Exhibit 13
[LOGO OF FMC]
1997 Annual Report
Shareholder Value
People
Superb Execution
Growth
[PHOTOS APPEAR HERE]
[LOGO OF FMC]
As one of the world's
leading producers
of chemicals and machinery
for industry and agriculture,
FMC participates on a worldwide
basis in three broad markets:
Machinery and Equipment,
Industrial Chemicals and
Performance Chemicals.
FMC operates 104 manufacturing
facilities and mines in 26 countries.
About the cover: From Argentina to Maine, from
Norway to Wyoming, FMC employees around the
world are developing new products and technologies,
improving production processes, providing solutions
to customers, and serving the communities in which
we operate. Together, we're charting a successful
course into the 21st Century.
Financial Summary
(In millions, except per share, common stock price, employee and stockholder data) 1997 1996
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Sales
In the United States $ 1,818.3 $ 1,754.7
Outside the United States, including exports 2,440.7 2,196.0
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Total sales $ 4,259.0 $ 3,950.7
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Income (loss) (after tax)
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (24.5) $ 162.8
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Income from continuing operations before asset
impairments, restructuring and other charges and
cumulative effect of change in accounting principle(1) $ 156.4 $ 162.8
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Earnings (loss) per share from continuing operations before
cumulative effect of change in accounting principle:
Basic $ (0.67) $ 4.40
Diluted $ (0.67) $ 4.28
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Earnings per share from continuing operations before
asset impairments, restructuring and other charges
and cumulative effect of change in accounting principle:(1)
Basic $ 4.25 $ 4.40
Diluted $ 4.13 $ 4.28
================================================================================================================================
FINANCIAL AND OTHER DATA
Common stock price range $ 90 5/8-59 5/8 $ 77 3/4-62 1/4
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Capital expenditures excluding acquisitions $ 316.7 $ 485.1
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Research and development expense $ 174.0 $ 176.5
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At December 31 Working capital $ 251.1 $ 172.0
Operating working capital(2) $ 410.4 $ 627.4
Number of employees 16,805 16,731
Number of stockholders 10,523 11,339
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As described further in Notes 1 and 3 to the consolidated financial statements,
FMC's Defense Systems segment has been reclassified as a discontinued operation
and results of prior years have been restated for comparative purposes.
(1) Supplemental financial information. Income from continuing operations before
asset impairments, restructuring and other charges and cumulative effect of
change in accounting principle, and earnings per share from continuing
operations before asset impairments, restructuring and other charges and
cumulative effect of change in accounting principle, should not be
considered in isolation nor as an alternative for income from continuing
operations or earnings per share determined in accordance with generally
accepted accounting principles, nor as the sole measure of the company's
profitability.
(2) Operating working capital includes trade receivables (net), inventories,
other current assets, accounts payable, accrued payroll, other current
liabilities, and the current portion of accrued pension and other
postretirement benefits.
-1-
Message to Shareholders
[Photo of Robert N. Burt]
ROBERT N. BURT
In early 1997, FMC Chairman and CEO Bob Burt visited Brazil, where the company's
new sulfentrazone herbicide was first sold commercially under the tradename
Boral.
In 1997, we saw our investments and confidence in our machinery and equipment
businesses pay off with record profits. This superior performance, however, was
not enough to overcome difficult market conditions throughout our chemical
businesses, as well as start-up problems with our new herbicide plant. As a
result, operating earnings per share were down 3 percent from 1996, and our
stock under-performed the market.
Sales from continuing operations were $4.3 billion, up 8 percent from $4
billion in 1996. After-tax income from continuing operations, before the charges
detailed below, was $156 million, or $4.13 per share on a diluted basis,
compared with $163 million, or $4.28 per share, in 1996. In the 1997 fourth
quarter, we announced charges of $310 million before income taxes, or $208
million after income taxes, for asset impairments and restructuring and other
costs, as well as environmental reserves related to discontinued operations.
Although earnings were disappointing, our traditional emphasis on cash flow
produced $350 million (before financing activities) from continuing operations.
We reduced operating working capital, exceeding our $100 million target. And we
sold our defense business to The Carlyle Group, which resulted in an after-tax
gain of $180 million and after-tax cash flow of approximately $375 million for
our 60 percent share of the business. Given reduced capital expenditure needs
and the uneconomically high price of acquisitions, our cash flow exceeded our
forecast needs. Therefore, we announced a $500 million, three-year stock buyback
program, and purchased 2.7 million shares in 1997 for $209 million.
Our major strategic initiative in 1997 was the sale of our defense business.
Our decision to exit defense was influenced by the outlook for profitability for
the next several years, as well as the significant budget pressures that we
believe will lead to further declines in defense budgets after the turn of the
century. The stagnant or declining profits in our defense business have
significantly affected our profit growth, as shown in the table below:
(In millions) 1997 1993 Annual Growth
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Operating profit (excluding defense) $ 314 $ 105 32 percent
Operating profit (with defense) $ 390* $ 265 10 percent
*Estimated
-2-
[Photo of Larry D. Brady]
Larry D. Brady
In Japan, FMC President Larry Brady visited a Fresh'n Squeeze orange juice
display at a local grocery store. FMC equipment processes 75 percent of the
world's orange juice.
In the future, we expect a similar pattern of significantly greater growth
without defense. This should translate into growth in our price/earnings ratio
at the same time our stock repurchase program reduces and eventually eliminates
the dilution from the lack of defense earnings.
Although 1997 was disappointing, that's water under the bridge. We are moving
on and concentrating on plans to improve earnings and enter the new century with
strong momentum.
In 1998 our highest priority is a significant increase in profits, which
translates into 25-plus percent growth in earnings per share. At the same time,
we will continue to focus on improving our working capital efficiency. Where
market conditions have deteriorated, we will aggressively reduce expenses, as
we've already done in both our industrial chemicals and agricultural products
businesses. We will not neglect the need to invest in areas critical to our
long-term success, including research and development, strategic acquisitions
and, most important, training and development for our employees.
The review of operations reports on the strategies, key events and outlook for
our businesses and highlights representative FMC employees who are helping us
achieve our goals.
Management changes. In 1997 we were pleased to welcome Ted Mooney to our board
of directors. As chairman and chief executive officer of Nalco Chemical Company,
Ted brings well-honed management and related industry experience to help chart
our future path.
We're sorry to report that Pehr Gyllenhammar has resigned from our board due
to increased time commitments in Europe. Pehr brought us broad-ranging
experience in international business and finance, and we'll miss his wise
counsel.
We're also pleased to announce several management changes. We brought Bill
Wheeler home to Philadelphia from Tokyo to help direct our development and
shared services efforts in the chemicals businesses. Reg Hall moved to Asia to
take Bill's place in heading our efforts in Asia-Pacific--no small challenge
given recent events. Replacing Reg as head of our specialty chemicals businesses
is recently elected FMC Vice President Bill Walter, who brings to his new
assignment 24 years of experience with FMC operations. We elected Gene
McCluskey, whose expertise on tax issues is an invaluable asset, as vice
president--tax. And given the importance of information technology to our future
success, we elected Craig Watson as FMC vice president and chief information
officer.
-3-
In 1997 we also bid farewell to FMC Corporate Secretary and Associate General
Counsel Bob Day. Bob took early retirement after 25 years of guiding us through
corporate governance issues, providing us with sound legal advice and
safeguarding our ethical values.
Building on core values. Inherent in the success of any company is what some
call ethics, others call corporate responsibility, and we call core values. At
FMC, core values are the heart of our company. These values center on valuing
the diversity and skills of our employees and providing for their development;
protecting the environment and the health and safety of our employees; and
improving the communities in which we operate. We value our relationships with
our customers. We take an analytical approach to decision-making. And we work to
continuously improve everything we do while maintaining the highest ethical
standards.
As in the past, we believe our future success in creating superior shareholder
value is built on these values. No report to shareholders is complete without
reinforcing our commitment to maintaining these values.
Outlook. Our overriding priority in 1998 is producing strong operating earnings
that exceed the financial expectations of our investors and increase our stock
price.
Although market conditions in some of our chemicals businesses still will be
unfavorable, we expect to achieve significant growth from crop protection
chemicals, which should snap back from low pest infestations in 1997 and from
improved operations at our Authority herbicide plant. We also expect continued
strength in our machinery businesses after a record-breaking 1997 performance.
Over the past five years, we've established a strong trend of growth in
operating earnings from our continuing businesses. We will continue to run our
businesses well--both in terms of productivity and controlling costs. We will
maintain our financial discipline, while continuing to look for growth
opportunities. We believe double-digit growth in earnings per share through the
turn of the century will favorably affect our stock price. These accomplishments
will be due to the efforts of terrific FMC employees who bring their enthusiasm,
commitment and know-how to work every day.
/s/ Robert N. Burt /s/ Larry D. Brady
Robert N. Burt Larry D. Brady
Chairman of the Board and President
Chief Executive Officer
February 25, 1998
-4-
Industry Segment Data
(In millions) Year ended December 31
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1997 1996 1995 1994 1993
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SALES
Machinery and Equipment $2,030.9 $1,684.9 $1,351.0 $ 972.7 $ 870.9
Industrial Chemicals 1,012.0 1,041.3 976.8 866.8 866.7
Performance Chemicals 1,242.2 1,251.8 1,176.5 1,060.5 973.5
Eliminations (26.1) (27.3) (21.7) (30.6) (32.3)
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Total $4,259.0 $3,950.7 $3,482.6 $2,869.4 $2,678.8
============================================================================================================
Income (loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle(1)
Machinery and Equipment $ 140.4 $ 75.9 $ 49.4 $ 31.6 $ 5.5
Industrial Chemicals 135.7 181.8 153.1 115.2 52.2
Performance Chemicals 112.3 159.2 163.7 154.2 139.4
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Segment operating profit 388.4 416.9 366.2 301.0 197.1
Corporate (86.2) (91.3) (99.0) (105.9) (117.0)
Other income and expense, net 11.8 3.2 12.2 15.3 24.6
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Operating profit before asset impairments,
restructuring and other charges, gain on sale
of FMC Wyoming stock and net interest expense 314.0 328.8 279.4 210.4 104.7
Asset impairments(2) (224.0) -- (26.4) -- (8.1)
Restructuring and other charges(3) (40.9) -- (123.6) -- (114.4)
Gain on sale of FMC Wyoming stock(4) -- -- 99.7 -- --
Net interest expense (108.8) (93.0) (76.4) (59.5) (62.1)
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Total $ (59.7) $ 235.8 $ 152.7 $ 150.9 $ (79.9)
============================================================================================================
December 31
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1997 1996 1995 1994 1993
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IDENTIFIABLE ASSETS
Machinery and Equipment $1,496.0 $1,599.0 $1,221.8 $ 669.4 $ 564.8
Industrial Chemicals 1,028.9 1,185.3 1,106.6 932.4 873.0
Performance Chemicals 1,408.0 1,366.7 1,040.9 870.1 806.8
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Subtotal 3,932.9 4,151.0 3,369.3 2,471.9 2,244.6
Corporate and other 180.2 202.9 199.4 279.9 242.2
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FMC continuing operations 4,113.1 4,353.9 3,568.7 2,751.8 2,486.8
Net assets of discontinued operations(5) -- 113.5 183.1 105.3 45.3
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Total $4,113.1 $4,467.4 $3,751.8 $2,857.1 $2,532.1
============================================================================================================
Business segment results are presented net of minority interest, reflecting only
FMC's share of earnings. The corporate line primarily includes staff expenses,
and other income and expense consists of all other corporate items, including
LIFO inventory adjustments. As described in Notes 1 and 3 to the consolidated
financial statements, the operations constituting FMC's Defense Systems and
Precious Metals segments have been reclassified as discontinued operations and
results of prior years have been restated for comparative purposes.
(1) Results for all segments are net of minority interests in 1997, 1996, 1995
and 1994 of $8.9 million, $9.7 million, $5.1 million and $1.6 million,
respectively, the majority of which pertain to Industrial Chemicals.
Minority interests in 1993 were not significant.
(2) Asset impairments in 1997 (Note 4 to the consolidated financial statements)
are related to Machinery and Equipment ($27.0 million), Industrial Chemicals
($126.0 million) and Performance Chemicals ($71.0 million). Asset
impairments in 1995 are related to Industrial Chemicals ($3.0 million) and
Performance Chemicals ($23.4 million). Asset impairments in 1993 are related
to Machinery and Equipment ($7.6 million) and Industrial Chemicals ($0.5
million).
(3) Restructuring and other charges in 1997 (Note 4 to the consolidated
financial statements) are related to Machinery and Equipment ($27.9 million)
and Performance Chemicals ($13.0 million). Restructuring and other charges
in 1995 are related to Machinery and Equipment ($15.5 million), Industrial
Chemicals ($74.5 million), Performance Chemicals ($21.6 million) and
Corporate ($12.0 million). Restructuring and other charges in 1993 are
related to Machinery and Equipment ($58.4 million), Industrial Chemicals
($29.2 million), Performance Chemicals ($3.2 million), and Corporate ($23.6
million).
(4) Gain on sale of FMC Wyoming stock (Note 2 to the consolidated financial
statements) is attributable to Industrial Chemicals.
(5) Net assets of discontinued operations comprise the net assets of FMC's
Defense Systems and Precious Metals segments.
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Products & Markets
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MACHINERY & EQUIPMENT Markets Served
--------------
Energy & Transportation
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Oil and gas wellhead completion equipment; Oil and gas drilling, production,
engineering, procurement, construction and refining, transportation and power
equipment for subsea exploration; metering generation companies.
products and systems; loading systems;
marine terminals and floating production
systems; pressure-relief valves.
Airline equipment, automated material Airlines, airports, industrial
handling systems. manufacturing, mining, warehouses,
newsprint, publishing, chemicals,
utilities.
FMC FoodTech
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Global full-line food technology provider, Fruit and vegetable growers, food
including harvesting, preparing, and juice processors and canners.
processing, packaging, and preserving Beef, poultry, seafood, potato, and
systems. Market-leading position in snack food markets. Restaurants and
thermal processing, sterilizing, cooking, fast-food industry.
frying and freezing systems, citrus and
tomato processing, vegetable harvesting,
and processing, handling and conveying
systems.
PERFORMANCE CHEMICALS Markets Served
--------------
Agricultural Products
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Produces crop protection and pest control Food and fiber growers, pest control
chemicals for worldwide markets. More markets.
than 50 percent of sales derived outside
the United States.
Food Ingredients
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Leading worldwide producer of carrageenan Food processing industry, personal
and Avicel cellulose gel. Market leader care products.
in applications technologies specializing
in fat replacement, texture, structure
and stability for food systems.
Pharmaceutical
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World's leading producer of Avicel Global pharmaceutical and
binders and Ac-Di-Sol disintegrants, as nutritional supplement industries.
well as other specialty excipients used
in pharmaceutical and vitamin manufacture.
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Products & Markets
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MACHINERY & EQUIPMENT
FMC Competitive Advantage Growth and Superb Execution Outlook
- ------------------------- --------------------------- -------
Energy & Transportation
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Provides a complete package of products Excellent performance and integration Strong global growth based on leadership in
and services in subsea/floating of recent acquisitions. Ongoing deepwater technology. Continuing to exploit
production and deepwater technology. technological achievements, including synergies and technologies from recent
Strategic alliances with key energy HOST, FMC's customized subsea system. acquisitions and internal development.
customers. Continuing to set standards in innovation,
adaptability, precision and safety.
Member of alliance awarded Terra Nova
project from Petro-Canada.
Market leader in ground support Strong growth in cargo loaders and New products, alliances and international
equipment for the air transport aircraft deicers. Positioned for future market penetration driving future growth.
industry and in passenger boarding growth through leadership in automated, Monitoring Southeast Asian economies.
bridges worldwide. Sole source laser-guided vehicle systems.
alliances with several key
airlines. Only supplier to provide air
conditioning, auxiliary power and
drinking water from the jet bridge.
FMC FoodTech
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Integrated provider of systems and Excellent performance and integration Continued positive performance. Applications
equipment, covering almost every phase of recent acquisitions. Leveraged focus on food safety. Solid growth potential
of the food harvesting, preparation, synergies among business units. New in the developing Latin American markets.
processing and preservation enterprise. product introductions focusing on Monitoring Southeast Asian economies.
Global sales and service. Partnerships customer needs and benefits include
with key food processors. the DSI W-624 Plus portioner, Special
Delivery and Express Limited conveyors,
and SPS (steam pasteurization system).
PERFORMANCE CHEMICALS
FMC Competitive Advantage Growth and Superb Execution Outlook
- ------------------------- --------------------------- -------
Agricultural Products
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Solid business presence around the Sulfentrazone herbicide registered for New registrations and expanding sales
world. Direct distribution in key use as Authority Broadleaf (U.S.), Boral in U.S. and international markets. Growing
markets. Strong insecticide and growing (Brazil), Capaz (Argentina, Paraguay). portfolio of herbicides and pest control
herbicide portfolio. Introduction of a Continued investment in R&D. Successfully products. Improved cost position.
new class of herbicides. Productive R&D introduced Command 3ME (microencapsulation)
effort, generating high profitability. herbicide. Carfentrazone-ethyl herbicide
Leader in applications technology. registered for use in Europe as Affinity,
Solid product stewardship programs. Lexus Class, Platform, Aurora and Spotlight.
U.S. registrations expected in 1998.
Food Ingredients
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Excellent product quality. Superior Developing new product applications Solid position as industry leader.
applications knowledge and product to meet customer needs, especially in Improved earnings through market-driven
performance capability. Global dairy, convenience foods and meat applications and lower costs. Increased
customer service and manufacturing. applications. International sales now sales to Europe. Monitoring Southeast
account for more than 50 percent of Asian economies.
total worldwide revenues.
Pharmaceutical
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Proprietary technology, brand Launched new binder products and Continued global market penetration,
recognition and global market presence. suspension aids. Leveraging superior driven by pharmaceutical company growth
Strong formulation support. Global applications knowledge and technology and greater use of prescription drugs as
service capabilities. with key customers worldwide. a result of managed healthcare programs.
-7-
Products & Markets
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PERFORMANCE CHEMICALS (cont.) Markets Served
--------------
Lithium
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World's largest producer of Pharmaceuticals, primary and secondary
lithium-based products. batteries, air conditioning, rubber
and plastic, primary aluminum and
aluminum alloys, ceramics and glass,
lubricating greases, swimming pool
sanitation, textiles, concrete
applications.
