costs previously capitalized. Without this charge, six-month net income would have been significantly higher.
- Discontinued Operations: The 1997 comparative periods include earnings from the Defense Systems segment ($12.1 million for Q2 and $30.8 million for 6M), which were sold in late 1997. These are excluded from 1998 results.
- Cash Flow: Operating cash flow for the first six months of 1998 ($45.7 million) decreased significantly compared to the same period in 1997 ($271.0 million). Management attributes this to the liquidation of higher year-end 1997 payables and working capital management factors.
- Segment Performance: Machinery and Equipment sales and profits increased (driven by subsea equipment and airport products). Industrial Chemicals and Performance Chemicals sales declined due to lower prices (soda ash, lithium) and volumes (herbicides, phosphorus), though earnings in Performance Chemicals improved due to cost reductions.
Guidance, Outlook, and Risks
- Stock Repurchases: The company plans to repurchase approximately $150 million of common stock in 1998 and $150 million in 1999. As of August 10, 1998, $48.9 million was spent in the first half of 1998, with an additional $42.9 million spent in July-August.
- Capital Expenditures: Expected capital spending for the remainder of 1998 is $150 million to $175 million, excluding acquisitions.
- Legal Contingency: A jury returned a $125 million verdict against FMC in a qui tam lawsuit regarding the Bradley Fighting Vehicle. Management believes the lawsuit is without merit and the likelihood of a material adverse judgment standing is remote; no provision has been made in the financial statements.
- Environmental: Total environmental reserves are $245.0 million. Management estimates reasonably possible losses may exceed accrued amounts by up to $150 million but does not expect a material adverse effect on liquidity.
- Market Risks: Risks include price competition, raw material shortages, currency exchange rates (specifically the strengthening U.S. dollar impacting Spanish operations), and weakened market conditions in Asia.
Investor Verification Checklist
- Verify the impact of the $36.1 million accounting change charge on the reported six-month net income of $58.3 million.
- Confirm the status of the $125 million qui tam lawsuit verdict and potential for trebling of damages under the False Claims Act.
- Monitor the execution of the $150 million stock repurchase plan for the remainder of 1998.
- Assess the sustainability of operating cash flows given the significant year-over-year decline in the first half of 1998.
- Review the backlog of $1,339 million in the Machinery and Equipment segment for future revenue visibility.