FMC Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. FMC is a diversified chemical company operating in Agricultural Products, Specialty Chemicals and Industrial Chemicals. Interim financial statements are unaudited and were reviewed by the independent accountant, not audited. Per-share data reflects the two-for-one stock split.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $905.2 million | $812.2 million | $1,845.9 million | $1,607.2 million |
| Gross margin | $337.8 million; 37.3% | $298.8 million; 36.8% | $685.1 million; 37.1% | $586.9 million; 36.5% |
| Income from continuing operations | $118.4 million | $121.1 million | $250.4 million | $226.5 million |
| Net income attributable to FMC stockholders | $104.9 million | $107.2 million | $224.0 million | $201.2 million |
| Diluted EPS | $0.76 | $0.74 | $1.61 | $1.39 |
| Operating cash flow, continuing operations | Not separately reported for quarter | Not separately reported for quarter | $267.9 million | $163.0 million |
- Q2 revenue rose 11% year over year, including about $20 million from acquisitions. Management attributed growth chiefly to higher volumes and pricing. Q2 gross margin excluding acquisition-related charges was $341.0 million, approximately 38% of revenue, up about one percentage point year over year.
- Q2 net income attributable to FMC stockholders declined about 2% despite higher revenue and operating profits, primarily due to higher tax, interest, pension and acquisition-related charges. Six-month net income increased about 11%.
- Q2 adjusted after-tax earnings from continuing operations, a non-GAAP measure, increased 15% to $126.9 million from $110.5 million. Six-month adjusted earnings rose to $262.3 million from $218.1 million.
- Segment Q2 revenue and operating profit: Agricultural Products $393.6 million and $111.2 million, up 19% and 18%; Specialty Chemicals $235.4 million and $52.7 million, up 3% and down 6%; Industrial Chemicals $277.1 million and $42.8 million, up 9% and 18%.
- Q2 effective tax rate was 27.7%, compared with 17.5%; the prior-year period benefited from a $14.1 million reduction in unrecognized tax-benefit liabilities following audit settlements.
Liquidity, debt and capital allocation
- At June 30, cash was $75.5 million, down from $158.9 million at year-end 2011; total debt was $856.5 million, up from $825.6 million. Cash included $60.6 million held by foreign subsidiaries, which FMC intends to reinvest permanently abroad.
- Six-month operating cash flow was $267.9 million. Working capital absorbed cash, notably inventory ($90.7 million) and receivables ($64.1 million), partly offset by increased accrued customer rebates ($142.9 million). Investing used $199.0 million, including $98.4 million for acquisitions and $81.2 million in capital expenditures. Financing used $130.9 million, including $144.9 million of share repurchases.
- FMC had $1.40 billion available under its revolving credit facility. It reported compliance with debt covenants; leverage was 1.3 against a 3.5 maximum and interest coverage was 17.2 against a 3.5 minimum.
- During the first half, FMC repurchased 3.07 million shares for $144.9 million; $244.8 million remained under the $250 million authorization. It paid $22.9 million in dividends in the first half.
Material developments, outlook and risks
- Business outlook: Management expected 2012 Agricultural Products revenue and operating-profit growth in the high teens; Specialty Chemicals revenue growth of about 5% with operating profit approximately flat; and Industrial Chemicals revenue growth in the mid-to-high single digits with operating-profit growth in the high teens. These are segment outlooks, not consolidated guidance.
- Management cited continued growth investment and expected 2012 capital expenditures about 30% above 2011, mainly to expand BioPolymer, lithium and soda ash capacity. In July, FMC announced an investment exceeding $100 million in a new microcrystalline-cellulose facility in Thailand and agreed to acquire Pectine Italia, expected to close by the end of Q3 2012.
- June acquisition of Phytone Ltd., a UK natural-colors producer, was assigned a preliminary purchase price of $74.8 million, including $41.8 million of goodwill. Acquisition-related inventory step-up charges were $3.2 million in Q2 and $6.6 million for the first half.
- Specialty Chemicals faced lithium supply constraints, first-quarter Argentina production downtime and continuing operating-cost pressures. Agricultural Products growth spending and research costs increased; Industrial Chemicals cited higher royalty and energy costs.
- Environmental exposure: The filing reports $246.3 million of environmental reserves before recoveries and $74.2 million of recorded recoveries; its roll-forward shows $224.8 million of total reserves net of recoveries at June 30. Reasonably possible environmental losses, net of expected recoveries, exceeded accrued amounts by approximately $160 million, an estimate increased by $50 million in Q2. Management said actual losses could be higher, while it did not expect these matters to materially impair liquidity or financial condition.
- At Pocatello, a tribal appeals court upheld $9.0 million in permit fees for 2002–2007 and reinstated a contract claim; FMC intended to seek relief in federal court. At Middleport, regulators proposed cleanup of about 180 residential properties under a remedy FMC considered overly conservative; the site reserve was $50.8 million.
- Other contingencies include hydrogen-peroxide antitrust litigation in Europe and Canada, asbestos claims and a Middleport residents’ lawsuit. FMC said it could not reasonably estimate potential losses for certain claims. It also cited pesticide registration processes and foreign-exchange, commodity and interest-rate risks.
- FMC expected approximately $35 million of net environmental remediation spending and $30 million of environmental compliance costs in 2012, and planned about $65 million of voluntary U.S. pension contributions. It cautioned that future pension funding could increase with adverse interest-rate or equity-market movements.
Key facts for investors to verify
- Whether segment growth and profit expectations were achieved, particularly the Specialty Chemicals recovery and Agricultural Products growth trajectory.
- Cash conversion and working-capital trends, including inventory build, customer rebates, receivable collections and foreign cash availability.
- Progress and potential cost changes in Pocatello and Middleport environmental matters, including the approximately $160 million reasonably possible exposure above accrued amounts.
- Acquisition integration, Phytone purchase-price finalization, Pectine Italia closing and the timing and returns of planned capacity investments.
- Effects of higher tax and pension charges, ongoing share repurchases, and any change in debt or covenant headroom.