Process Additives
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World's largest producer of Plastics, hydraulic fluids,
phosphate ester flame retardants. lubricant additives, industrial
Leading supplier of specialty water water treatment and desalination.
treatment chemicals.
BioProducts
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Largest worldwide producer of Life science research, including
agarose. Leading supplier of DNA sequencing, mutation detection
proprietary DNA and protein products and protein analysis.
for life science markets.
INDUSTRIAL CHEMICALS Markets Served
--------------
Alkali Chemicals
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World's largest producer of natural Glass-making, chemicals, detergents,
soda ash and market leader in North food products, animal feed additives,
America. Downstream products include mining, air/water treatment, pulp and
sodium bicarbonate, sodium cyanide, paper.
sodium sesquicarbonate, caustic soda.
Active Oxidants
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Major worldwide producer of Polymers, electronic circuit boards,
persulfates, peracetic acid and process equipment sanitizers,
specialty peroxygens. industrial biocides.
Hydrogen Peroxide
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Major worldwide producer of hydrogen Pulp and paper, textiles,
peroxide. environmental clean-up, mining,
detergents, electronics.
Phosphorus Chemicals
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Major worldwide supplier and leading Detergents, cleaning compounds,
North American producer of phosphorus metal treatment, food products,
and its derivatives, phosphates and textiles, pesticide intermediates,
phosphoric acid. additives, pharmaceuticals, water
treatment.
Foret
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Major European chemical Detergents, pulp and paper, textiles,
producer. Products include chemicals, tanning, animal feed,
hydrogen peroxide, perborates, mining, rubber, pharmaceuticals,
phosphates, silicates, zeolites, ceramics, paint, food, photography,
sulfur derivatives. Leading agriculture, water treatment.
share in Spanish peroxygen and
phosphate markets.
-8-
Products & Markets
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PERFORMANCE CHEMICALS (cont.)
FMC Competitive Advantage Growth and Superb Execution Outlook
- ------------------------- --------------------------- -------
Lithium
- -------
Diverse, high-value-added products. Technology and market leader in R&D effort spurring growth in
Strong manufacturing capabilities. New, downstream specialty markets. Investment specialty markets, such as batteries,
proprietary extraction technology. in capacity additions to meet growing pharmaceuticals and polymers. New
demand for butyllithium, specialty reagents competitor causing price pressure for
and rechargeable battery applications. commodity products.
Lithium resource in Argentina coming on
stream. Low-cost position in lithium
chloride.
Process Additives
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Global manufacturing and technical Introduced Belgard EV2030, an enhanced Competitive markets continue. Focus
sales capabilities. Diverse products. maleate polymer technology, to the on new products, applications, and
Applications know-how. thermal desalination market. Bellacide ongoing cost improvements.
375 biocide was registered and introduced
to the U.S. cooling water market. Two new
lubricant additives were introduced to
the fluids market: Durad 310M and Durad 90.
Continuing R&D investments. Continued
process improvements driven by technology.
BioProducts
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Advanced applications technology. Introduced new application-specific Increasing demand for DNA and
Excellent product quality. Proprietary products for conducting DNA sequencing, protein-related analysis in research and
technology. Worldwide brand recognition. mutation detection and protein analysis. diagnostics. Life science funding remains
Continuing R&D investments. Improved strong in private and public sectors.
market position in DNA sequencing.
INDUSTRIAL CHEMICALS
FMC Competitive Advantage Growth and Superb Execution Outlook
- ------------------------- --------------------------- -------
Alkali Chemicals
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Proprietary, low-cost solution mining Continuing focus on new proprietary Volumes will increase in 1998 to
technology. Significant share of mining technology, improving costs. continue fill-out of earlier expansion.
worldwide capacity. Excellent Fill-out of most recent expansion is on Overall pricing will remain steady.
distribution and transportation systems. track. Increased market penetration Monitoring Southeast Asian economies.
from new products in cleaning compounds,
feed additives, and acid waste
neutralization.
Active Oxidants
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Strong North American market position. Continuing focus on cost improvement Continued growth in global markets
Unique operational and cost advantage through process control and proprietary and product applications.
at manufacturing site. process technology. Growth is expected
in all market segments. New product
applications.
Hydrogen Peroxide
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Highly cost-effective manufacturing Continued focus on cost reduction. Seeing more demand in pulp and paper
and distribution. High level of service, Improved cost position through capital- and some industry improvement in Europe.
reliability, product quality and safety. efficient technology, reduction of Continue to face over-capacity issues
Major capacity share. Downstream share high-cost capacity, and restructuring of until 1999 or 2000. Focus is on cost
of specialty market niches. the business. Improved market position improvement.
in industrial segments.
Phosphorus Chemicals
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World's lowest-cost elemental phosphorus Growing diversity of product uses. Volumes remain high; however, imports
production. Significant U.S. capacity Introduced new high-performance product influenced by a stronger U.S. dollar may
share. Lowest-cost U.S. production of for cleaning compounds industry. Optimized pressure prices.
sodium tripolyphosphate--our largest product mix.
downstream product--used in automatic
dish detergents. High level of service
and reliable delivery.
Foret
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Excellent cost positions. Strong Continuing focus on strong market Continued solid performance based on
manufacturing and distribution positions and growth. costs, exports and competitive advantages
capabilities. Growing export business. of product portfolio.
-9-
MACHINERY AND EQUIPMENT
Machinery and Equipment sales for 1997 were up 21 percent to $2 billion. Profits
rose 85 percent to $140 million.
In 1997, FMC employees ROBERT "BUBBA" HARDEE and CORTEZ BURKHART led a
successful installation of three HOST platforms at Mobil's Zafiro Field in
Equatorial Guinea, West Africa. The satisfied customer has summoned Hardee and
Burkhart to return to install another HOST in 1998.
UNDERWATER WONDERLAND. FMC subsea trees and HOST platforms form the foundation
for oil production at Mobil Oil's Zafiro Field project in Equatorial Guinea,
West Africa.
*
THE PRESSURE'S OFF. FMC's Crosby pressure-relief valves, manufactured here at
Market Harborough, England, deliver critical protection against high-pressure
situations in oil production.
PER MORTEN of FMC Kongsberg Offshore in Norway leads a team of engineers in
designing deep-water systems for major oil producers like Statoil and Mobil.
Morten and his team use the full range of FMC's subsea resources to "knit
systems together" for customers.
*
MOVING ON. FMC Jetway Systems passenger boarding bridges, such as the one here
at Ronald Reagan Washington National Airport, provide air conditioning,
electricity and drinking water to the aircraft.
NO MOVING PARTS. Our new coriolis mass flowmeter applies the properties of
physics to provide extremely precise measurements of the flow of gas and oil in
pipelines.
[SIX PHOTOS APPEAR HERE]
-10-
MACHINERY & EQUIPMENT
ENERGY AND TRANSPORTATION EQUIPMENT. We continued to solidify our position as a
complete supplier of equipment and services for oil and gas customers--
especially in the offshore arena. FMC's integrated capabilities in wellhead,
subsea, floating production and metering systems--built through internal
development and acquisition in recent years--have allowed FMC to develop
strong, profitable alliances with key energy customers around the world. In the
transportation field, we're also positioned as an integrated supplier--offering
a full package of ground support and bridge products to airport and airline
customers.
In 1997, energy and transportation equipment sales and earnings were up
significantly, driven by our market leadership in subsea systems. Strong demand
by oil companies in exploration and production, high capital spending in the
airline industry and improved margins also contributed to increased results.
OUR ENERGY BUSINESS, with industry-leading technology, continued to dominate in
deep-water applications. In 1997, we installed the subsea manifold and two
subsea trees for the Shell Mensa project in the Gulf of Mexico-at 5,300 feet
below sea level, the deepest project off the coast of the United States. We'll
install a third tree in 1998. We also installed the world's deepest floating
production and storage systems for Petrobras Barracuda offshore Brazil in 2,798
feet of water.
In 1997, we received an order to supply subsea trees and tools for Brazil's
Petrobras Roncador project, which will become the world's deepest installation
at 8,250 feet below sea level. Exxon awarded us the contract to supply subsea
trees and controls for the Diana project at 4,295 feet of water in the Gulf of
Mexico. We'll deliver equipment for both projects over the next few years. In
addition, we installed a hinge-over-subsea-template and subsea trees at Mobil's
Zafiro project offshore West Africa.
Our interest in forging multi-year, preferred-provider alliances with strategic
customers continued across product lines. Long-time Norwegian customers Statoil
and Norske Hydro are committing 100 percent of their petroleum measurement
business to FMC for five years. In a new, five-year alliance with Mobil
Lubricants, we're providing the combined capabilities of our loading and
transfer systems, Smith meters, and Waugh blending and control systems for
Mobil's integrated lube blending plants.
OUR AIRPORT PRODUCTS AND SYSTEMS BUSINESS performed well as the airline industry
continued to invest in FMC support equipment, including cargo loaders, deicers
and passenger boarding bridges. We continued to pursue sole-source alliances,
and entered into multi-year agreements to provide ground support equipment to
Federal Express and UPS.
STRONG PERFORMANCE SHOULD CONTINUE for FMC's energy and transportation
businesses. While our energy customers continue to actively explore and produce,
we remain well positioned as a supplier capable of serving their complete
oilfield needs with the latest technology. With our formal alliance commitments,
improved pricing and efficient plants, we expect profit growth to exceed sales
growth. In the airport products and systems arena, our total-capabilities
approach, leading-edge technology and alliance partnerships also should result
in ongoing strong performance.
-11-
MACHINERY & EQUIPMENT
TITLE CHANGE. FMC FoodTech made its debut in 1997 to better reflect food
processing expertise in the global market.
FMC Citrus Systems' Mike Suter worked with employees of FMC Brazil to automate
juice extractors at Citrosuco Paulista S.A., one of the world's largest juice
processors. The upgrade dramatically increased the customer's extraction
efficiency.
*
SAFE AND SOUND. At Ameriqual Foods in Indiana, FMC FoodTech equipment sterilizes
combat rations for the U.S. Army and non-refrigerated products for major food
companies.
SOME LIKE IT HOT. Perdigao, Brazil's second largest producer of processed
chicken, used FMC Stein and Frigoscandia cooking, frying and freezing technology
to launch more than 30 new products in 1997.
*
HERE'S THE BEEF. At Wis-Pak Foods Inc. of Milwaukee, Wisconsin, FMC's
Frigoscandia Flat Products Freezer processes more than 500,000 hamburger patties
a day.
A small team of engineers, led by Ramesh Gunawardena, is responsible for much of
Stein's recent success in cooking and frying applications. Gunawardena and his
team develop new technologies, like the THERMoFIN fryer, which safely fries
foods coated with delicate seasonings.
[SIX PHOTOS APPEAR HERE]
-12-
MACHINERY & EQUIPMENT
FMC FoodTech. Following a series of recent acquisitions of strategic businesses,
we've built our food processing business into a multi-capabilities supplier with
expanded global markets. In 1997, we adopted the name FMC FoodTech--an evolution
from the original Food Machinery Group--to reflect our shifting product and
market orientation toward systems and processing technology.
Sales and profits were up sharply in 1997. Contributing to performance was a
strong year for citrus machinery, margin improvement for food processing
systems, and a full year of strong operating results for Frigoscandia Equipment,
the Swedish-based marketer of industrial freezers that we acquired in 1996.
The addition of Frigoscandia freezing equipment and Stein fryers, ovens, and
batter and breading equipment further broadens FMC's food processing
capabilities and expands our presence in key markets around the world.
Throughout 1997, we concentrated on integrating these new businesses with FMC's
existing operations to take advantage of marketplace synergies and provide
complete solutions to customer needs.
Citrus systems, the world leader in citrus processing equipment, met heightened
demand for industry capacity in 1997 by enhancing our products' efficiency to
boost customers' throughput and yield. Our ongoing development work also centers
on continually improving the quality of citrus juices. Our food processing
systems business had success with sterilization and fruit processing lines in
Europe and North and South America.
Food systems and handling also benefited from several strong key markets,
particularly in poultry, the meat of choice around the world because it is low-
fat and low-cost. Our business is a specialist in providing complete poultry
processing lines, and late in the year, we concluded a sale to Perdue Chicken
that encompassed the battering, breading, frying and cooking capabilities of
Stein, the freezing component of Frigoscandia Equipment and the conveying
systems of our food handling business. A new product we introduced in the last
half of 1997, our DSI 624 water jet cutter, uses an advanced robotic system and
high-pressure water jets to cut poultry with greater speed and efficiency than
any product on the market. We're taking orders on the product now and expect to
see sales gains in 1998.
In December, FMC FoodTech signed a global sales and service agreement with food
giant Unilever. FMC will be considered a preferred supplier for the variety of
products this customer requires, and conducting business will be easier. We
anticipate negotiating more of this type of preferred-partner arrangement in the
future.
We expect FMC FoodTech will turn in another positive performance in 1998. A
number of key markets remain strong, and FMC FoodTech is armed with a fuller,
more diversified portfolio of capabilities to meet the needs of food processing
customers worldwide. We continue to consider acquiring appropriate businesses
worldwide to close the remaining gaps in our diversified product lines.
-13-
[PHOTO APPEARS HERE]
SUBSEA SUPERSTAR. An FMC development team graphically displays a complete subsea
oilfield project. FMC combined its petroleum equipment, floating production
systems and advanced metering technologies to become a leading supplier of
subsea systems.
Technology Watch
FMC technology leads the industry. Building on our longstanding expertise in
subsea systems, we're engineering equipment to perform at the extreme pressures
and temperatures of the deepest subsea installations. As we design even deeper
systems in the coming years, our customized products will become more sensitive
to challenging environments. Through recent technology acquisitions, FMC is now
the leader in highly accurate, electronic flowmeter equipment that measures the
flow of oil and gas. Our airport products and systems, also, are at the
forefront of the trend to move services such as air conditioning, electricity
and potable water from ground support vehicles to the passenger boarding bridge.
At FMC FoodTech, our new name reflects our commitment to technology. In 1997, we
worked closely with our customers to introduce a range of new products to help
them operate more safely and effectively. In response to the beef industry's
concerns about food safety and product contamination, Frigoscandia Equipment
introduced a new Steam Pasteurization System that minimizes the risk of beef
contamination from E. Coli bacteria or other harmful microorganisms. FMC
FoodTech's food processing systems also addressed food safety issues with
FranRica's commercialization of a system to process tomato and fruit
particulates and LogTec automated sterilization modeling tools and controls. As
food safety continues to emerge as a pressing issue throughout the world, FMC
offers solid expertise in solving problems.
-14-
Machinery and Equipment--Management's Discussion and Analysis
1997 COMPARED WITH 1996
Machinery and Equipment segment sales of $2.0 billion increased 21 percent from
sales of $1.7 billion in 1996, and operating profits of $140.4 million in 1997
were 85 percent higher than the prior year. These gains were achieved across a
broad range of products, primarily as a result of improved market conditions and
continuing cost reductions. FMC's FoodTech (formerly the food machinery group)
operations also benefited from the inclusion of a full year of operating results
of Frigoscandia Equipment, acquired on June 30, 1996.
Sales of energy equipment were significantly higher in 1997, reflecting strong
demand from oil companies in exploration and production, including Shell Oil
Co., and higher subsea equipment sales under a contract with Statoil, Norway's
state-owned oil company. FMC's recent internal development investments and
acquisitions in deep water technologies have resulted in profitable alliances
with major oil customers throughout the world. The company's market leadership
position in the expanding subsea market, coupled with strong cost control
activities, improved 1997's margins and operating profits.
Sales of airport products and systems were also significantly higher in 1997 as
a result of a period of strong airline investment. Increased sales of ground
support and automated material handling equipment and higher shipments under
several Jetway passenger boarding bridge projects also positively affected
operating profits.
FMC FoodTech's performance improved significantly in 1997, primarily from the
inclusion of full-year results for the operations of Frigoscandia Equipment.
Increased sales and profits of citrus machinery in 1997 also contributed to the
improved operating results of FMC FoodTech. Profits of the food processing
equipment business benefited from a healthy poultry market, as well as the
strength of FMC's sterilization and fruit processing lines.
1996 COMPARED WITH 1995
Machinery and Equipment segment sales of $1.7 billion increased 25 percent from
1995, and operating profits of $75.9 million in 1996 were 54 percent higher than
the prior year. Increased sales resulted from acquisitions and strengthening
market conditions in the energy, food machinery and transportation equipment
businesses. Improved market conditions and continuing cost improvement
contributed to the increased profitability.
Sales and operating profits of energy equipment were significantly higher than
in 1995 as the result of increased sales in most product lines. Higher subsea
equipment volume reflected sales to two major oil companies and performance
under the contract with Statoil. Partially offsetting these increases were lower
sales related to projects completed or nearing completion (on a percentage-of-
completion basis) during the year. Sales and profits of energy equipment
benefited from the inclusion of full-year results for businesses acquired in the
June 1995 purchase of Moorco International Inc. and from growth in sales of
loading systems to the liquefied natural gas market.
Airline equipment sales and profits increased significantly in 1996, reflecting
a strong deicer season, increased shipments of Commander 15 main deck loaders,
and improved sales of Jetway boarding bridges. Sales of material handling
systems declined slightly in 1996, but operating profits improved due to higher
international sales and margins for water treatment and screening equipment. The
company's strategic divestiture of the Automotive Service Equipment Division
early in 1996 resulted in an overall decrease in sales of transportation
equipment for the year.
FMC FoodTech sales increased significantly in 1996, primarily as the result of
the inclusion of FranRica for a full year and the acquisitions of Sandei in
April 1996 and Frigoscandia Equipment on June 30, 1996. Sales of citrus
equipment and food processing systems also improved. Operating profits declined
slightly from 1995, however, as a result of incremental costs related to the
acquisitions.
OUTLOOK FOR MACHINERY AND EQUIPMENT
The order backlog for Machinery and Equipment was $988.8 million at December 31,
1997, compared with $923.0 million at the end of the prior year. This increase
of $65.8 million reflects the improved market conditions in 1997 for energy
equipment.
Continued growth in the subsea business of energy equipment is expected in 1998,
but delays could occur in some programs, partially due to the economic issues in
Southeast Asia. The company continues to enter into strategic alliances with
customers, many of which are of a long-term nature. The transportation equipment
business expects sustained growth in 1998 with a strong market in airport
products and systems and continued demand for material handling systems
products. The company anticipates that the citrus equipment business will remain
strong in early 1998, but possible economic problems in the Brazilian market may
negatively affect the latter part of the year. FMC FoodTech expects to record
another strong year in 1998, although backlog is down from the prior year.
