FMC Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. FMC is a diversified chemicals company with Agricultural Products, Specialty Chemicals and Industrial Chemicals segments. Financial statements are unaudited and prepared under U.S. GAAP; the interim statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $902.4m | $862.1m | $2,748.3m | $2,469.3m |
| Gross margin | $315.5m (35.0%) | $287.4m (33.3%) | $1,000.6m (36.4%) | $874.3m (35.4%) |
| Income from continuing operations | $100.9m | $97.2m | $351.3m | $323.7m |
| Net income attributable to FMC stockholders | $90.0m | $86.8m | $314.0m | $288.0m |
| Diluted EPS | $0.65 | $0.61 | $2.26 | $2.00 |
| Operating cash flow, continuing operations | Not presented by quarter | Not presented by quarter | $364.4m | $327.8m |
For the first nine months, investing cash outflow was $270.3m, including $128.0m of capital expenditures and $114.3m for acquisitions; financing cash outflow was $137.1m. Cash declined to $84.4m from $158.9m at year-end 2011. Working-capital uses included receivables ($84.4m) and inventories ($147.4m), partly offset by a $163.6m increase in accrued customer rebates. Cash flow from discontinued operations was a $31.8m use.
At September 30, total debt was $869.4m, versus $825.6m at December 31, 2011; cash was $84.4m. Current assets were $2,025.5m and current liabilities $1,087.3m. The company reported $1,402.6m of available funds under its revolving credit facility and compliance with its financial covenants. Approximately 92% of debt was fixed-rate. The filing says $73.6m of cash was held by foreign subsidiaries and foreign earnings were intended to remain permanently reinvested.
Material changes and segment results
- Q3 revenue increased 5% year over year; management attributed about $23m of the increase to acquisitions. Gross margin improved on higher volumes, selling prices and mix, partly offset by currency and higher costs. Adjusted after-tax earnings from continuing operations attributable to FMC stockholders, a non-GAAP measure, were $109.4m versus $99.2m.
- Agricultural Products: Q3 revenue rose 11% to $423.6m and segment operating profit rose 23% to $99.8m, led by Latin American and North American growth. Nine-month revenue rose 20% to $1,271.4m and operating profit rose 24% to $340.8m.
- Specialty Chemicals: Q3 revenue increased 4% to $226.3m, but operating profit fell 8% to $44.0m. Lithium volumes and profit were affected by operational issues and an extended planned outage in Argentina; higher costs also weighed on results. Nine-month operating profit declined 5% to $141.0m.
- Industrial Chemicals: Q3 revenue declined 4% to $254.2m while operating profit was broadly flat at $36.5m. Nine-month revenue rose 6% to $803.8m and operating profit increased 13% to $127.4m, supported by Alkali pricing and volumes and a favorable Peroxygens mix.
- Interest expense and non-operating pension/postretirement charges increased. Nine-month effective tax rate rose to 26.2% from 22.9%, largely because prior-year tax benefits did not recur. Discontinued operations reduced earnings by $6.3m in Q3 and $21.8m year to date.
Outlook, risks and unusual items
- Management’s 2012 segment outlook: Agricultural Products revenue growth of 20%–25% and segment operating profit growth in the mid-twenties percent range; Specialty Chemicals revenue growth of about 5% and operating profit decline in the low-to-mid single digits; Industrial Chemicals revenue growth of about 5% and operating profit growth in the high single digits. These are management expectations, not guarantees.
- FMC decided to exit its Spanish zeolites product line by Q4 2012, citing competitive disadvantages and underperformance. It expected approximately $4m of additional accelerated depreciation through year-end. Q3 included $5.7m of zeolites severance charges. The quarter also included a $4.4m charge for rights to technology relating to a fungicide still under development.
- Environmental reserves were $238.4m excluding recoveries; recorded net environmental reserves were $220.1m. Estimated reasonably possible environmental losses, net of recoveries, exceeded accrued amounts by approximately $160m, including a $50m increase associated with Pocatello and Middleport. Management said the exposure could be material to a future period’s results, though it did not expect unreserved obligations to materially affect liquidity or financial condition because they may be paid over many years.
- At Pocatello, a tribal appellate decision upheld a $1.5m annual permit fee for 2002–2007 ($9m total) and reinstated a contract claim; FMC disputed tribal jurisdiction and planned further legal challenges. At Middleport, regulators proposed a cleanup more extensive than FMC’s recommended remedy; the recorded site reserve was $50.3m.
- Other contingencies include European and Canadian hydrogen-peroxide antitrust litigation and asbestos claims; FMC said potential exposure could not be reasonably estimated in these matters. Management stated known contingencies were not expected to have a material adverse effect overall, while cautioning that adverse outcomes could materially affect a reporting period or liquidity.
- Other notable liquidity uses include $65m in voluntary pension contributions year to date (no further 2012 contribution expected), $144.9m of share repurchases year to date, and $35.4m of dividends paid. Planned 2012 capital expenditures were approximately 20% above 2011 levels; the company also expected about $35m of net environmental remediation spending and about $30m of environmental compliance costs.
Important facts for investors to verify
- Whether Agricultural Products growth and the stated 2012 segment outlook were sustained, and how much growth depended on acquisitions, pricing and regional conditions.
- Progress in resolving Lithium operational issues and the effect of the Argentina outage on volumes, costs and Specialty Chemicals profitability.
- Working-capital requirements, particularly inventory and receivables, and the resulting cash and borrowing needs.
- Environmental reserve adequacy and developments at Pocatello and Middleport, as well as outcomes in litigation where exposure is not estimable.
- Execution and costs of the zeolites exit, planned capital spending, pension funding and remaining share-repurchase authorization.