FMC Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. FMC is a diversified chemical company operating in Agricultural Products, Specialty Chemicals and Industrial Chemicals. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $776.8 million | $700.3 million | $1,533.3 million | $1,390.8 million |
| Income from continuing operations | $88.2 million | $76.9 million | $174.3 million | $152.2 million |
| Net income attributable to FMC stockholders | $65.7 million | $69.3 million | $143.1 million | $138.4 million |
| Diluted EPS | $0.90 | $0.94 | $1.95 | $1.89 |
| Operating cash flow from continuing operations | Not reported by quarter | $199.2 million | $173.9 million |
Revenue increased about 11% in Q2 and 10% in the first half. Gross margin, calculated as revenue less cost of sales and services divided by revenue, was approximately 34.1% in Q2 versus 31.8% and 34.7% for the first half versus 33.0%. Q2 stockholder net income declined despite higher continuing-operations income, principally reflecting a larger discontinued-operations loss, higher taxes and lower Agricultural Products profit. Discontinued operations were losses of $19.3 million for Q2 and $25.0 million for the first half, primarily from environmental and legal matters.
Segments and drivers
- Agricultural Products: Q2 revenue rose 16% to $293.9 million, but operating profit fell 12% to $79.6 million. First-half revenue increased 16% to $598.5 million and profit decreased 6% to $172.4 million. Management cited sales growth, offset by less favorable mix, higher inventory and distribution costs, U.S. import duties and growth spending.
- Specialty Chemicals: Q2 revenue increased 11% to $214.6 million and operating profit rose 26% to $51.1 million. First-half revenue grew 14% to $417.2 million and profit 17% to $91.9 million, led by BioPolymer performance and lithium volume recovery, partly offset by higher raw-material costs.
- Industrial Chemicals: Q2 revenue increased 5% to $269.2 million and operating profit rose 121% to $29.9 million. First-half revenue was up 1% to $519.3 million, while profit rose 77% to $64.4 million. Higher volumes and lower raw-material and energy costs more than offset lower selling prices.
Financial position, liquidity and cash flow
- At June 30, cash and equivalents were $162.4 million, up from $76.6 million at year-end 2009. Total debt was $638.2 million, down from $643.9 million; cash less total debt was approximately negative $475.8 million.
- Current assets were $1,658.6 million and current liabilities $737.2 million. FMC reported no borrowings under its domestic or European revolving credit agreements; available capacity was $453.7 million and $271.3 million, respectively. It was in compliance with credit covenants, with leverage of 1.2 versus a maximum of 3.5 and interest coverage of 17.0 versus a minimum of 3.5.
- First-half continuing-operations operating cash flow was $199.2 million. Receivables used $94.3 million of cash, partly offset by a $76.3 million increase in accrued customer rebates. Pension contributions used $49.8 million of cash, including a $46 million U.S. plan contribution. Capital expenditures were $59.2 million; investing activities used $65.6 million and financing activities used $34.9 million. Cash increased by $85.8 million.
- Environmental liabilities on the balance sheet included $216.1 million long-term and $11.4 million current. The filing also reports $247.1 million of environmental reserves before expected recoveries of $69.7 million; recovery presentation includes both liability offsets and other assets.
Outlook, risks and unusual items
- Management expected 2010 Agricultural Products revenue growth of about 10%, with segment operating profit up in the mid-single digits; Specialty Chemicals revenue growth of about 10% and profit growth of 20%; and Industrial Chemicals revenue approximately level with 2009 and profit up 25%–30%. These are management expectations, not guarantees.
- FMC expected 2010 capital expenditures about 17% below 2009. It planned approximately $30 million of net environmental remediation spending, about $9 million for environmental-control capital projects, and about $26 million of environmental compliance costs. It intended to contribute about $80 million to its U.S. defined-benefit pension plan in 2010; $46 million had been contributed by June 30.
- Environmental estimates increased, notably for Middleport and Pocatello. Management estimated reasonably possible environmental losses could exceed accruals by about $90 million, while stating such obligations were not likely to materially harm liquidity or financial condition and could be paid over 20 years or longer. Costs remain subject to regulatory review and uncertain remediation requirements.
- Regulatory exposure includes pesticide registration proceedings. A July 2010 appeals court reinstated carbofuran import tolerances but upheld EPA’s denial of a requested administrative hearing concerning domestic tolerances; FMC had ceased U.S. carbofuran sales. FMC did not expect material 2010 sales impact from the EU bifenthrin decision, but product re-registration remains a risk.
- Other unusual items included $32.0 million of first-half restructuring and other charges, versus $52.6 million in 2009; $8.4 million of operating-site environmental charges; and a $5.7 million charge for rights to a herbicide under development. First-half tax expense was $74.5 million, with a 29.9% effective rate, versus 23.6% in 2009, reflecting prior-year tax-benefit settlements, income mix and a $3.5 million adjustment related to Medicare Part D legislation.
- Legal matters include appealed European Commission hydrogen peroxide fines, U.S. and Canadian antitrust litigation and an animal-feed-phosphate settlement requiring a €14.4 million payment. The filing says known contingencies were not expected to materially affect financial position or liquidity, but adverse outcomes could be material.
- Management identified currency, commodity and interest-rate exposures and uses derivatives to manage them. Foreign-exchange and commodity movements, pension funding needs and customer credit guarantees—principally seasonal agricultural financing in Brazil—remain relevant risks.
Most important facts for investors to verify
- Whether Agricultural Products can convert substantial revenue growth into improved segment profit given cost, mix and duty pressures.
- Actual progress against segment outlooks, including Industrial Chemicals pricing, volumes and plant-outage costs.
- Environmental reserve assumptions, expected recoveries and potential additional exposure at Middleport and Pocatello.
- Developments in pesticide registrations and the hydrogen peroxide, phosphate and other legal proceedings.
- Cash conversion and working-capital trends, planned pension contributions, capital spending and continued covenant compliance.