Performance for all machinery and equipment operations will be negatively
affected in 1998 if anticipated business in Southeast Asia does not materialize.
-15-
INDUSTRIAL CHEMICALS
Industrial Chemicals sales of $1 billion were slightly below the previous year.
Profits of $136 million were down 25 percent, or 46 million dollars from 1996, a
year that included a $24 million gain from the sale of our minority interest in
a Japanese hydrogen peroxide venture.
In Barcelona, FMC Foret's Miguel Naya suggested modifying the metasilicate plant
steam system to better clean process pipes. Naya's idea saved time and improved
safety conditions for plant operators.
A GREEN SOLUTION. As an environmentally sound solution, FMC's hydrogen peroxide
eliminates odor-causing compounds in this water treatment system at the Encina
Wastewater Authority in California.
DISTRIBUTION PARTNERS. FMC's phosphoric acid, used in chemical and food
processing, arrives at the new Van Waters & Rogers distribution facility in
Illinois. This distributor sells a variety of FMC chemicals to customers in
North America.
*
ACTIVE AGENT. Sodium perborate, produced by FMC Foret, provides the bleaching
power for these powdered laundry detergents manufactured in Turkey.
In his role as union president at FMC's phosphorus-producing facility in
Lawrence, Kansas, Cheldon Coleman shares a common goal with FMC management:
Deliver an accident-free workplace. Coleman has worked to meet that goal,
conducting day-long safety programs for more than 200 employees at the plant.
*
INTO THE LIGHT. FMC's natural soda ash is a key raw ingredient in the high-
quality fluorescent tubing made by Philips Lighting company in Kentucky.
GROWTH-ORIENTED. At its feed-formulating operation in Arkansas, ConAgra uses
FMC's feed-grade sodium bicarbonate for poultry feed that promotes growth.
[SEVEN PHOTOS APPEARS HERE]
-16-
INDUSTRIAL CHEMICALS
Industrial Chemicals. Our ongoing strategy is to effect cost improvements to
maintain our low-cost positions across global product lines, encompassing
phosphorus, soda ash, hydrogen peroxide and persulfates.
Demand is strong for phosphorus products, and our phosphorus chemicals
operations in North America and at FMC Foret in Europe performed well in 1997.
Volumes were higher, operating performance improved, and costs were lower. In
1997, we introduced Polyclear, a soluble phosphate product that offers cost-
effective performance in liquid industrial and institutional cleaners. Our
research into new, higher-performing phosphate products is ongoing, and we offer
a growing portfolio of products for food applications, including special blends
for the meat industry.
Our newly added soda ash capacity operated for a full year in 1997, and we sold
record volumes, offset by lower prices. We had success with AbsorptaPlus, a
highly absorptive soda ash for powdered detergents, and with S-Carb, a purified
sodium sesquicarbonate product used as an animal feed buffer.
Excess industry capacity and resulting price declines made 1997 a disappointing
year for our hydrogen peroxide business. In response to these tough conditions,
we focused on cost reductions throughout the business and retired some capacity
within our multi-plant supply network. New, proprietary process technology has
significantly reduced plant costs at our operation in Mexico and will contribute
to cost reductions at our Bayport, Texas, facility, where the new system was
installed on-time and on-budget in 1996. By year-end 1997, we began to see
stronger pulp and paper demand and some industry improvement in Europe.
Our active oxidants business performed well in 1997. The demand for persulfates
remains steady in two major market segments, polymer and printed circuit board
manufacturing. We are leveraging technology and cost advantages to provide a
reliable global supply. Also, newly registered applications are driving demand
for peracetic acid.
For the future, demand remains strong for phosphorus. But pricing pressures will
continue given increases in capacity worldwide and competition from imports
based on the strength of the U.S. dollar. We'll continue to fill out our
capacity expansion for soda ash as we see continued growth in demand, moderated
somewhat by the Asian economic situation. The hydrogen peroxide industry
continues to face over-capacity issues, and we don't expect relief until 1999 or
2000. We'll continue to concentrate on cost improvements across all our
businesses.
-17-
[PHOTO APPEARS HERE]
STICK-TO-IT-TIVENESS. Rohm and Haas, the Philadelphia-based specialty chemicals
manufacturer, tests the bonding properties of adhesives manufactured using FMC
persulfates.
Technology Watch
Advances that our industrial chemicals businesses have introduced in processing
and systems in recent years are providing FMC a competitive edge in efficiency
and cost. The solution-mining technology and capacity expansion put in place at
our Green River, Wyoming, soda ash site from 1995 to 1996 are allowing us to
retrieve previously unrecoverable deposits of trona ore, process record volumes
and slash production costs. We're currently the lowest-cost producer in the
industry.
Similarly, the new, proprietary process installed with our capacity expansion
for hydrogen peroxide in Bayport, Texas, in 1996 is resulting in more cost-
efficient production. The system will also give us the flexibility to add
significant capacity in future years at a low investment cost.
Meanwhile, the installation of an SAP-based integrated business system across
our chemical businesses is allowing all of these operations to meet the growing
needs of our customers more effectively. Tracking purchasing, order entry,
scheduling, shipping, inventory and account information, the system provides for
faster, more accurate retrieval of information and more thorough customer
service. This computer system installation was one of the largest and more
complex projects under way in the chemical industry.
-18-
Industrial Chemicals--Management's Discussion and Analysis
1997 COMPARED WITH 1996
Industrial Chemicals sales of $1.0 billion declined slightly from 1996, as
improved phosphorus sales essentially offset declines in sales of soda ash and
peroxygen products. Operating profits (net of minority interest) of $135.7
million in 1997 declined significantly from $181.8 million in the prior year,
which included a $24.1 million gain from the sale of FMC's minority interest in
Tokai Denka Kogyo ("TDK"), a Japanese hydrogen peroxide joint venture. Continued
price erosion in hydrogen peroxide due to a weak pulp market and industry
overcapacity resulting from recent hydrogen peroxide plant expansions have also
contributed to the profit decline.
Soda ash sales volume increased in 1997, primarily due to the continuing fill-
out of expanded capacity, but declines in prices partially offset the volume
gains. Lower volumes and prices for caustic soda and sodium cyanide also
contributed to lower operating profits.
Sales volumes for peroxygen products, which include hydrogen peroxide,
persulfates and peracetic acid, improved in 1997, but declines in hydrogen
peroxide prices resulted in a net reduction in sales from the prior year.
Operating profits decreased substantially from the 1996 level as the result of
the price declines and the absence of the gain from the 1996 sale of the
company's minority interest in TDK.
Phosphorus chemical sales were slightly higher in 1997 due to improved domestic
sales, partially offset by lower exports. Operating profits were also slightly
stronger than the prior year as a result of the higher sales volume and better
operating performance. During the fourth quarter of 1997, the company recorded
an asset impairment charge of $120.0 million against the division's property,
plant and equipment based on recently increased environmental capital cost
estimates and the impact of increasing international competition.
Spain-based FMC Foret reported increased sales volumes and pricing
improvements in most product lines. However, sales and operating profits
declined in the U.S. dollar financial statements primarily as a result of the
strong U.S. dollar.
1996 COMPARED WITH 1995
Industrial Chemicals sales of $1.0 billion increased 7 percent, and operating
profits (net of minority interest) of $181.8 million increased 19 percent in
1996, primarily reflecting improved pricing and a gain on the sale of the
company's interest in TDK. Earnings comparisons were negatively affected by the
full year minority interest expense in 1996 following the July 1995 sale of a 20
percent interest in FMC's soda ash business.
Sales of alkali chemicals increased from 1995 levels primarily as a result of
higher prices and volumes for soda ash and sodium cyanide. Strong soda ash
volumes reflected increased export sales and the impact of new product
applications. Operating profit gains from higher soda ash volumes and prices and
a non-recurring gain on a property sale were partially offset by an increase in
minority interest expense related to the soda ash joint venture.
Sales of peroxygen products were higher in 1996, largely due to increased sales
by FMC's Mexican peroxygen operation. However, lower sales of hydrogen peroxide
to the North American pulp and paper market reduced operating earnings compared
to the prior year. During 1996, the unit benefited from a $24.1 million gain
($6.5 million after tax) on the sale of FMC's 27 percent investment in TDK.
Phosphorus chemical sales and operating profits improved significantly in 1996
as a result of higher pricing and volume for most products, partially offset by
reduced export sales.
Sales by FMC Foret were higher than 1995 levels due to a significant improvement
in Spanish and export pricing, partially offset by reduced sales volume within
the Spanish market. The higher selling prices, combined with lower raw material
costs, more than offset the reduced Spanish sales volume, resulting in improved
operating profits.
OUTLOOK FOR INDUSTRIAL CHEMICALS
In 1998, soda ash volumes are expected to remain approximately even with 1997,
largely due to the economic situation in Southeast Asia. Domestic prices are
expected to approximate prior-year levels in response to strong competition.
Sodium cyanide product sales will continue to be negatively affected by
declining gold production and expanded industry capacity.
Although the pulp market is expected to recover in 1998, the Company anticipates
that underutilization of industry capacity will limit favorable hydrogen
peroxide price movements in the near term.
In recent years, FMC has added significant capacity in both soda ash and
hydrogen peroxide, which positions these businesses to benefit from expected
long-term increases in worldwide demand.
Phosphorus chemical sales volumes are expected to rise in 1998, although
competitive pricing pressures could limit increases in total sales. The 1997
asset impairment charge will result in significantly reduced depreciation
charges in 1998 and future years, which will favorably affect earnings.
FMC Foret expects its strong performance to continue in 1998, with increasing
demand for phosphate and peroxygen products and pricing improvements in certain
other products.
-19-
PERFORMANCE CHEMICALS
Performance Chemicals sales for 1997 were $1.2 billion, approximately even with
1996 sales. Profits dipped 29 percent to $112 million.
WEED IT OUT. Sulfentrazone, successfully introduced in the United States in 1997
as Authority Broadleaf, is one of FMC's new-generation herbicides used on
soybeans.
Rod Winter works closely with his customers in the fertile farmlands of
northwest Illinois to find solutions to crop safety and agronomic problems. In
1997, Winter's approach generated strong sales of FMC Command herbicide and
Furadan and Pounce insecticides.
FIELDS OF GOLD. Protecting Poland's wheat crop from devastating weeds is the job
of FMC's new herbicide, carfentrazone-ethyl. The product is marketed in Poland
as Affinity and Aurora Super.
VINE RIPE. Tomatoes from the field reach this packaging house in Culiacan,
Mexico, ready for export, thanks to the protection supplied by FMC Furadan and
Pounce pesticides.
GROWING INDEPENDENCE. FMC's highly effective Furadan insecticide is helping
Indonesia sustain self sufficiency in rice production.
For nearly five years, Callista Chukwunenye worked with the EPA to register
FMC's new herbicide, sulfentrazone, for sale in the United States. In February
1997, Chukwunenye traveled to Washington to personally collect the EPA-approved
registration.
[SIX PHOTOS APPEARS HERE]
-20-
PERFORMANCE CHEMICALS
Agricultural Products. FMC's agricultural products business remains focused on
internal development--to research new solutions to effectively protect the
world's crops and bring our newly developed products to market as quickly as
possible. Historically, this business has been a global one, and we continue to
penetrate important markets around the world.
1997 was a disappointing year for our agricultural products business. Sales were
slightly lower, reflecting low pest pressure in key markets and declines in
Asian markets. Profits declined significantly, with continuing difficulties in
starting up production of our new herbicide, sulfentrazone.
Sulfentrazone was launched, as planned, as Authority Broadleaf herbicide in the
United States in 1997. But problems in bringing the new plant in Baltimore on
stream limited volumes significantly. We expect the operational issues to be
resolved early in 1998, and in the process we'll double production capacity. In
Brazil, where sulfentrazone was introduced as Boral in late 1996, we gained
strength in sugar cane markets.
Our second new herbicide, carfentrazone-ethyl, was introduced in Europe in 1997
as Affinity, Lexus Class and Platform for use on cereal crops. We're expecting
strong sales in 1998. We also launched this product on wheat in Pakistan and
will proceed with a larger-scale introduction in 1998. The product is on a fast
track for registration for wheat and corn in the United States in 1998.
Around the world, decreased demand, weather problems and currency issues cut
into sales and depressed profits in 1997. In North America, sales to cotton
growers diminished because insects didn't present a significant problem, and a
wet spring led to late planting of the crop. We did expand sales of a variety of
insecticide products on corn crops and the new microencapsulated formulation of
Command herbicide on soybeans. In Central America, demand was down as farmers
planted fewer crops following heavy rains. Weakening European currencies, a
deteriorating economic situation in Ukraine and floods in Poland hurt our
position in Europe. Also, the financial crisis in Southeast Asia had a slight
impact on our business in that region.
Our best performance was in South America, where sales and profits were strong.
Despite a difficult fourth quarter with currency stabilization efforts in
Brazil, FMC took the lead in that country's cotton market and also gained
strength in sugar cane in Brazil and rice markets in Argentina, Bolivia, Brazil
and Uruguay.
We expect to see a significant upturn in our agricultural products business in
1998. With the resolution of our sulfentrazone production problems early in the
year, we should successfully expand our sales in the United States and elsewhere
in the world. The herbicide component of our product portfolio should be
significant. By the years 2001 and 2002, sales of both sulfentrazone and
carfentrazone-ethyl will be major contributors to our business. And with
significant cost-cutting measures in early 1998, FMC's agricultural products
business is on track for improved results.
-21-
PERFORMANCE CHEMICALS
"Apply FMC technologies to regional formulation needs," George Ayling directed
his technical team of food ingredients specialists in Latin America. That
approach helped strengthen FMC's food ingredients presence in the region. And in
1997, the team surpassed expectations with increased sales of Avicel
microcrystalline cellulose and Novagel cellulose gel.
IT'S IN THE GENES. FMC's MetaPhor agarose gel and GelStar nucleic acid stain
allow researchers to analyze high-resolution images of DNA fragments. FMC's
BioProducts business supplies essential genetic-detection tools to researchers
worldwide.
DRINKING IT UP. FMC's Flocon 260 prevents iron from damaging the filter
membranes of this water softening plant, allowing Miramar, Florida, to produce
4.5 million gallons of drinking water each day.
HAVE A HEART. FMC lithium metal forms the heart of pacemaker batteries produced
by Wilson Greatbatch Ltd. FMC's versatile product has a range of powerful
applications, from AIDS-combating drugs to power sources for the International
Space Station.
TAKING OUT THE FAT. San-Ei Gen F.F.I., Inc., the largest food ingredients
manufacturer in Japan, uses FMC's Novagel cellulose gel as a fat replacer for
dairy and bakery foods.
Puerto Rico, which produces $8 billion of the world's pharmaceuticals, is a
major portion of Erin O'Brien's sales territory. Her drive and commitment has
enabled FMC's pharmaceutical business to sustain greater than 95 percent market
share in that territory-despite aggressive competition.
NUTRITIONALLY FIT. Nutritional supplements, such as these manufactured by
General Nutrition Products, are prepared with FMC excipients, Accelerate,
Endurance MCC and Endurance Plus.
[SEVEN PHOTOS APPEARS HERE]
-22-
PERFORMANCE CHEMICALS
Specialty Chemicals. Our specialty chemicals businesses--pharmaceutical, food
ingredients, lithium, process additives--are focused on growing already strong
market positions by developing targeted, value-added products for our customers,
as well as managing costs internally.
In 1997, sales were even, and profits improved. Sales of new products and cost
improvements in food ingredients and pharmaceuticals more than offset operating
difficulties and weak pricing in our lithium business and the impact of
unfavorable currency trends for our United Kingdom-based process additives
business.
PHARMACEUTICAL PRODUCTS registered another year of robust performance with
strong market demand. We expanded our product offerings by signing agreements to
distribute two binders that complement our original Avicel microcrystalline
cellulose product line: Super-Tab spray-dried lactose monohydrate, engineered
for direct-compression tableting, and Ceolus microcrystalline cellulose, a
highly compressible binder used to produce smaller, easier-to-swallow tablets.
We also expanded globally with successful, direct sales of Avicel
microcrystalline cellulose and Ac-Di-Sol super-disintegrant in China and
Australia.
EARNINGS FOR OUR FOOD INGREDIENTS BUSINESS improved substantially following
several years of high raw material costs and supply pressures. To produce
carrageenan, a food stabilizer, we expanded the sourcing of seaweed, our raw
material, and introduced new, lower-cost process technologies for several
specific food applications.
RESULTS FOR LITHIUM were depressed slightly given substantially lower prices for
lithium carbonate. In Argentina, the new lithium carbonate plant came onstream
in the last half of 1997, to be followed by lithium chloride production in 1998.
This new, proprietary extraction technology will help us achieve a cost-
competitive position in carbonate and the low-cost position in lithium chloride.
In 1997, we continued to focus on our value-added products and saw ongoing
strong demand for our specialty products, led by the pharmaceutical and battery
markets.
OUR PROCESS ADDITIVES BUSINESS, producer of flame retardants, fluids and water
additives, continued to face highly competitive markets worldwide. As the world
leader in water treatment polymer technology to arrest scale build-up in thermal
desalination processes, we introduced our enhanced product, Belgard EV2030,
developed for Middle East customers. In the United States, we launched Bellacide
375, a new biocide that controls microorganisms in cooling towers. In flame
retardants and fluids, we launched two new lubricant additives, Durad 310M and
Durad 90.
CONTINUED INNOVATION, as well as the focus of managed care providers on overall
health care spending, will stimulate strong demand from our pharmaceutical
customers. But the increasing price pressure on our customers from managed care
providers will likely squeeze margins. We expect our food ingredients business
will see improved earnings in 1998 with the continued success of new products,
lower raw material costs and reduced spending. Competitive markets will continue
in our process additives lines. But we also expect profit growth from new
applications, continued cost improvements and new products based on proprietary
technology for the flame retardants and fluids markets. In the lithium business,
the market for value-added products for use in batteries and pharmaceuticals
remains strong, though we'll continue to face stiff price competition in
commodity products.
-23-
[PHOTO APPEARS HERE]
A MODEL CONCEPT. Molecular models of insect enzymes reveal important clues in
the discovery of new insecticides. FMC scientists use the information to
determine the efficiency and safety of promising compounds.
