FMC Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. FMC is a diversified global chemicals company with Agricultural Products, Specialty Chemicals and Industrial Chemicals segments. Financial statements are unaudited; the interim review by KPMG was not an audit opinion.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $862.1 million | $772.5 million | $2,469.3 million | $2,305.8 million |
| Gross margin | $287.4 million; 33.3% of revenue | $254.7 million; 33.0% | $874.3 million; 35.4% | $786.3 million; 34.1% |
| Income from continuing operations | $97.2 million | $86.2 million | $323.7 million | $260.5 million |
| Net income attributable to FMC stockholders | $86.8 million | $82.9 million | $288.0 million | $226.0 million |
| Diluted EPS attributable to FMC stockholders | $1.21 | $1.13 | $4.01 | $3.08 |
| Cash from continuing operating activities | Not stated by quarter | Not stated by quarter | $327.8 million | $308.2 million |
Q3 revenue rose about 12% as reported. Management cited 16% growth excluding approximately $28 million of prior-year revenue from exited phosphate and sulfur derivative businesses. Q3 gross margin dollars increased 13%; margin rate was broadly stable. Nine-month net income increased 27%, benefiting from higher segment operating profits and a lower effective tax rate. Adjusted after-tax earnings from continuing operations attributable to FMC stockholders, a non-GAAP measure, were $99.2 million for Q3 versus $86.0 million and $317.3 million for nine months versus $281.7 million.
Segment trends: Q3 revenue and operating profit were Agricultural Products $382.1 million and $80.9 million (up 24% and 8%); Specialty Chemicals $217.9 million and $47.6 million (up 8% and 1%); and Industrial Chemicals $264.0 million and $36.0 million (up 1% and 20%). For the first nine months, segment operating profit rose in all three businesses: Agricultural Products to $275.7 million from $247.5 million, Specialty Chemicals to $148.5 million from $139.0 million, and Industrial Chemicals to $112.5 million from $94.3 million. Industrial Chemicals revenue declined 3% for the nine months, mainly because of exited businesses.
Cash, debt and liquidity
- Cash and equivalents were $109.4 million at September 30, 2011, down from $161.5 million at year-end 2010. Cash provided by continuing operations was $327.8 million; discontinued operations used $29.8 million.
- Investing activities used $136.9 million, including $119.1 million of capital expenditures. Financing activities used $214.0 million, including $90.4 million of long-term debt repayments, $114.2 million of share repurchases and $30.6 million of dividends.
- Total debt was $571.1 million, down from $637.9 million at December 31, 2010. Debt due within one year was $77.5 million. The $1.5 billion unsecured revolving facility had $1,369.0 million available, after borrowings and outstanding letters of credit.
- FMC reported compliance with credit covenants: leverage of 1.0 against a maximum of 3.5, and interest coverage of 14.8 against a minimum of 3.5. Its debt portfolio was 87% fixed-rate and 13% variable-rate.
- Inventories increased to $444.3 million from $347.8 million. Management attributed cash uses partly to inventory build for expected Agricultural Products demand and lower accounts payable.
Material changes and management outlook
- All three segments posted higher Q3 operating profit. Management attributed growth broadly to higher pricing, volumes and market activity; higher raw material, energy and growth-investment costs offset some gains.
- Management expected 2011 Agricultural Products revenue growth of approximately 15% and operating-profit growth of approximately 10%; Specialty Chemicals revenue growth in the mid-single digits and operating-profit growth in the high-single digits; and Industrial Chemicals revenue approximately level with operating-profit growth of 25%–30%. No consolidated numerical earnings outlook is provided in the filing text.
- Management expected 2011 capital expenditures to be approximately 30% above 2010 levels, primarily to expand BioPolymer, Lithium and Alkali capacity. It expected approximately $30 million of net environmental remediation spending, about $7 million for environmental-control capital projects, and approximately $24 million of environmental compliance costs.
- FMC established Ruralco, an Argentine agrochemical distribution venture, and formed Natronx Technologies with partners to develop sodium-based air-pollution-control sorbents. It completed the RheinPerChemie persulfates acquisition in October and agreed to acquire Chilean natural-colors and specialty-nutrition producer South Pole Biogroup.
Unusual items, risks and contingencies
- Q3 restructuring and other charges were $13.4 million versus $3.7 million, mainly reflecting $10.1 million of accelerated depreciation for the planned phase-out of the sodium percarbonate plant in Spain. FMC expected approximately $5 million of additional accelerated depreciation through year-end 2011.
- FMC paid a European Commission hydrogen-peroxide antitrust fine of €25.0 million ($36.3 million) plus €5.1 million ($7.5 million) accrued interest in August; the proceeding is concluded. The payment contributed to restructuring-related cash spending, but the fine had been expensed previously.
- Environmental liabilities on the balance sheet included $208.6 million long-term, and the filing’s environmental-reserve rollforward reported $233.1 million net of recoveries at September 30. Management estimated reasonably possible environmental losses could exceed accrued amounts by approximately $110 million; potential obligations may affect results in a future quarter or year, though management did not expect a material adverse effect on liquidity or financial condition.
- Discontinued operations generated a $6.3 million Q3 loss and a $23.2 million nine-month loss, primarily from environmental and legal reserve adjustments for legacy operations. FMC also reported a $37.6 million pre-tax charge to discontinued operations for the first nine months, principally environmental and legal items.
- FMC continued to face European purchaser litigation and Canadian antitrust class actions related to hydrogen peroxide; the company said it could not reasonably estimate potential losses in those matters. A new Middleport, New York state-law complaint was filed after an earlier federal case was dismissed; FMC moved to dismiss it.
- Crop-protection regulation remains a risk: U.S. carbofuran registrations were cancelled in 2011, and FMC was not selling bifenthrin for agricultural use in the EU during 2011 while pursuing regulatory review. The company said these sales absences were not expected to materially affect results. Brazilian authorities had indicated a possible carbofuran review, without a formal proposal at the filing date.
- FMC identified currency, energy and commodity-price exposures, including rapid Brazilian-real devaluation late in Q3. It also noted that pension funding needs could rise if interest rates or equity returns remain unfavorable.
Important facts for investors to verify
- Whether segment growth and the stated 2011 segment outlook were achieved, particularly given raw-material, energy, currency and growth-investment pressures.
- Actual cash conversion and inventory levels after the sizable inventory build, and whether customer rebates and seasonal working-capital balances settled as expected.
- Progress and final costs of the sodium percarbonate phase-out, other restructuring actions, and the planned capacity investments and acquisitions.
- Changes in environmental reserves and recoveries, including the potential exposure above accrued amounts and developments at Front Royal and Pocatello.
- Developments in European and Canadian antitrust litigation, Middleport claims, and crop-protection re-registration proceedings.
- Whether liquidity and covenant headroom remain adequate as FMC funds capital spending, pension contributions, dividends and share repurchases.