TECHNOLOGY WATCH
With the introduction of next-generation products the key to our success in the
21st Century, R&D spending for agricultural products is at 12 percent of sales--
higher than the industry average. Our focus is on low-dose products and
environmentally friendly compounds in both insecticides and herbicides. FMC also
is recognized as a technology leader in our specialty chemicals businesses. With
diverse products and applications, we're known for working closely with our
customers to develop highly tailored solutions to their needs. In the
pharmaceutical area, we made progress in 1997 with our advanced drug delivery
technologies that allow customers to load more active ingredients into the
tablet and improve drug-release action. We'll continue testing in these areas in
1998. In lithium, our R&D effort is zeroing in on specialty markets, such as
batteries, pharmaceuticals and polymers. We continue to make research and
development investments in flame retardants, fire-resistant fluids and water
treatment chemicals. And our new, lower-cost process technology for carrageenan
production will be rolled out over the next few years on existing and new
applications.
PERFORMANCE CHEMICALS-MANAGEMENT'S DISCUSSION AND ANALYSIS
1997 COMPARED WITH 1996
Performance Chemicals sales of $1.2 billion remained approximately even with
1996. Operating profits declined significantly, however, to $112.3 million in
1997 from $159.2 million in the prior year, primarily as the result of lower
sales and prices of some insecticide products, as well as continued start-up
problems associated with the introduction of the new Authority herbicide.
Sales of most insecticides and agricultural intermediates declined in 1997 as
the result of weaker sales in Southeast Asia, lower pest infestations in some
markets, and competitive pressure surrounding some product lines. Operating
profits declined significantly as a result of these factors and production
start-up problems associated with the introduction of Authority, a new herbicide
being produced at the company's plant in Baltimore, Maryland. During the fourth
quarter of 1997, the division recorded a $10.0 million restructuring charge to
cover workforce reductions across the business, as well as an asset impairment
of $9.0 million related to the partial reengineering and debottlenecking of the
Authority plant.
Sales of U.K.-based water additives and flame retardant products were
approximately even with 1996, while operating profits were slightly lower due to
significant foreign currency impacts. The division recorded a $46.0 million
impairment charge in the fourth quarter of 1997, largely resulting from
competitive and foreign exchange factors.
-24-
PERFORMANCE CHEMICALS - MANAGEMENT'S DISCUSSION AND ANALYSIS CONT'D
Food ingredients sales volumes improved from 1996, but total sales in dollars
remained level, largely due to the effects of weaker European currencies.
Operating profits improved, however, as a result of operating efficiencies,
lower raw material costs and reductions in selling and administrative costs.
Sales of pharmaceutical products improved in 1997, primarily due to increased
volumes. Operating profits improved slightly, primarily due to strong sales
volumes and a partial recovery from the 1996 increase in raw material costs.
Lithium products operating profits declined from 1996 as a result of a new
competitor's impact on the pricing of lithium carbonate. The company
successfully began producing lithium carbonate at its new Argentine facility in
1997, and shut down its aging North Carolina mine and mill in early 1998.
1996 COMPARED WITH 1995
Performance Chemicals sales of $1.3 billion increased 6 percent from sales of
$1.2 billion in 1995 as worldwide growth continued in these businesses.
Operating profits declined, however, to $159.2 million in 1996 from a record
$163.7 million in the prior year, primarily as the result of higher raw material
costs in food ingredients and pharmaceuticals and higher expenses relating to
the pending launch of Authority.
Sales increased in 1996 for most insecticides, herbicides and agricultural
intermediates, as well as in most geographic regions, with the largest gains in
the Asia-Pacific regions and Brazil. Operating profits declined slightly from
the record 1995 performance, primarily due to higher selling and marketing
expenses related to the scheduled North American introduction in 1997 of
Authority herbicide, as well as increased spending on herbicide research and
development projects.
Sales of water additives and flame retardant products declined in 1996 due
principally to the weak European economy. Operating profits improved, however,
as a result of favorable manufacturing performance, lower selling and
distribution costs, and reduced general and administrative expenses.
Food ingredients sales improved from 1995, although margins declined primarily
as the result of the higher cost of Philippine-harvested seaweed. Lower selling
and administrative costs, resulting from personnel reductions and improved cost
controls, partially offset lower sales margins.
Sales of pharmaceutical products increased from the prior year, but operating
profits declined slightly due to increased pulp costs and a higher investment in
advertising, selling and research costs to support the introduction of several
new products.
Sales and operating profits of lithium products increased in 1996, primarily as
a result of continued worldwide sales growth of products used in specialty
applications. Profits from the increased sales were partially reduced by
increased spending on research and development projects to support the specialty
performance products and by costs related to the new Argentine production
facility.
OUTLOOK FOR PERFORMANCE CHEMICALS
The strategic focus of the Performance Chemicals business continues to be on
developing and marketing specialty products for new applications, while the
operational objectives include bringing FMC's newer investments to a state of
full performance.
Sales of insecticides, herbicides and agricultural intermediates in 1998 may
continue to be affected by the economic issues in Southeast Asia. Management
expects the operating issues at the Baltimore facility to be resolved in early
1998, which will result in the doubling of production capacity in the coming
year. The agricultural chemicals operations also are expected to significantly
reduce operating costs in 1998 as a result of workforce reductions and cost
management efforts.
The process additives business expects its base to expand in 1998 through the
offering of several new products in the flame retardant product line. The
business will also have reduced costs in 1998 as the result of the asset
impairment charge recorded in 1997. Potential negative factors for 1998 include
the possibility of higher raw material costs, the continued strength of the
British pound and increased business risk in Southeast Asia.
The outlook for food ingredients in 1998 remains positive. New process
technology is expected to provide continued cost savings. This factor, combined
with growth of the company's key product lines, should result in significant
improvement from 1997 results.
The forecast for the pharmaceutical industry is for continued strong growth in
1998, although customer price pressures, particularly in the binders and
disintegrants lines, may dampen revenue growth for components used in
prescription products. FMC's strategy is to maintain a strong market position in
these products by providing superior quality products and services, while
focusing on cost management. Further growth depends on introducing value-added
products.
Pricing pressures and competitive conditions in the lithium carbonate market are
expected to remain intense in 1998. Specialty lithium applications should
continue to grow in 1998 due to increasing demand for pharmaceutical reagents,
polymer initiators, rechargeable battery materials and butyllithium. In response
to this expected demand, capacity expansions for specialty lithium products will
be initiated at several production facilities worldwide and investments will
continue to be made in research and development.
-25-
GENERAL--MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis should be read in conjunction with the
company's consolidated financial statements and accompanying notes, segment data
and other supplemental information. Additional background information on the
company's operations is provided in the segment discussions on pages 5 through
25.
1997 COMPARED WITH 1996
Sales from continuing operations of $4.3 billion in 1997 were up 8 percent from
$4.0 billion in 1996. Sales in the United States increased 4 percent during the
year, while sales outside the United States increased 11 percent from 1996.
After-tax income from continuing operations in 1997, before asset impairments of
$154.0 million and restructuring and other charges of $26.9 million (Note 4 to
the consolidated financial statements) and the cumulative effect of a change in
accounting principle (Note 1 to the consolidated financial statements), was
$156.4 million, compared with $162.8 million in 1996. Earnings from continuing
operations in 1997, before asset impairments, restructuring and other charges
and the cumulative effect of a change in accounting principle, were $4.13 per
share on a diluted basis versus $4.28 per share in 1996. Net income per share,
including discontinued operations in 1997 and 1996, and asset impairments,
restructuring and other charges, and the cumulative effect of a change in
accounting principle in 1997, decreased to $4.41 on a diluted basis in 1997 from
$5.54 in 1996.
Net income from discontinued operations (Note 3 to the consolidated financial
statements) in 1997 of $191.4 million includes an after-tax gain on the sale of
FMC's Defense Systems operations of $179.7 million and after-tax income from
operations of the Defense Systems segment through August 25, 1997 of $38.7
million, partially offset by an after-tax increase in environmental reserves for
previously divested operations of $27.0 million.
1996 COMPARED WITH 1995
Sales from continuing operations in 1996 were $4.0 billion, an increase of 13
percent from $3.5 billion in 1995. Sales in the United States increased 13
percent during the year, while sales outside the United States increased 14
percent from 1995.
Net income in 1996 was $210.7 million, compared with $215.6 million in 1995.
After-tax income from continuing operations increased to $162.8 million in 1996
from $151.2 million, before asset impairments and restructuring and other
charges of $80.7 million, a $99.7 million non-taxable gain on the sale of FMC
Wyoming stock (Note 2 to the consolidated financial statements) and a $15.5
million write-off of acquired in-process research and development costs, in
1995. Earnings per share were $5.54 on a diluted basis in 1996, compared with
$5.72 in 1995. Earnings per share from continuing operations on a diluted basis
were $4.28 in 1996 compared with $4.01, before asset impairments and
restructuring and other charges, a non-taxable gain on the sale of FMC Wyoming
stock and a write-off of acquired in-process research and development costs, in
1995.
Net income of $47.9 million from discontinued operations in 1996 consisted
primarily of after-tax income from operations of the Defense Systems segment and
a net gain from the sale of FMC's 80 percent interest in FMC Gold Company on
July 31, 1996, partially offset by an increase in general and product liability
reserves for previously divested operations.
INDUSTRY SEGMENTS
Results on a segment basis for the five years ended December 31, 1997 are
presented on page 5. Segment operating profits exclude certain elements of
revenue and expense as described in Note 1 to the consolidated financial
statements. Management's Discussion and Analysis of segment operating
performance appears on these pages following the operating highlights for each
segment: Machinery and Equipment on page 15; Industrial Chemicals on page 19;
and Performance Chemicals on pages 24 and 25.
OTHER INFORMATION
TAXES
Although FMC's domestic earnings (losses) are generally subject to tax expense
(benefit) at the statutory rate of 35 percent, many factors can alter the
company's consolidated tax expense (or tax benefit) rate. These factors include
non-deductible or non-benefitable transactions related to goodwill or other
items, differing foreign tax rates, state tax increments, and other permanent
differences. The effective tax benefit rate in 1997 was 59 percent, which
includes the impact of asset impairments and restructuring and other charges
(Note 4 to the consolidated financial statements). The effective rate excluding
these charges was 24 percent. The effective tax rate of 31 percent in 1996
includes taxes provided on the sale of the company's investment in Tokai Denka
Kogyo (Note 1 to the consolidated financial statements). The effective tax rate
excluding this event was 26 percent. The effective tax benefit rate of 1 percent
for 1995 includes the impact of asset impairments, restructuring and other
charges and a write-off of acquired in-process research and development costs
(Note 4 to the consolidated financial statements) and the tax-free gain on the
sale of a minority interest in FMC's soda ash business (Note 2 to the
consolidated financial statements). The 1995 effective rate excluding these
events was 25 percent. Depletion and foreign sales corporation benefits, as well
as income from foreign operations taxed at rates lower than the U.S. statutory
rate, also contributed to the different effective rates in 1997, 1996 and 1995.
-26-
ASSET IMPAIRMENTS, RESTRUCTURING AND OTHER CHARGES
FMC recorded pretax charges of $264.9 million ($180.9 million after tax) in the
fourth quarter of 1997, primarily related to asset impairments and restructuring
activities. Of this amount, $224.0 million ($154.0 million after tax) related to
asset impairments, primarily in the phosphorus chemicals and process additives
businesses, and $40.9 million ($26.9 million after tax) was provided primarily
to cover smaller restructuring activities in several other businesses. See Note
4 to the consolidated financial statements for further discussion of the asset
impairments and restructuring charges. In addition, the company increased its
environmental reserves related to discontinued operations by $45.0 million
($27.0 million after tax), as more fully described in Note 3 to the consolidated
financial statements.
FMC recorded restructuring and other charges of $35.0 million ($20.0 million
after tax) in the third quarter of 1995 covering asset impairments and related
exit liabilities for the shift of lithium-based production from North Carolina
to a new lower-cost, higher quality mineral resource in Argentina. Other charges
of $17.0 million ($10.0 million after tax) related primarily to asset
impairments. In addition, the company increased its environmental reserves by
$82.5 million, or $50.7 million after tax, as part of its ongoing assessment of
sites with known environmental issues. See Notes 4 and 15 to the consolidated
financial statements for further discussions of the restructuring and
environmental reserves.
ACCOUNTING STANDARDS ADOPTED IN 1997
During 1997, the company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share"; the Emerging Issues Task
Force consensus on Issue No. 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation"; AICPA Statement of
Position 96-1, "Environmental Remediation Liabilities"; and the Securities and
Exchange Commission's requirements for additional disclosures regarding
derivative financial instruments. These changes are described in further detail
in Note 1 to the consolidated financial statements.
ENVIRONMENTAL
FMC, like other industrial manufacturers, is involved with a variety of
environmental matters in the ordinary course of conducting its business that are
subject to federal, state and local environmental laws. FMC feels strongly about
its responsibility to protect the environment, public health and employee
safety. This includes cooperating with other parties to resolve issues created
by past and present handling of wastes. When issues arise, including notices
from the Environmental Protection Agency, or other government agencies,
identifying FMC as a Potentially Responsible Party, FMC's Environment, Health,
Safety and Toxicology staff assess and manage the issues. When necessary, the
company utilizes multifunctional advisory teams composed of environmental,
legal, financial and communications management to ensure that the company's
actions are consistent with its responsibilities to the environment and public
health, as well as to employees and shareholders.
Additional information regarding the company's environmental accounting policies
and potential environmental liability is included in Notes 1 and 15,
respectively, to the company's consolidated financial statements. Information
regarding environmental obligations associated with the company's discontinued
operations (including additional amounts recorded in 1997) is included in Note 3
to the consolidated financial statements. Estimates of 1998 environmental
spending are included under Liquidity and Capital Resources below.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents at December 31, 1997 and 1996 were $62.7 million
and $74.8 million, respectively. At December 31, 1997, the company had total
borrowings of $1.3 billion, down from $1.8 billion at December 31, 1996.
Advances under uncommitted credit facilities decreased $239.6 million and
commercial paper borrowings decreased $235.6 million (net of discount) from 1996
to 1997. The decrease in debt results from cash generated by operations, as well
as the use of cash received from the sale of the company's Defense Systems
business.
The company also has $750.0 million in committed credit facilities consisting of
a $300.0 million, 364-day non-amortizing revolving credit agreement due in
December 1998, and a $450.0 million, five-year non-amortizing revolving credit
agreement due in December 2001. At December 31, 1997, no amounts were
outstanding under these credit facilities. See Note 9 to the consolidated
financial statements for further discussion of the company's debt facilities.
In 1995, the company filed a universal shelf registration statement under which
$500.0 million of debt and/or equity securities may be publicly offered. As
discussed further in Note 9 to the consolidated financial statements, the
company issued $100.0 million of 7.75 percent senior debentures for net proceeds
of $98.2 million in 1996 and issued $70.0 million of medium-term notes during
1997 for net proceeds of $69.6 million. The net proceeds of the 1996 and 1997
debt issues under the shelf registration statement were used to retire short-
term debt.
-27-
Capital spending (including property, plant and equipment from acquisitions) of
$316.7 million for the twelve months ended December 31, 1997 decreased $195.4
million versus 1996. The decrease is primarily driven by lower capital spending
in the company's chemical businesses and the absence of acquisition spending in
1997. During 1996, FMC completed expansions of the Green River, Wyoming soda ash
facility and the Bayport, Texas hydrogen peroxide plant and substantially
completed construction of a plant in Baltimore, Maryland to manufacture a new
family of herbicides. Development of a new lithium resource in Argentina and
modifications to the herbicide plant continued throughout 1997. In addition, in
June 1996, FMC acquired Frigoscandia Equipment Holding AB for approximately $165
million plus acquisition costs and debt assumed. The company continues to
evaluate potential acquisitions on an ongoing basis.
On August 28, 1997, the Board of Directors authorized a $500.0 million, open-
market stock repurchase program for FMC common stock through the end of 1999.
During 1997, the company repurchased a total of 2.7 million shares of its common
stock at a cost of $209.0 million, including shares repurchased under the $500.0
million stock repurchase program as well as shares repurchased throughout the
first half of 1997 under a smaller, previously announced program. The company
plans to continue purchasing shares of its common stock on the open market from
time to time, depending on market conditions, and expects to repurchase
approximately $150 million of the company's common stock during both 1998 and
1999.
As discussed in Note 3 to the company's consolidated financial statements, the
company sold its defense operations to The Carlyle Group on October 6, 1997 (the
closing date). As a result of the transaction, all 1997 and prior year financial
disclosures have been restated to present FMC's Defense Systems segment as a
discontinued operation. On the closing date, the company received its share of
the net proceeds (to be adjusted based on certain closing balance sheet items as
of the closing date) from the sale, which included $460.0 million in cash
(approximately $375 million in cash after tax). FMC used the proceeds to reduce
its outstanding debt and to fund its stock repurchase program.
Cash generated from operations in 1998 and available credit facilities are
expected to be sufficient to meet operating needs, fund capital expenditures and
potential acquisitions, and meet debt service requirements for the year.
Expected cash requirements for 1998 include approximately $275 million to $350
million for planned capital expenditures, including approximately $50 million
for capital projects related to environmental control facilities. Projected 1998
spending also includes approximately $60 million for environmental compliance at
current operating sites, plus approximately $20 million of remediation spending
and $20 million for environmental study costs at current operating, previously
operated and other sites.
Total working capital of $251.1 million at December 31, 1997 increased by $79.1
million compared with 1996, as a decrease in short-term debt of $369.2 million
more than offset a decrease in current assets and an increase in accounts
payable. Operating working capital, excluding cash and cash equivalents, short-
term debt and income tax balances, decreased $217.0 million to $410.4 million at
December 31, 1997 from $627.4 million at December 31, 1996. The majority of the
decrease is due to a combination of sustainable and temporary decreases in trade
receivables and increases in accounts payable as a result of the company's
overall effort to reduce working capital. Working capital increased to $172.0
million at December 31, 1996 from $66.2 million at December 31, 1995, primarily
due to higher trade receivables and inventories as a result of increased sales
volumes and acquisitions, partially offset by higher short-term debt levels.
An increase in other non-current assets from $155.2 million at December 31, 1996
to $174.1 million at December 31, 1997 included the capitalization of
manufacturing start-up costs and certain costs related to the development of
internal-use software in 1997. See Note 1 to the consolidated financial
statements.
The company's ratios of earnings to fixed charges were 0.6x and 2.7x for the
years ended December 31, 1997 and 1996, respectively. The decrease in the ratio
in 1997 is primarily the result of lower 1997 earnings, including asset
impairments and restructuring and other charges, as well as an increase in
interest expense in 1997.
The company's foreign currency translation adjustment increased from $65.5
million at December 31, 1996 to $135.7 million at December 31, 1997, primarily
as a result of the weakening of the Spanish peseta, Belgian franc and Norwegian
krone against the U.S. dollar.
DIVIDENDS
No dividends were paid in 1997, 1996 and 1995, and no dividends are expected to
be paid in 1998.
-28-
DERIVATIVE FINANCIAL INSTRUMENTS
FMC's primary financial market risks include fluctuations in interest rates and
currency exchange rates. The company manages these risks by using derivative
financial instruments in accordance with established policies and procedures.
FMC does not use derivative financial instruments for trading purposes.
When FMC sells or purchases products or services outside the United States,
transactions are frequently denominated in currencies other than U.S. dollars.
At December 31, 1997, the foreign currencies to which the company had the most
significant exchange rate exposure were the Spanish peseta, Swedish krona,
Japanese yen, Italian lira, British pound, German mark, Belgian franc, Norwegian
krone and Irish punt. Exposure to variability in currency exchange rates is
mitigated, when possible, through the use of natural hedges, whereby purchases
and sales in the same foreign currency and with similar maturity dates offset
one another. Additionally, FMC initiates hedging activities by entering into
foreign exchange forward contracts with third parties when the use of natural
hedges is not possible. The maturity dates of the currency exchange agreements
which provide hedge coverage are consistent with those of the underlying
purchase or sales commitments.
To monitor its currency exchange rate risks, the company uses sensitivity
analysis, which measures the impact on earnings of a 10 percent devaluation of
the foreign currencies to which it has exposure. Based on its sensitivity
analysis at December 31, 1997, fluctuations in currency exchange rates in the
near term would not materially affect FMC's consolidated operating results,
financial position or cash flows. FMC's management believes that its hedging
activities have been effective in reducing its limited risks related to currency
exchange rate fluctuations.
FMC utilizes interest rate swaps to manage its exposure to fluctuations in
earnings due to changes in interest rates. The company's interest rate swap
portfolio is an integral part of its risk management strategy and as such, all
swaps are linked to an underlying debt obligation. At December 31, 1997, the
company had in place one interest rate swap denominated in British pounds with a
notional amount of 30.0 million ($49.3 million at December 31, 1997) which
matures in May 1998. The swap settles monthly, and the receive and pay rates are
British pounds Libor and 6.885 percent, respectively.
For more information on derivative financial instruments, see Notes 1 and 7 to
the consolidated financial statements.
YEAR 2000 COMPLIANCE
FMC management has established a companywide initiative to examine the
implications of the Year 2000 on the company's computing systems and related
technologies, and to assess the potential need for changes. The company has
identified areas of potential business impact, and appropriate modifications to
its computing systems are underway. Management believes this will be
accomplished in a timely manner. The company is also communicating with
suppliers and customers to coordinate Year 2000 conversion. Although final cost
estimates have yet to be determined, management does not currently believe that
the costs related to the company's compliance with the Year 2000 issue will have
a material adverse effect on the company's financial position, results of
operations or cash flows. However, in the event that the company or any of the
company's significant suppliers or customers experience disruptions due to the
Year 2000 issue, the company's operations could be adversely affected.
-29-
Consolidated Statements of Income
(In millions, except per share data) Year ended December 31
-----------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
REVENUE
Sales $ 4,259.0 $ 3,950.7 $ 3,482.6
Other revenue 53.6 79.6 35.5
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 4,312.6 4,030.3 3,518.1
- -----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 3,190.4 2,929.4 2,540.5
Selling, general and administrative expenses 625.3 586.0 533.2
Research and development 174.0 176.5 175.4
Asset impairments (Note 4) 224.0 -- 26.4
Restructuring and other charges (Note 4) 40.9 -- 108.1
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,254.6 3,691.9 3,383.6
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interests,
net interest expense, gain on sale of FMC Wyoming stock, income
taxes and cumulative effect of change in accounting principle 58.0 338.4 134.5
- -----------------------------------------------------------------------------------------------------------------------------
Minority interests 8.9 9.6 5.1
Interest income 9.5 10.0 7.6
Interest expense 118.3 103.0 84.0
Gain on sale of FMC Wyoming stock (Note 2) -- -- 99.7
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle (59.7) 235.8 152.7
Provision for (benefit from) income taxes (Note 10) (35.2) 73.0 (2.0)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle (24.5) 162.8 154.7
Discontinued operations, net of income taxes (Note 3) 191.4 47.9 60.9
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle 166.9 210.7 215.6
Cumulative effect of change in accounting principle, net of income taxes (Note 1) (4.5) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 162.4 $ 210.7 $ 215.6
=============================================================================================================================
BASIC EARNINGS (LOSS) PER COMMON SHARE (NOTE 1)
Continuing operations $ (0.67) $ 4.40 $ 4.23
Discontinued operations (Note 3) 5.20 1.29 1.66
Cumulative effect of change in accounting principle (Note 1) (0.12) -- --
- -----------------------------------------------------------------------------------------------------------------------------
$ 4.41 $ 5.69 $ 5.89
=============================================================================================================================
DILUTED EARNINGS (LOSS) PER COMMON SHARE (NOTE 1)
Continuing operations $ (0.67) $ 4.28 $ 4.10
Discontinued operations (Note 3) 5.20 1.26 1.62
Cumulative effect of change in accounting principle (Note 1) (0.12) -- --
- -----------------------------------------------------------------------------------------------------------------------------
$ 4.41 $ 5.54 $ 5.72
=============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
Consolidated Balance Sheets
(In millions, except share and per share data) December 31
-------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 62.7 $ 74.8
Trade receivables, net of allowances of $10.4 in 1997 and $10.8 in 1996 834.2 913.7
Inventories (Note 5) 524.1 497.3
Other current assets 210.4 190.2
Deferred income taxes (Note 10) 84.2 86.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,715.6 1,762.8
Investments 35.9 54.5
Net assets of discontinued operation (Note 3) -- 113.5
Property, plant and equipment, net (Note 8) 1,679.3 1,834.5
Goodwill and intangible assets (Note 2) 420.4 471.7
Other assets 174.1 155.2
Deferred income taxes (Note 10) 87.8 75.2
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,113.1 $4,467.4
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 9) $ 186.4 $ 555.6
Accounts payable, trade and other 663.5 538.7
Accrued payroll 115.5 101.1
Other current liabilities 362.3 321.8
Current portion of long-term debt (Note 9) 14.0 10.4
Current portion of accrued pension and other postretirement benefits (Notes 13 and 14) 17.0 12.2
Income taxes payable (Note 10) 105.8 51.0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,464.5 1,590.8
Long-term debt, less current portion (Note 9) 1,140.2 1,268.4
Accrued pension and other postretirement benefits, less current portion (Notes 13 and 14) 246.5 266.6
Reserve for discontinued operations (Note 3) 231.3 191.4
Other liabilities 212.0 236.9
Minority interests in consolidated companies 58.0 57.5
Commitments and contingent liabilities (Notes 15 and 16)
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTE 12)
Preferred stock, no par value, authorized 5,000,000 shares; no shares issued in 1997 or 1996 -- --
Common stock, $0.10 par value, authorized 60,000,000 shares;
issued 37,875,549 shares in 1997 and 37,480,854 shares in 1996 3.8 3.7
Capital in excess of par value of common stock 141.0 120.1
Retained earnings 969.2 806.8
Foreign currency translation adjustment (Note 6) (135.7) (65.5)
Treasury stock, common, at cost; 2,951,573 shares in 1997 and 300,427 shares in 1996 (217.7) (9.3)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 760.6 855.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,113.1 $4,467.4
=======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-31-
Consolidated Statements of Cash Flows
(In millions) Year ended December 31
------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
RECONCILIATION FROM INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE TO CASH
PROVIDED (REQUIRED) BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Income (loss) from continuing operations before cumulative
effect of change in accounting principle $ (24.5) $ 162.8 $ 154.7
Adjustments to reconcile income (loss) from continuing operations before
cumulative effect of change in accounting principle to cash provided
(required) by operating activities of continuing operations:
Asset impairments (Note 4) 224.0 -- 26.4
Restructuring and other charges (Note 4) 40.9 -- 108.1
Gain on sale of FMC Wyoming stock (Note 2) -- -- (99.7)
Depreciation and amortization 238.4 223.4 194.0
Deferred income taxes (15.8) 52.0 (3.7)
Minority interests 8.9 9.6 5.1
Other (21.2) (6.4) (7.4)
Changes in operating assets and liabilities:
Trade receivables 73.1 (180.7) (171.0)
Inventories (39.9) (96.7) (151.4)
Other current assets and other assets (37.8) (287.3) (304.3)
Accounts payable, accrued payroll, other current liabilities and other
liabilities 111.3 92.4 144.9
Income taxes payable 56.8 (3.3) (15.2)
Restructuring reserve (13.7) (14.7) (48.5)
Accrued pension and other postretirement benefits, net (12.5) (28.1) 0.1
- ----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (REQUIRED) BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 588.0 (77.0) (167.9)
- ----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (REQUIRED) BY DISCONTINUED OPERATIONS 353.9 116.7 (32.9)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided (required) by investing activities:
Capital spending (316.7) (512.1) (500.0)
Disposal of property, plant and equipment 57.1 43.7 25.4
Decrease in investments 21.2 35.2 48.7
- ----------------------------------------------------------------------------------------------------------------------------
CASH REQUIRED BY INVESTING ACTIVITIES (238.4) (433.2) (425.9)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided (required) by financing activities:
Net increase (decrease) in short-term debt (368.3) 127.0 79.5
Net proceeds from issuance of (repayments of) commercial paper (252.3) 94.7 272.3
Net increase under credit facilities 60.6 84.2 89.0
Increase in other long-term debt 69.7 112.4 18.5
Repayment of other long-term debt (18.9) (37.5) (49.4)
Proceeds from sale of FMC Wyoming stock (Note 2) -- -- 171.8
Distributions to minority partners (8.0) (6.9) --
Repurchases of common stock (Note 12) (209.0) (0.1) (0.1)
Issuances of common stock 21.6 20.4 9.3
- ----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (REQUIRED) BY FINANCING ACTIVITIES (704.6) 394.2 590.9
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (11.0) 3.2 8.5
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12.1) 3.9 (27.3)
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 74.8 70.9 98.2
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 62.7 $ 74.8 $ 70.9
============================================================================================================================
Supplemental cash flow information:
The company considers investments in all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents. Cash flows
from hedging contracts are reported in the statements of cash flows in the same
categories as the cash flows from the transactions being hedged. Income taxes
paid (including taxes paid related to Defense Systems operations), net of
refunds, were $46.0 million, $47.1 million and $29.4 million for 1997, 1996 and
1995, respectively. Interest payments, excluding amounts capitalized (Note 1),
for 1997, 1996 and 1995 were $112.0 million, $94.9 million and $76.3 million,
respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
-32-
Consolidated Statements of Changes in Stockholders' Equity
(In millions, except par value) Common Capital Foreign
stock, $0.10 in excess Retained currency Treasury
par value of par earnings translation stock
- -------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 $ 3.7 $ 90.4 $ 380.5 $ (48.9) $ (9.1)
Net income 215.6
Stock options exercised (Note 11) 9.3
Purchases of treasury shares (Note 12) (0.1)
Translation adjustment (Note 6) 12.1
- -------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 3.7 99.7 596.1 (36.8) (9.2)
Net income 210.7
Stock options exercised (Note 11) 20.4
Purchases of treasury shares (Note 12) (0.1)
Translation adjustment (Note 6) (28.7)
- -------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 3.7 120.1 806.8 (65.5) (9.3)
Net income 162.4
Stock options exercised (Note 11) 0.1 20.3
Purchases of treasury shares (Note 12) (209.0)
Shares reissued 0.6 0.6
Translation adjustment (Note 6) (70.2)
- -------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ 3.8 $ 141.0 $ 969.2 $ (135.7) $ (217.7)
===================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-33-
GEOGRAPHIC SEGMENT INFORMATION
SALES Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Third party sales (by origin of sale)
- --------------------------------------------------------------------------------------------------------------------------
United States $ 2,553.3 $ 2,504.8 $ 2,242.8
Latin America and Canada 285.9 203.8 179.8
Europe 1,232.2 1,084.9 947.3
Asia, Africa & others 187.6 157.2 112.7
- --------------------------------------------------------------------------------------------------------------------------
Total sales 4,259.0 3,950.7 3,482.6
- --------------------------------------------------------------------------------------------------------------------------
Intersegment sales (by origin of sale)
- --------------------------------------------------------------------------------------------------------------------------
United States 276.1 193.7 151.5
Latin America and Canada 22.6 12.6 10.1
Europe 126.4 113.3 92.2
Asia, Africa & others 33.3 27.3 22.1
Eliminations (458.4) (346.9) (275.9)
- --------------------------------------------------------------------------------------------------------------------------
Total sales $ 4,259.0 $ 3,950.7 $ 3,482.6
==========================================================================================================================
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
United States $ 202.2 $ 265.9 $ 219.2
Latin America and Canada 36.5 19.7 21.3
Europe 137.0 119.1 121.5
Asia, Africa & others 12.7 12.2 4.2
- --------------------------------------------------------------------------------------------------------------------------
Operating profit from continuing operations 388.4 416.9 366.2
Asset impairments (Note 4) (224.0) -- (26.4)
Restructuring and other charges (Note 4) (40.9) -- (123.6)
Gain on sale of FMC Wyoming stock (Note 2) -- -- 99.7
Net interest expense (108.8) (93.0) (76.4)
Corporate and other (86.2) (91.3) (99.0)
Other income and expense, net 11.8 3.2 12.2
- --------------------------------------------------------------------------------------------------------------------------
Total $ (59.7) $ 235.8 $ 152.7
==========================================================================================================================
IDENTIFIABLE ASSETS December 31
- --------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
United States $ 2,455.3 $ 2,540.1 $ 2,173.8
Latin America and Canada 392.4 329.9 208.2
Europe 980.3 1,155.9 900.2
Asia, Africa & others 104.9 125.1 87.1
- --------------------------------------------------------------------------------------------------------------------------
Subtotal 3,932.9 4,151.0 3,369.3
Corporate and other 180.2 202.9 199.4
- --------------------------------------------------------------------------------------------------------------------------
Continuing operations 4,113.1 4,353.9 3,568.7
Net assets of discontinued operations -- 113.5 183.1
- --------------------------------------------------------------------------------------------------------------------------
Total $ 4,113.1 $ 4,467.4 $ 3,751.8
==========================================================================================================================
U.S. EXPORT SALES TO UNAFFILIATED CUSTOMERS BY
DESTINATION OF SALE Year ended December 31
- --------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Latin America and Canada $ 245.7 $ 267.8 $ 210.9
Europe 113.1 88.6 94.5
Asia, Africa & others 376.2 393.7 378.3
- --------------------------------------------------------------------------------------------------------------------------
Total $ 735.0 $ 750.1 $ 683.7
==========================================================================================================================
-34-
OTHER SUPPLEMENTAL INFORMATION
Quarterly financial information (unaudited)
- ------------------------------------------------------------------------------------------------------------------------
(In millions, except per share and common stock data) 1997
- ------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Qtr. Qtr. Qtr Qtr
- ------------------------------------------------------------------------------------------------------------------------
Sales $ 992.9 $1,134.3 $1,059.4 $1,072.4
Income (loss) from continuing operations
before minority interests, net interest
expense, income taxes and cumulative
effect of change in accounting principle $ 60.3 $ 111.1 $ 103.2 $ (216.6)
Income from discontinued operations,
net of income taxes $ 18.8 $ 12.1 $ 7.8 $ 152.7
Income (loss) before cumulative effect
of change in accounting principle $ 40.0 $ 72.7 $ 62.9 $ (8.7)
Net income (loss) $ 40.0 $ 72.7 $ 62.9 $ (13.2)
- -----------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle $ 1.07 $ 1.95 $ 1.69 $ (0.24)
Cumulative effect of change in
accounting principle -- -- -- (0.13)
- ------------------------------------------------------------------------------------------------------------------------
$ 1.07 $ 1.95 $ 1.69 $ (0.37)
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle $ 1.05 $ 1.90 $ 1.63 $ (0.24)
Cumulative effect of change in
accounting principle -- -- -- (0.13)
- ------------------------------------------------------------------------------------------------------------------------
$ 1.05 $ 1.90 $ 1.63 $ (0.37)
- ------------------------------------------------------------------------------------------------------------------------
Common stock prices:
High $ 72 1/8 $ 79 1/16 $ 90 5/8 $ 89 1/2
Low $ 61 1/4 $ 59 5/8 $ 78 5/8 $ 64 1/4
========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
(In millions, except per share and common stock data) 1996
- ------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------------------------------------------------
Sales $ 861.2 $ 973.7 $1,023.8 $1,092.0
Income (loss) from continuing operations
before minority interests, net interest
expense, income taxes and cumulative
effect of change in accounting principle $ 69.4 $ 88.9 $ 98.9 $ 81.2
Income from discontinued operations,
net of income taxes $ 21.8 $ 9.5 $ 3.1 $ 13.5
Income (loss) before cumulative effect
of change in accounting principle $ 55.2 $ 56.3 $ 54.6 $ 44.6
Net income (loss) $ 55.2 $ 56.3 $ 54.6 $ 44.6
- ------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle $ 1.50 $ 1.52 $ 1.47 $ 1.20
Cumulative effect of change in
accounting principle -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
$ 1.50 $ 1.52 $ 1.47 $ 1.20
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle $ 1.45 $ 1.48 $ 1.44 $ 1.17
Cumulative effect of change in
accounting principle -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
$ 1.45 $ 1.48 $ 1.44 $ 1.17
- ------------------------------------------------------------------------------------------------------------------------
Common stock prices:
High $ 76 1/4 $ 76 $ 67 7/8 $ 77 3/4
Low $ 67 1/4 $ 62 1/4 $ 62 3/4 $ 64 1/2
========================================================================================================================
Significant transactions that affect quarterly results in 1997 and 1996 are
described in Notes 1, 2, 3 and 4 to the consolidated financial statements.
Quarterly earnings per common share may differ from full-year amounts due to
changes in the number of shares outstanding during the year.
OTHER INDUSTRY SEGMENT INFORMATION
- -------------------------------------------------------------------------------------------------------------------------
Depreciation Research and
Capital expenditures and amortization development expense
- -------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Year ended December 31 Year ended December 31
- -------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Machinery and Equipment $ 65.1 $ 87.5 $132.2 $ 64.8 $ 57.9 $ 45.6 $ 46.7 $ 41.5 $ 49.0
Industrial Chemicals 112.6 167.5 205.1 92.6 91.6 75.2 18.2 20.4 16.2
Performance Chemicals 129.2 219.0 143.3 67.8 59.3 59.4 109.1 113.1 109.2
Corporate 9.8 38.1 19.4 13.2 14.6 13.8 -- 1.5 1.0
- -------------------------------------------------------------------------------------------------------------------------
Total $316.7 $512.1 $500.0 $238.4 $223.4 $194.0 $174.0 $176.5 $175.4
=========================================================================================================================
Descriptions of the company's industry segments are on pages 10 through 25 of
this annual report. Sales, income (loss) from continuing operations before
income taxes and cumulative effect of change in accounting principle, and
identifiable assets by industry segment are on page 5.
Research and development expense in 1995 for the Machinery and Equipment segment
includes a $15.5 million write-off of acquired in-process research and
development costs related to the Moorco International Inc. acquisition (Note 2
to the consolidated financial statements).
Order backlog (unaudited) December 31
- -------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Machinery and Equipment $988.8 $923.0 $545.0
=========================================================================================================================
Backlogs are not reported for Industrial Chemicals or Performance Chemicals due
to the nature of these businesses.
-35-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE [1] PRINCIPAL ACCOUNTING POLICIES
NATURE OF OPERATIONS. FMC Corporation ("FMC" or "the company") is a diversified
producer of chemicals, machinery and other products for industry and
agriculture. Further descriptions of FMC's products, its principal markets and
the relative significance of its operations are included in this annual report
in Products and Markets on pages 6 through 9 and in the Industry Segment Data on
page 5.
RESTATEMENTS AND RECLASSIFICATIONS. As described further in Note 3, during
1997 the company divested its defense operations, including its interest in the
United Defense, L.P. partnership. As a result of the divestiture, the operations
constituting the Defense Systems segment have been accounted for as a
discontinued operation, and all prior-period financial statements and
disclosures presented herein have been restated for comparative purposes.
Certain prior-period balances have been reclassified to conform with the
current period's presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results are likely to differ from those
estimates, but management does not believe such differences will materially
affect the company's financial position, results of operations or cash flows.
CONSOLIDATION. The consolidated financial statements include the accounts
of FMC and all significant majority-owned subsidiaries and joint ventures except
those excluded because control is restricted or temporary in nature. All
material intercompany accounts and transactions are eliminated in consolidation.
INVESTMENTS. Investments in companies in which ownership interests are 50
percent or less and in which FMC exercises significant influence over operating
and financial policies are accounted for using the equity method after
eliminating the effects of any material intercompany transactions. All other
investments are carried at their fair values, or at cost, if appropriate.
During the fourth quarter of 1996, FMC sold its 27 percent interest in
Tokai Denka Kogyo, a Japanese hydrogen peroxide joint venture, resulting in a
gain of $24.1 million ($6.5 million after tax).
INVENTORIES. Inventories are stated at the lower of cost or market value.
Cost is determined on the last-in, first-out ("LIFO") basis for all domestic
inventories, except certain inventories relating to contracts which are stated
at the actual production cost incurred to date, reduced by amounts identified
with recognized revenue. The first-in, first-out ("FIFO") method is used to
determine the cost for all other inventories.
Inventory costs include those directly attributable to products prior to
sale, including all manufacturing overhead but excluding costs to distribute.
REVENUE RECOGNITION FOR CONTRACTS-IN-PROGRESS. Sales are recorded for most
production contracts as deliveries are made. A smaller portion of production
contracts use the percentage-of-completion method. Losses are provided for
contracts-in-progress in the period in which such losses become probable.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment, including
capitalized interest, is recorded at cost. Depreciation for financial reporting
purposes is provided principally on the straight-line basis over the estimated
useful lives of the assets (land improvements-20 years, buildings-20 to 50
years, and machinery and equipment-3 to 18 years). Gains and losses are
reflected in income upon sale or retirement of assets.
Expenditures that extend the useful life of property, plant and equipment
or increase its productivity are capitalized.
The company periodically evaluates the recoverability of property, plant
and equipment net book values, particularly in the case of a change in business
circumstances or other triggering events, based on expected future undiscounted
cash flows for the asset or group of assets. As described further in Notes 4 and
8, the company recognized significant impairments of certain long-lived assets
during the fourth quarter of 1997. The company believes that no additional
material impairment of long-lived assets existed at December 31, 1997.
CAPITALIZED INTEREST. Interest costs of $6.6 million in 1997 ($15.5 million
in 1996 and $10.2 million in 1995) associated with the construction of certain
long-lived assets have been capitalized as part of the cost of those assets and
are being amortized over their estimated useful lives.
DEFERRED COSTS AND OTHER ASSETS. Pre-operating and start-up costs directly
related to, and incurred in the start-up phase of, major new manufacturing
facilities are deferred and amortized over a five-year period. The company also
capitalizes certain costs related to software for internal use. Such costs are
amortized over periods not exceeding the expected life of software technology
(three to seven years). Recoverability of deferred costs is assessed on an
ongoing basis and writedowns to net realizable value are recorded as necessary.
The deferred start-up costs totaling $46.5 million and $22.2 million and
capitalized software costs totaling $58.0 million and $41.7 million at December
31, 1997 and 1996, respectively, are components of other assets, which also
include anticipated environmental recoveries (Note 15), bond discounts and other
deferred charges.
GOODWILL AND INTANGIBLE ASSETS. Goodwill and identifiable intangible assets
(such as trademarks) are amortized on a straight-line basis over their estimated
useful or legal lives, not exceeding 40 years. At each balance sheet date, the
company
-36-
evaluates the recoverability of goodwill based on expected future undiscounted
cash flows for each operation having a significant goodwill balance. As
described further in Note 4, the company recognized impairments of certain
intangible assets, including goodwill and patents, during the fourth quarter of
1997. The company believes that no additional material impairment of recorded
goodwill existed at December 31, 1997.
ACCOUNTS PAYABLE. Amounts advanced by customers as deposits on orders not
yet billed, and progress payments on contracts-in-progress, are recorded as
accounts payable ($130.6 million at December 31, 1997 and $85.1 million at
December 31, 1996).
INCOME TAXES. Current income taxes are provided on income reported for
financial statement purposes adjusted for transactions that do not enter into
the computation of income taxes payable. Deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. Income
taxes are not provided for the equity in undistributed earnings of foreign
subsidiaries or affiliates when it is management's intention that such earnings
will remain invested in those companies. Taxes are provided in the year a
dividend payment is received or when the decision is made to repatriate the
earnings.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of most foreign
operations are translated at exchange rates in effect at year-end, and income
statements are translated at the average monthly exchange rates prevailing
during the year. Translation gains and losses are accumulated in a separate
component of stockholders' equity until the foreign entity is sold or
liquidated. For operations in highly inflationary countries and where the local
currency is not the functional currency, inventories, property, plant and
equipment, and other noncurrent assets are converted to U.S. dollars at
historical exchange rates, and all gains or losses from conversion are included
in net income.
DERIVATIVE FINANCIAL INSTRUMENTS AND FOREIGN CURRENCY TRANSACTIONS. The
company uses derivative financial instruments selectively to offset exposure to
market risks arising from changes in foreign exchange rates and interest rates.
Derivative financial instruments currently utilized by the company primarily
include foreign currency forward contracts. Hedges are executed centrally to
minimize transaction costs on currency conversions and minimize losses due to
adverse changes in foreign currency rates. The company evaluates and monitors
consolidated net exposures by currency and maturity, and external derivative
financial instruments correlate with that net exposure in all material respects.
Gains and losses on hedges of existing assets and liabilities are included
in the carrying amounts of those assets or liabilities and are ultimately
recognized in income when those carrying amounts are converted. Gains and losses
related to hedges of firm commitments are also deferred and included in the
basis of the transaction when it is completed. Gains and losses on unhedged
foreign currency transactions are included in income as part of cost of sales.
Gains and losses on derivative financial instruments which protect the company
from exposure in a particular currency, but do not currently have a designated
underlying transaction, are also included in income as part of cost of sales. If
a hedged item matures, or is sold, extinguished, terminated, or is related to an
anticipated transaction that is no longer likely to take place, the derivative
financial instrument is closed out and the related gain or loss is included in
income as part of cost of sales.
TREASURY STOCK. Shares of common stock repurchased under the company's
stock repurchase plans are recorded at cost as treasury stock and result in a
reduction of stockholders' equity in the consolidated balance sheet. When the
treasury shares are reissued under FMC's stock compensation plans, the company
uses a first-in, first-out method for determining cost. The difference between
the cost of the shares and the reissuance price is added to or deducted from
capital in excess of par value of common stock.
EARNINGS (LOSSES) PER COMMON SHARE ("EPS"). Basic EPS is computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding during the year. Diluted EPS is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year plus the weighted average number of additional
common shares that would have been outstanding during the year if potentially
dilutive common shares had been issued under the company's stock compensation
plans. The weighted average numbers of shares outstanding used to calculate the
company's annual EPS are as follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------
Basic EPS 36,805 37,024 36,615
Diluted EPS 36,805 38,058 37,721
- ------------------------------------------------------------------------------
The company's loss from continuing operations in 1997 results in an
antidilutive effect in the calculation of diluted EPS. Accordingly, the
potential common shares that cause the antidilutive effect have been omitted
from the calculation of 1997 diluted EPS.
During January and February 1998, FMC repurchased an additional 311,100
common shares, and will continue to repurchase common shares during 1998 under
its stock repurchase plan.
SEGMENT INFORMATION. Segment operating profit from continuing operations is
defined as total revenue less operating expenses. The following items have been
excluded in computing segment operating profit: general corporate income and
expense, non-operating interest income and expense, income
-37-
taxes, significant gains or losses on abnormal retirements of assets,
restructuring and other charges (Note 4), asset impairments (Note 4), the 1995
gain on the sale of FMC Wyoming stock (Note 2), LIFO inventory adjustments and
other income and expense items. Identifiable assets by industry segment are
those assets that are used by or attributable to segment operations. Corporate
assets are principally cash and cash equivalents, LIFO reserves, deferred income
tax benefits and non-operating property and equipment.
ENVIRONMENTAL. The company provides for environmental-related obligations
when they are probable and amounts can be reasonably estimated. Where the
available information is sufficient to estimate the amount of liability, that
estimate has been used; where the information is only sufficient to establish a
range of probable liability and no point within the range is more likely than
any other, the lower end of the range has been used.
Estimated obligations to remediate sites that involve the United States
Environmental Protection Agency ("EPA"), or equivalent government agencies,
are generally accrued no later than when a Record of Decision, or equivalent, is
issued, or upon completion of a Remedial Investigation/Feasibility Study
("RI/FS") that is accepted by FMC and the appropriate government agency or
agencies. Estimates are reviewed quarterly by the company's Environment, Health,
Safety and Toxicology organization, as well as financial and legal management
and, if necessary, adjusted as additional information becomes available. The
estimates can change substantially as additional information becomes available
regarding the nature or extent of site contamination, required remediation
methods, and other actions by or against governmental agencies or private
parties.
The company's environmental liabilities for continuing and discontinued
operations are principally for costs associated with the remediation and/or
study of sites at which the company is alleged to have disposed of hazardous
substances. Such costs include, among other items, remedial investigations and
feasibility studies, site remediation, costs of operation and maintenance of the
remediation plan, fees to outside law firms and consultants for work related to
the environmental effort, and future monitoring costs. Estimated site
liabilities are determined based upon existing remediation technologies,
specific site consultants' engineering studies or by extrapolating experience
with environmental issues at comparable sites.
Provisions for environmental costs are reflected in income, net of probable
and reasonably estimable recoveries from named Potentially Responsible Parties
("PRPs") or other third parties. Such provisions incorporate inflation and are
not discounted to their present values.
In calculating and evaluating the adequacy of its environmental reserves,
the company has taken into account the joint and several liability imposed by
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and the analogous state laws on all PRPs and has considered the
identity and financial condition of each of the other PRPs at each site to the
extent possible. The company has also considered the identity and financial
condition of other third parties from whom recovery is anticipated, as well as
the status of the company's claims against such parties. In general, the company
is aware of a degree of uncertainty in disputes regarding the financial
contribution by certain named PRPs, which is common to most multi-party sites.
Although the company is unable to forecast the ultimate contributions of PRPs
and other third parties with absolute certainty, the degree of uncertainty with
respect to each party is taken into account when determining the environmental
reserve by adjusting the reserve to reflect the facts and circumstances on a
site-by-site basis. The company believes that recorded recoveries related to
PRPs are realizable in all material respects. Recoveries, excluding those
relating to discontinued operations, are recorded as other assets, and those
relating to discontinued operations are recorded in the reserve for discontinued
operations.
ACCOUNTING STANDARDS ADOPTED. The company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," for the period
ended December 31, 1997. Prior-period EPS data included herein have been
restated as required under the new standard. SFAS No. 128 replaces Accounting
Principles Board Opinion No. 15 and simplifies the computation of EPS by
replacing the presentation of primary EPS with a presentation of basic EPS,
which includes no dilution from potential common stock. Diluted EPS, which
replaces fully diluted EPS, reflects the dilution from potential common stock
that could share in the earnings of the company. The standard requires dual
presentation of basic and diluted EPS by entities with complex capital
structures, including FMC.
During 1997, the company adopted the Securities and Exchange Commission's
requirements for additional disclosures regarding derivative financial
instruments. The required disclosures are included in Derivative financial
instruments and foreign currency transactions above, Note 7 and in Management's
Discussion and Analysis on page 29.
In the fourth quarter of 1997, the company adopted the requirements of the
Emerging Issues Task Force ("EITF") consensus on Issue No. 97-13, "Accounting
for Costs Incurred in Connection with a Consulting Contract or an Internal
Project That Combines Business Process Reengineering and Information Technology
Transformation." In conjunction with the adoption, the company charged $7.6
million ($4.5 million after tax, or $0.12 per share on a diluted basis) to
expense, which was reported as the cumulative effect of a change in accounting
principle.
-38-
The expense represented the write-off of business process reengineering costs
capitalized prior to October 1, 1997. Had the consensus in EITF 97-13 been
applied historically by the company, net income in 1997, 1996 and 1995 would
have been $166.6 million ($4.53 per share on a diluted basis), $210.0 million
($5.52 per share) and $212.4 million ($5.63 per share), respectively.
AICPA Statement of Position ("SOP") 96-1, "Environmental Remediation
Liabilities," was adopted by the company effective January 1, 1997. SOP 96-1
provides guidance on the recognition, measurement and display and disclosure of
environmental remediation liabilities. The adoption of SOP 96-1 did not have a
material impact on the company's consolidated financial position, results of
operations, or cash flows.
ACCOUNTING STANDARDS NOT ADOPTED. SFAS No. 130, "Reporting Comprehensive
Income," is effective for fiscal years beginning after December 15, 1997, and
establishes standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. The standard requires that all items that must be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The company is evaluating the statement's provisions
to conclude how it will present comprehensive income in its financial
statements, and has not yet determined the amounts to be disclosed. FMC will
adopt SFAS No. 130 in 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The company is
evaluating the new statement's provisions to determine the additional
disclosures required in its financial statements. FMC will adopt SFAS No. 131 in
1998.
NOTE [2] BUSINESS COMBINATIONS
ACQUISITIONS. In June 1996, FMC acquired all of the common shares of
Frigoscandia Equipment Holding AB ("Frigoscandia"), a wholly owned subsidiary of
ASG AB, for approximately $165 million plus acquisition costs and debt assumed.
Frigoscandia is a leading worldwide manufacturer of industrial freezers, ovens,
fryers and other equipment for the food processing industry. Frigoscandia's
operations are included in the company's Machinery and Equipment segment. In
conjunction with the acquisition of Frigoscandia, goodwill and other intangible
assets of $164.4 million were recorded during 1996.
In June 1995, FMC acquired all of the common shares of Moorco International
Inc. ("Moorco") for $28 per share, or approximately $350 million (including
acquisition costs and debt assumed). Moorco is the leading worldwide
manufacturer of meters for the petroleum industry and a leading manufacturer of
valves for the process and power generation industries. Moorco's operations are
included in the company's Machinery and Equipment segment. In conjunction with
the acquisition of Moorco, goodwill and other intangible assets of $218.4
million were recorded, and $15.5 million of acquired in-process research and
development costs were charged to research and development expense during 1995.
The company also completed a number of other smaller acquisitions and joint
ventures during the years ended December 31, 1997, 1996 and 1995.
The purchase prices for all the aforementioned acquisitions were satisfied
from cash flow from operations and short-term and long-term financing. Results
of operations of the acquired companies have been included in the company's
consolidated statements of income from the respective dates of acquisition. The
company's 1997 and 1996 acquisitions did not have a material pro forma impact on
the company's consolidated results of operations.
These acquisitions were accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values of such
assets and liabilities at the date of acquisition. The excess of the purchase
price over the fair value of the net tangible assets acquired has been recorded
as intangible assets, primarily goodwill, which are amortized over periods
ranging from 15 to 40 years.
JOINT VENTURE. In July 1995, FMC completed a joint venture involving the
sale of 20 percent of its soda ash business, FMC Wyoming Corporation, to
Sumitomo Corporation and Nippon Sheet Glass Company, Ltd. for $150.0 million,
resulting in a nontaxable gain of $99.7 million ($2.64 per share on a diluted
basis). The company retains management control of the joint venture. In
accordance with the agreement, the company's joint venture partners also
contributed approximately $22 million to the joint venture, representing their
share of preformation funding of capital projects at FMC Wyoming Corporation's
soda ash facilities.
-39-
NOTE [3] DISCONTINUED OPERATIONS
The company's results of discontinued operations for the years ended December
31, 1997, 1996 and 1995 comprise the following:
- ---------------------------------------------------------------
(In millions) 1997 1996 1995
- ---------------------------------------------------------------
Gain on sale of Defense Systems
operations (net of income
taxes of $138.7) $179.7 $ -- $ --
Income from operations of
Defense Systems segment
through August 25, 1997
(net of income taxes of
$25.5 in 1997, $31.6 in 1996
and $37.8 in 1995) 38.7 55.3 62.8
Gain on disposal of FMC Gold
Company (including income
tax benefit of $10.3) -- 19.7 --
Loss from operations of Precious
Metals segment through
July 31, 1996 (net of income
tax benefits of $1.8 in 1996
and $4.5 in 1995) -- (3.7) (1.9)
Provision for liabilities related
to previously discontinued
operations (net of income
tax benefits of $18.0 in 1997
and $15.6 in 1996) (27.0) (23.4) --
- ---------------------------------------------------------------
Discontinued operations,
net of income taxes $191.4 $ 47.9 $ 60.9
===============================================================
SALE OF DEFENSE SYSTEMS OPERATIONS. On August 25, 1997, FMC, Harsco
Corporation, Harsco UDLP Corporation (together with Harsco Corporation,
"Harsco"), and Iron Horse Acquisition Corp., an affiliate of The Carlyle Group
("Carlyle"), signed a definitive agreement for the sale of United Defense, L.P.
("United Defense" or "UDLP") and certain other assets to Carlyle for
approximately $850 million. The transaction closed on October 6, 1997.
FMC was the managing general partner and 60 percent owner of United
Defense, which was formed in 1994 by combining FMC's Defense Systems Group with
Harsco's BMY Combat Systems Division. Harsco owned the remaining 40 percent of
UDLP. United Defense supplies ground combat and naval weapons systems for the
U.S. armed forces and military customers around the world.
The gross sale proceeds to FMC and Harsco consisted of $800.0 million in
cash, to be adjusted based on certain closing balance sheet items as of October
6, 1997, and a $50.0 million note payable to FMC by Carlyle upon finalization of
certain international joint-venture agreements. Of the estimated proceeds, FMC
received $460.0 million in cash (subject to adjustment) and expects to collect
the $50.0 million note, which bears interest at 8 3/4 percent, in 1998.
In addition to its interest in the UDLP partnership, FMC sold to Carlyle as
part of UDLP its wholly owned Corporate Technology Center ("CTC"). FMC also
agreed to contract for certain research services with CTC in the future. FMC
transferred 92 of its CTC, legal and defense audit staff to UDLP in conjunction
with the disposition of UDLP. These staff primarily performed defense-related
duties while at FMC.
After deducting its investment in UDLP of $97.9 million, including FMC's
share of UDLP's results of operations during the period from August 25, 1997
(measurement date) through October 6, 1997, and providing for required pension
funding of $22.0 million, transaction costs, valuation reserves against certain
retained properties, and other costs, FMC recognized a gain of $318.4 million
($179.7 million after tax) during the fourth quarter of 1997. The reported gain
is subject to resolution of closing issues in accordance with the sale contract.
FMC used the cash received to retire variable rate debt and commercial paper and
contribute towards its common stock repurchase program.
Sales of the Defense Systems segment were $918.9 million for the period
from January 1, 1997 through August 25, 1997 and $1,018.8 million and $968.2
million, respectively, for the years ended December 31, 1996 and 1995.
SALE OF PRECIOUS METALS OPERATIONS. On July 15, 1996, FMC's management
approved a plan to dispose of shares of FMC Gold Company through a secondary
offering of substantially all of FMC's interest following a reincorporation of
FMC Gold Company in Canada under the name Meridian Gold Inc. In connection with
the disposal, the Precious Metals segment have been accounted for as a
discontinued operation.
Upon completion of the reincorporation and offering in the third quarter of
1996, FMC received cash proceeds, including a dividend of $0.02 per share, of
$210.7 million. Amounts owing to FMC Gold Company totaling $79.2 million at July
31, 1996 and transaction and other related costs aggregating $23.3 million were
paid from proceeds or accrued pending payment. FMC recorded a gain of $9.4
million ($19.7 million after tax) on the transaction. A net tax benefit of $10.3
million on the gain included the reversal of previously recorded valuation
allowances, which are no longer required, related to certain deferred tax assets
arising from the Precious Metals business.
Sales of the Precious Metals segment were $41.3 million for the seven
months ended July 31, 1996 and $59.0 million for the year ended December 31,
1995.
RESERVE FOR DISCONTINUED OPERATIONS. In the fourth quarter of 1997, FMC
provided $45.0 million ($27.0 million after tax) for environmental costs at
discontinued operations' sites based on the company's quarterly assessment of
future remediation costs.
-40-
In the third quarter of 1996, the company recorded a charge of $39.0
million ($23.4 million after tax) to increase reserves related to operations
discontinued by the company between 1976 and 1984. These additional reserves
resulted primarily from an increase in the company's actuarially determined
estimate of product liability and in other potential claims principally related
to the discontinued Construction Equipment and Chlor-Alkali businesses.
Disposal of all assets related to discontinued operations has been
completed in accordance with plans adopted within one year of the measurement
dates. In addition to the 1997 sale of the company's Defense Systems operations
and the 1996 sale of FMC Gold Company, residual liabilities relate to operations
discontinued between 1976 and 1984--primarily the Film, Fiber, Power
Transmission and Construction Equipment businesses. Most residual liabilities
are of a long-term nature and will be settled over a number of years.
Liabilities remaining with FMC total $231.3 million at December 31, 1997 ($191.4
million at December 31, 1996) and comprise: $64.7 million (net of $68.0 million
in anticipated third party recoveries) for environmental remediation and study
obligations, most of which relate to former chemical plant sites; $58.2 million
for product liability and other potential claims principally related to the
discontinued Construction Equipment group; $68.1 million for retiree benefits
provided to employees of former chemical businesses and the Construction
Equipment group; $36.6 million related to the sale of the Defense Systems
operations; and $3.7 million related to the sale of FMC Gold Company.
The company uses actuarial methods, to the extent practicable, to monitor
the adequacy of product liability and retiree benefit reserves on an ongoing
basis. The environmental liabilities are subject to the environmental accounting
and review practices described in Notes 1 and 15. While the amounts required to
settle the company's liabilities for discontinued operations could ultimately
differ materially from the estimates used as a basis for recording these
liabilities, management believes that changes in estimates or required
expenditures for any individual cost component will not have a material adverse
impact on the company's liquidity or financial condition in any single year and
that, in any event, such costs will be satisfied over many years. Spending in
1997, 1996 and 1995, respectively, included $25.9 million, $9.4 million and
$12.4 million for environmental obligations, net of recoveries; $10.2 million,
$8.2 million and $5.7 million for product liability claims; and $4.5 million,
$3.5 million and $5.2 million for retiree benefits.
NOTE [4] ASSET IMPAIRMENTS AND RESTRUCTURING AND OTHER CHARGES
FMC recorded pre-tax charges of $264.9 million ($180.9 million after tax, or
$4.92 per share on a diluted basis) in the fourth quarter of 1997. Of this
amount, $224.0 million ($154.0 million after tax, or $4.19 per share) related to
asset impairments primarily in the phosphorus chemicals and process additives
businesses, and $40.9 million ($26.9 million after tax, or $0.73 per share) was
provided to cover restructuring and other activities in several businesses.
Restructuring and other reserves related to the 1997 charge totaled $29.3
million at December 31, 1997.
In the phosphorus chemicals business, asset impairments of $120.0 million
were based on recently increased environmental capital cost estimates and
difficult market conditions resulting from increased international competition.
Based on an agreement subject to final negotiation with the U.S. government, the
increased capital costs include environmental projects to reduce air emissions
and meet waste handling and waste pond treatment requirements at the company's
Pocatello, Idaho facility.
In the United Kingdom-based process additives business, asset impairments
of $46.0 million, including the impairment of $19.8 million of goodwill,
reflected lower expected future cash flows resulting from increased market
competition in the flame retardant and water treatment businesses, as well as
the strength of the British pound.
Additional asset impairments of $58.0 million primarily related to a
partial re-engineering of the Authority herbicide plant, the write-off of
certain impaired assets at both the lithium facility in North Carolina and at
the food ingredients facility in Cork, Ireland, and the write-off of unused
patents in the airport products business.
The fair values of impaired assets were determined using discounted cash
flow models and assumptions based on management's estimates.
Restructuring charges of $26.0 million related primarily to the
agricultural products business ($10.0 million), the FMC FoodTech businesses
($7.0 million), and the Crosby industrial valve business ($6.0 million). In
conjunction with the restructuring process, the company has severed, or expects
to sever, approximately 270 personnel, and has eliminated about 70 unfilled
positions. Other charges of $14.9 million consist of various one-time writeoffs
and other costs .
FMC recorded pre-tax asset impairments and restructuring and other charges
of $35.0 million ($20.0 million after tax, or $0.53 per share on a diluted
basis) in the third quarter of 1995 covering asset impairments and related exit
liabilities for the shift of lithium-based production from North Carolina to a
new lower-cost, higher-quality mineral resource in Argentina. Additional charges
of $17.0 million ($10.0 million after tax, or $0.27 per share) related primarily
to asset impairments, and the
-41-
company recorded $82.5 million ($50.7 million after tax, or $1.34 per share) of
additional environmental reserves (Note 15). In addition, FMC wrote off $15.5
million ($0.41 per share) of acquired in-process research and development costs
with no associated tax benefit (Note 2), which was charged to research and
development expense. Except for environmental reserves (Note 15), remaining
accruals related to the 1995 charges are not significant at December 31, 1997.
NOTE [5] INVENTORIES
Inventories are recorded at the lower of cost or market value. The current
replacement costs of inventories exceeded their recorded values by approximately
$283.8 million at December 31, 1997 and $279.4 million at December 31, 1996.
During 1997, 1996 and 1995 there were no reductions in LIFO inventories which
were carried at lower than prevailing costs.
NOTE [6] FOREIGN CURRENCY
Net income for 1997, 1996 and 1995 included aggregate foreign currency gains of
$0.8 million, $2.3 million and $0.2 million, respectively. The U.S. dollar
strengthened significantly against most currencies in 1997 while European
currencies were mixed against the U.S. dollar in 1996. The Japanese yen and
Mexican peso continued their 1995 weakening trend during 1996.
The 1997 decrease in the foreign currency translation adjustment component
of stockholders' equity was largely due to the weakening of European currencies,
particularly the Spanish peseta, against the U.S. dollar. The 1996 decrease was
due to the sale of the company's minority interest in a Japanese hydrogen
peroxide venture (Note 1) as well as smaller amounts related to European
currency movements against the U.S. dollar. The 1995 increase was primarily
attributable to a weaker U.S. dollar in relation to European currencies,
particularly the Spanish peseta.
The following table presents the foreign currency adjustments to key
balance sheet categories and the offsetting adjustments to the foreign currency
translation adjustment component or to income. Interest earned on foreign cash
and cash equivalents and debt service costs are classified as interest income
and interest expense, respectively, and are not included in the table. In
addition, foreign currency impacts on cash and cash equivalents and debt in
hyperinflationary economies are netted against interest income and expense and
are also not shown in the table.
- ------------------------------------------------------------------
Gains (Losses)
- ------------------------------------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------
Cash and cash equivalents $(11.0) $ 3.2 $ 8.5
Debt 1.5 (7.3) (3.1)
Other working capital (19.5) 1.7 2.1
Property, plant & equipment, net (38.5) (1.3) 15.1
Investments (3.0) (17.8) (3.6)
Other 1.1 (4.9) (6.7)
- ------------------------------------------------------------------
$(69.4) $(26.4) $12.3
==================================================================
Foreign currency translation
adjustment $(70.2) $(28.7) $12.1
Gain in income 0.8 2.3 0.2
- ------------------------------------------------------------------
$(69.4) $(26.4) $12.3
- ------------------------------------------------------------------
NOTE [7] FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES. The carrying amounts of cash and cash equivalents, trade
receivables, other current assets, accounts payable and amounts included in
investments and accruals meeting the definition of a financial instrument
approximate fair value. The carrying value and related estimated fair values
for the company's remaining financial instruments are as follows:
- ------------------------------------------------------------------
December 31, 1997
- ------------------------------------------------------------------
Carrying Estimated
(In millions) Amount Fair Value
- ------------------------------------------------------------------
Assets
- ------------------------------------------------------------------
Foreign exchange forward contracts $ -- $ 2.1
Interest rate swap agreement $ -- $ 0.1
- ------------------------------------------------------------------
Liabilities
- ------------------------------------------------------------------
Total debt $1,340.6 $1,354.6
==================================================================
Fair values of debt have been determined through a combination of
management estimates and information obtained from independent third parties
using market data, such as bid/ask spreads, available on the last business day
of the year. Fair values relating to derivative financial instruments reflect
the estimated amounts that the company would receive or pay to terminate the
contracts at the reporting date based on quoted market prices of comparable
contracts as of December 31, 1997.
DERIVATIVE FINANCIAL INSTRUMENTS. The company has entered into an interest
rate swap agreement under which the company pays fixed-rate British pound
amounts in exchange for floating-rate British pound amounts. This swap agreement
reduces the company's risk to higher British pound interest rates on sterling-
denominated debt.
-42-
In addition, as of December 31, 1997 and 1996, the company had
approximately $436.4 million and $410.6 million, respectively, of outstanding
foreign exchange forward contracts in which foreign currencies (primarily
Spanish peseta, Swedish krona, Japanese yen, Italian lira, British pound and
German mark in 1997 and Belgian franc, British pound, Norwegian krone and
Spanish peseta in 1996) were purchased, and approximately $485.9 million and
$495.5 million, respectively, of outstanding foreign exchange forward contracts
in which foreign currencies (primarily Spanish peseta, British pound, Belgian
franc, Swedish krona, Norwegian krone and Irish punt in 1997 and British pound,
Japanese yen, Spanish peseta and Swedish krona in 1996) were sold.
Cross-currency contracts at December 31, 1997 and 1996 were not
significant. Such contracts provide for the exchange of certain European
currencies.
At December 31, 1997, the majority of outstanding hedges relate to
receivables, payables and intercompany transactions.
NOTE [8] PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
- -------------------------------------------------------------------
December 31
- -------------------------------------------------------------------
(In millions) 1997 1996
- -------------------------------------------------------------------
Land and land improvements $ 189.9 $ 173.8
Buildings 521.6 469.7
Machinery and equipment 2,751.5 2,780.3
Construction in progress 192.2 343.0
- -------------------------------------------------------------------
Total cost 3,655.2 3,766.8
Accumulated depreciation 1,975.9 1,932.3
- -------------------------------------------------------------------
Net property, plant and equipment $1,679.3 $1,834.5
===================================================================
Depreciation expense was $218.3 million, $205.7 million and $182.6 million
in 1997, 1996 and 1995, respectively. As discussed further in Note 4, impairment
charges recorded in the fourth quarter of 1997 reduced net property, plant and
equipment by $169.2 million.
NOTE[9] DEBT
LONG-TERM DEBT. Long-term debt consists of the following:
- -------------------------------------------------------------------
December 31
- -------------------------------------------------------------------
(In millions) 1997 1996
- -------------------------------------------------------------------
Revolving credit facility (effective rate:
1997--6.7%; 1996--6.2%)/(1)/ $ -- $ --
Commercial paper (effective rate:
1997--5.7%; 1996--5.5%)/(2)/ 155.0 390.6
Uncommitted credit facilities (effective
rate: 1997--5.8%; 1996--5.6%)/(2)/ 120.0 59.4
Notes payable to banks, various rates,
due 1998 to 2042 18.7 28.4
Pollution control and industrial
revenue bonds, 3.8% to 7.1%,
due 1998 to 2024 166.5 175.7
Senior debt, 8 3/4%, due 1999,
less unamortized discount
(1997--$0.2; 1996--$0.4),
effective rate 8.8% 249.8 249.6
Senior debt, 6 3/8%, due 2003,
less unamortized discount
(1997--$0.6; 1996--$0.7),
effective rate 6.4% 199.4 199.3
Senior debt, 7 3/4%, due 2011,
less unamortized discount
(1997--$1.0; 1996--$1.0),
effective rate 7.9% 99.0 99.0
Medium term notes, 7.20% and 7.21%,
due 2002, less unamortized discount
(1997--$0.1), effective rate 7.2% 24.9 --
Medium term notes, 7.32%, due 2007,
less unamortized discount
(1997--$0.3), effective rate 7.4% 44.7 --
Exchangeable senior subordinated
debentures, 6 3/4%, due 2005 75.0 75.0
Other 1.2 1.8
- -------------------------------------------------------------------
Total 1,154.2 1,278.8
Less current portion 14.0 10.4
- -------------------------------------------------------------------
Long-term portion $1,140.2 $1,268.4
===================================================================
(1) The effective rate for the revolving credit facility is based on average
balances outstanding during the year and includes facility fees.
(2) The effective rates for commercial paper and uncommitted facilities are
based on average balances outstanding during the year.
-43-
In December 1996, the company entered into a $450.0 million, five-year non-
amortizing revolving credit agreement and a $300.0 million, 364-day non-
amortizing revolving credit agreement (which was subsequently renewed until
December 1998). These agreements provide the company with $750.0 million in
committed credit facilities. No amounts were outstanding under these credit
facilities as of December 31, 1997 and 1996. Among other restrictions, the
credit agreements contain covenants relating to liens, consolidated net worth
and cash flow coverage (as defined in the agreements). The company is in
compliance with all financial debt covenants.
Committed credit available under the revolving credit facilities provides
management with the ability to refinance a portion of its debt on a long-term
basis and, as it is management's intent to do so, $155.0 million and $390.6
million in outstanding commercial paper, which is supported by credit
facilities, have been classified as long-term debt at December 31, 1997 and
1996, respectively. In addition, $120.0 million and $59.4 million of borrowings
under short-term uncommitted credit facilities have been classified as long-term
debt at December 31, 1997 and 1996, respectively.
In January 1997, the company registered $400.0 million of medium-term debt
securities pursuant to a $500.0 million universal shelf registration statement
filed in 1995 under which, on January 29, 1997, the company issued $45.0 million
of 7.32 percent notes due in 2007. The net proceeds totaled $44.7 million and
were used to retire short-term borrowings. Additionally, on May 2, 1997, the
company issued $25.0 million of notes due in 2002 at rates of 7.20 percent and
7.21 percent. The net proceeds of $24.9 million were also used to retire short-
term debt.
In July 1996, the company issued $100.0 million of 7.75 percent Senior
Debentures due 2011 pursuant to the 1995 universal shelf registration statement.
The net proceeds from the issuance totaled $98.2 million and were used to reduce
variable rate short-term debt.
The exchangeable senior subordinated debentures bearing interest at 6 3/4
percent and maturing in 2005 are exchangeable at any time into Meridian Gold
Inc. common stock at an exchange price of $15 1/8 per share, subject to
adjustment. The company may, at its option, pay an amount equal to the market
price of Meridian Gold Inc. common stock in lieu of delivery of the shares.
However, the market price at December 31, 1997 was substantially below $15 1/8
per share. The debentures are redeemable at the option of FMC at prices
decreasing from 103 3/8 percent of face amount on January 16, 1995, to par on
January 16, 2000. The debentures are subordinated in right of payment to all
existing and future senior indebtedness of the company.
Aggregate maturities and sinking fund requirements over the next five years
are (in millions): 1998--$14.0, 1999--$264.2, 2000--$0.7, 2001--$277.6, 2002--
$25.8, and thereafter--$571.9. The maturities in the year 2001 include
commercial paper redemptions of $155.0 million and $120.0 million of borrowings
under short-term uncommitted credit facilities.
SHORT-TERM DEBT. At December 31, 1997, short-term debt consisted entirely
of foreign short-term borrowings. The balance at December 31, 1996 included
foreign short-term borrowings and advances under uncommitted credit facilities.
Outstanding foreign short-term borrowings totaled $186.4 million and $255.4
million at December 31, 1997 and 1996, respectively. The weighted average
interest rates on outstanding foreign short-term borrowings at December 31, 1997
and 1996 were 8.4 percent and 9.7 percent, respectively. The average interest
rates have been adjusted for currency devaluation associated with borrowing in
hyperinflationary countries.
In November 1995, the company commenced a short-term commercial paper
program, providing for the issuance of up to $500.0 million in aggregate
maturity value of commercial paper at any given time. Two-day to 30-day
commercial paper with an aggregate maturity value of $155.0 million was
outstanding at December 31, 1997. As described above, the outstanding balance at
December 31, 1997 was classified as long-term debt. At December 31, 1996, $390.6
million of outstanding commercial paper was classified as long-term debt.
Advances under uncommitted credit facilities were $120.0 million and $359.6
million at December 31, 1997 and 1996, respectively. As described above, $120.0
million of the outstanding balance at December 31, 1997 ($59.4 million at
December 31, 1996) was classified as long-term debt.
COMPENSATING BALANCE AGREEMENTS. FMC maintains informal credit arrangements
in many foreign countries. Foreign lines of credit, which include overdraft
facilities, typically do not require the maintenance of compensating balances,
as credit extension is not guaranteed but is subject to the availability of
funds.
-44-
NOTE [10] INCOME TAXES
Domestic and foreign components of income (loss) from continuing operations
before income taxes and the cumulative effect of a change in accounting
principle are shown below:
- -----------------------------------------------------------
Year ended December 31
- -----------------------------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------
Domestic $(174.2) $100.4 $ 43.0
Foreign 114.5 135.4 109.7
- -----------------------------------------------------------
Total $ (59.7) $235.8 $152.7
===========================================================
The provision for (benefit from) income taxes attributable to continuing
operations before the cumulative effect of a change in accounting principle
consists of:
- -----------------------------------------------------------
Year ended December 31
- -----------------------------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------
Current:
Federal $ (33.0) $ (8.3) $ (7.6)
Foreign 17.3) 28.6 14.4
State and local (3.7) 0.7 (5.1)
- -----------------------------------------------------------
Total current (19.4) 21.0 1.7
Deferred (15.8) 52.0 (3.7)
- -----------------------------------------------------------
$ (35.2) $ 73.0 $ (2.0)
===========================================================
Total income tax provisions (benefits) for the years ended December 31 were
allocated as follows:
- -----------------------------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------
Continuing operations before
the cumulative effect of
a change in accounting
principle $ (35.2) $ 73.0 $ (2.0)
Discontinued operations 146.2 3.8 33.3
Cumulative effect of a change
in accounting principle (3.1) - -
Items charged directly to
stockholders' equity (7.1) (7.8) (3.7)
- -----------------------------------------------------------
Income tax provision $ 100.8 $ 69.0 $ 27.6
===========================================================
Significant components of the deferred income tax provision (benefit)
attributable to income (loss) from continuing operations before income taxes and
the cumulative effect of a change in accounting principle for the years ended
December 31 are as follows:
- -----------------------------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------
Deferred tax (exclusive of the
valuation allowance) $(15.4) $ 57.3 $ (7.4)
(Decrease) increase in
the valuation allowance
for deferred tax assets (0.4) (5.3) 3.7
- -----------------------------------------------------------
Deferred income tax
provision (benefit) $(15.8) $ 52.0 $ (3.7)
===========================================================
Significant components of the company's deferred tax assets and liabilities
as of December 31 are as follows:
- -----------------------------------------------------------
(In millions) 1997 1996
- -----------------------------------------------------------
Reserves for discontinued operations
and restructuring $209.7 $156.7
Accrued pension and other
postretirement benefits 92.8 103.6
Other reserves 61.3 43.2
Net operating loss carryforwards 15.8 22.7
Alternative minimum tax
credit carryforwards - 46.0
Other 20.0 16.0
- -----------------------------------------------------------
Deferred tax assets 399.6 388.2
Valuation allowance (12.9) (13.3)
- -----------------------------------------------------------
Deferred tax assets, net of
valuation allowance $386.7 $374.9
===========================================================
Property, plant and equipment $210.3 $204.9
Other 4.4 8.0
- -----------------------------------------------------------
Deferred tax liabilities $214.7 $212.9
===========================================================
Net deferred tax assets $172.0 $162.0
===========================================================
-45-
The effective income tax rate applicable to income (loss) from continuing
operations before income taxes and the cumulative effect of a change in
accounting principle is different from the statutory U.S. federal income tax
rate due to the factors listed in the following table:
- --------------------------------------------------------------------------------
(Percent of income (loss) from continuing
operations before income taxes and
the cumulative effect of a change
in accounting principle) Year ended December 31
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Statutory U.S. tax rate (35)% 35% 35 %
- --------------------------------------------------------------------------------
Net difference:
Foreign sales corporation income not
subject to U.S. tax (13) (3) (3)
Percentage depletion (12) (5) (8)
State and local income taxes, less
federal income tax effect (11) 3 (1)
Foreign earnings subject to different
tax rates (18) (2) (4)
Tax on intercompany dividends
and deemed dividends for
tax purposes 6 2 2
Sale of a minority interest
in FMC Wyoming not taxed -- -- (24)
Nondeductible goodwill 16 1 1
Nondeductible expenses 5 1 3
Minority interests 5 1 2
Additional taxes on sale
of investment -- 4 --
Equity in earnings of affiliates
not taxed (3) (2) (1)
Other 1 (4) (3)
- --------------------------------------------------------------------------------
Total difference (24) (4) (36)
- --------------------------------------------------------------------------------
Effective tax rate (59)% 31% (1)%
================================================================================
The effective tax benefit rate of 59 percent for 1997 includes the impact
of restructuring and other charges (Note 4). The effective tax rate excluding
these charges was 24 percent. The effective tax rate of 31 percent in 1996
includes taxes provided on the sale of the company's investment in Tokai Denka
Kogyo (Note 1). The effective tax rate excluding this event was 26 percent. The
effective tax benefit rate of 1 percent for 1995 includes the impact of
restructuring and other charges (Note 4) and the nontaxable gain on the sale of
FMC Wyoming stock (Note 2). The effective tax rate excluding these events was 25
percent.
FMC's federal income tax returns for years through 1994 have been examined
by the Internal Revenue Service and substantially all issues have been settled.
Management believes that adequate provision for income taxes has been made for
the open years 1995 and after and for any unsettled issues prior to 1995. U.S.
income taxes have not been provided for the equity in undistributed earnings of
foreign consolidated subsidiaries ($484.2 million and $440.8 million at December
31, 1997 and 1996, respectively) or unconsolidated subsidiaries and affiliates
($14.8 million and $16.1 million at December 31, 1997 and 1996, respectively).
Restrictions on the distribution of these earnings are not significant. Foreign
earnings taxable to the company as dividends were $28.1 million, $20.3 million
and $9.5 million in 1997, 1996 and 1995, respectively.
NOTE [11] INCENTIVE COMPENSATION PLANS
The 1995 Management Incentive Plan (the Incentive Plan) and the 1995 Stock
Option Plan (the Option Plan), approved by the stockholders on April 21, 1995,
provide certain incentives and awards to key employees. The plans are
administered by the Compensation and Organization Committee of the Board of
Directors (the Committee) which, subject to the provisions of the plans, reviews
and approves financial targets, times and conditions for payment.
The Incentive Plan provides for the grant of multi-year incentive awards
payable partly in cash and partly in stock.
The Option Plan (and its predecessor plans) provides for regular grants of
stock options which may be incentive and/or nonqualified stock options. The
exercise price for options is not less than the fair market value of the stock
at the date of grant. Options are exercisable at the time designated by the
Committee in the option (four years for grants prior to 1995 and three years for
grants during 1995 and thereafter). Incentive options expire not later than 10
years from the grant date. Nonqualified options expire not later than 15 years
from the grant date (10 years for grants prior to 1990), although the Committee
may extend the expiration date of any nonqualified stock option upon such terms
and conditions as the Committee shall determine.
Under the plans adopted in 1995, 3 million shares became available for
awards and options granted in 1995 and later years. These shares are in addition
to the shares available from the predecessor plans. Cancellation (through
expiration, forfeiture or otherwise) of outstanding awards and options granted
after 1989 increases the shares available for future awards or grants. At
December 31, 1997, 2,081,650 shares were available for future use under these
plans.
The company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the Option Plan. Had compensation cost for the Option Plan
been determined based on the fair value at the grant date for awards in 1997,
1996 and 1995 consistent with the provisions of SFAS
-46-
No. 123, the company's net income and diluted earnings per share for the three
years ended December 31, 1997 would have been reduced to the pro forma amounts
indicated below:
- ------------------------------------------------------------
(Net income in millions) 1997 1996 1995
- ------------------------------------------------------------
Net income--as reported $162.4 $210.7 $215.6
Net income--pro forma $157.6 $207.3 $214.5
Diluted earnings per share
--as reported $ 4.41 $ 5.54 $ 5.72
Diluted earnings per share
--pro forma $ 4.28 $ 5.45 $ 5.69
- ------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 0 percent for all years; expected volatility of 17.4 percent, 17.8 percent
and 22.5 percent; risk-free interest rates of 6.8 percent, 6.0 percent and 6.9
percent; and expected lives of 5 years for all grants.
The weighted average fair value per share of stock options granted during
the years ended December 31, 1997, 1996 and 1995 calculated using the Black-
Scholes option-pricing model was $19.84, $21.51 and $21.00, respectively.
The following summary shows stock option activity for the three years ended
December 31, 1997:
- ------------------------------------------------------------
Number of Weighted-
Shares Average
(Number of shares Optioned But Exercise Price
in thousands) Not Exercised per Share
- ------------------------------------------------------------
December 31, 1994
(1,141 shares exercisable) 2,888 $37.21
Granted 372 $58.71
Exercised (210) $25.62
Forfeited (66) $47.07
- ------------------------------------------------------------
December 31, 1995
(1,092 shares exercisable) 2,984 $40.49
Granted 520 $70.93
Exercised (457) $27.67
Forfeited (121) $51.73
- ------------------------------------------------------------
December 31, 1996
(1,200 shares exercisable) 2,926 $47.44
Granted 555 $61.42
Exercised (395) $33.54
Forfeited (169) $63.73
- ------------------------------------------------------------
December 31, 1997
(1,012 shares exercisable) 2,917 $51.05
============================================================
The following tables summarize information about fixed-priced stock options
outstanding at December 31, 1997:
- -------------------------------------------------------------------------------
Options Outstanding
- -------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Average
Outstanding at Remaining Exercise
Range of December 31, 1997 Contractual Life Price
Exercise Prices (in thousands) (in years) per Share
- -------------------------------------------------------------------------------
$24.50-$31.13 516 6.9 $30.42
$45.00-$46.38 1,169 10.5 $46.20
$59.63-$69.00 812 10.4 $60.72
$71.13-$86.38 420 8.2 $71.20
- -------------------------------------------------------------------------------
Total 2,917 9.5 $51.05
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Options Exercisable
- -------------------------------------------------------------------------------
Number Weighted-
Exercisable at Average
Range of December 31, 1997 Exercise Price
Exercise Prices (in thousands) per Share
- -------------------------------------------------------------------------------
$24.50-$31.13 516 $30.42
$45.00-$46.38 496 $46.12
- -------------------------------------------------------------------------------
Total 1,012 $38.12
- -------------------------------------------------------------------------------
On January 2, 1998 an additional 1,016,100 shares became exercisable at
prices of $46.25, $59.625 and $79.00 with expiration dates of March 31, 2009 and
April 21, 2010.
Under a plan adopted in 1995, discretionary awards of restricted stock may
be made to selected employees. The awards vest over a period designated by the
Committee, with payment conditional based on continued employment. Compensation
cost is recognized over the vesting period based on the market value of the
stock on the date of the award and is adjusted to reflect the market value of
FMC stock at each reporting date. Compensation cost recognized in 1997 and 1996
was $1.6 million in each year.
Under the FMC Deferred Stock Plan for Non-Employee Directors, a portion of
the annual retainer for these directors was deferred and paid in the form of
shares of the company's common stock upon retirement or other termination of
their directorships. Effective January 1, 1997, the Board of Directors approved
a comprehensive compensation plan that terminated the retirement plan for
directors and increased the proportion of director compensation paid in common
stock of the company. Each current director elected to convert the benefits
provided for and earned under the old plan into stock units payable in shares of
common stock of the company upon retirement from the Board based on the fair
market value of the common stock on December 31, 1996. At December 31, 1997,
stock units representing an aggregate of 39,847 shares of stock were credited to
the nonemployee directors' accounts.
-47-
NOTE [12] STOCKHOLDERS' EQUITY
The following is a summary of FMC's capital stock activity over the past
three years:
- --------------------------------------------------------
Common Treasury
(In thousands) stock stock
- --------------------------------------------------------
December 31, 1994 36,814 298
Stock options exercised 210 2
- --------------------------------------------------------
December 31, 1995 37,024 300
Stock options exercised 457 (2)
Stock repurchases -- 2
- --------------------------------------------------------
December 31, 1996 37,481 300
Stock options exercised 395 --
Stock repurchases -- 2,667
Shares reissued -- (15)
- --------------------------------------------------------
December 31, 1997 37,876 2,952
========================================================
At December 31, 1997 and 1996, treasury stock consisted of 3.0 million and
0.3 million shares of common stock, respectively. During 1997, 2.7 million
shares were acquired under the company's stock repurchase plans at an aggregate
cost of $209.0 million. Also in 1997, 15,000 shares of treasury stock were
reissued under the restricted stock award plan and the deferred compensation
plan for nonemployee directors.
At December 31, 1997, 5,160,205 shares of unissued FMC common stock were
reserved for stock options and awards. Common stock equivalents at December 31,
1997 totaled 968,253 potential shares.
Covenants of the revolving credit facility agreement (Note 9) contain
minimum net worth and other requirements.
No dividends are expected to be paid on the company's common stock in 1998.
On February 22, 1986, the Board of Directors of the company declared a
dividend distribution to each recordholder of common stock as of March 7, 1986,
of one Preferred Share Purchase Right for each share of common stock outstanding
on that date. Each right entitles the holder to purchase, under certain
circumstances related to a change in control of the company, one one-hundredth
of a share of Junior Participating Preferred Stock, Series A, without par value,
at a price of $300 per share (subject to adjustment), subject to the terms and
conditions of a Rights Agreement dated February 22, 1986 as amended through
February 9, 1996. The rights expire on March 7, 2006, unless redeemed by the
company at an earlier date. The redemption price of $.05 per right is subject to
adjustment to reflect stock splits, stock dividends or similar transactions. The
company has reserved 400,000 shares of Junior Participating Preferred Stock for
possible issuance under the agreement.
NOTE [13] RETIREMENT PLANS
FMC has retirement plans for substantially all domestic employees and certain
employees in other countries. Plans covering salaried employees provide pension
benefits based on years of service and an average of the highest 60 consecutive
months of compensation during the last 120 months of consecutive employment.
Plans covering hourly employees generally provide benefits of stated amounts for
each year of service.
The company's funding policy is to make contributions based on the
projected unit credit actuarial cost method and to limit contributions to
amounts that are currently deductible for income tax purposes.
As a result of divestitures described in Note 3, the 1996 and 1995 pension
income and the December 31, 1996 plan funded status amounts have been restated
to exclude plans no longer sponsored by FMC. The 1997 and 1996 net pension
income includes salaried and hourly retirement plans of Frigoscandia Equipment,
which was acquired in June 1996.
The following table summarizes the assumptions used and the components of
domestic net pension income:
- -------------------------------------------------------------------
Year ended December 31
- -------------------------------------------------------------------
Assumptions: 1997 1996 1995
- -------------------------------------------------------------------
Weighted average discount rate 8.0% 8.0% 8.0%
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
Weighted average expected
long-term asset return 9.2% 9.2% 9.2%
- ------------------------------------------------------------------
Components (in millions):
- ------------------------------------------------------------------
Service cost of benefits earned $ 21.2 $ 17.9 $ 16.3
Interest cost on projected
benefit obligation 55.8 47.2 42.2
Actual return on plan assets--
investment gains (182.9) (73.7) (133.6)
Net amortization and deferral:
Net transition asset
amortization (22.8) (22.0) (22.0)
Prior service cost
amortization 3.1 2.5 2.2
Net (gain) loss amortization (2.8) 0.2 (0.4)
Net asset gain deferred 123.1 27.3 91.8
- ------------------------------------------------------------------
Net pension (income) $ (5.3) $ (0.6) $ (3.5)
==================================================================
-48-
The funded status of the plans and accrued pension liability recognized in
the company's consolidated financial statements as of December 31 are as
follows:
- ----------------------------------------------------------------
(In millions) 1997 1996
- ----------------------------------------------------------------
Actuarial present value of benefits for
service rendered to date:
Accumulated benefit obligation based
on salaries to date, including vested
benefits of $613.8 in 1997 and
$511.3 in 1996 $(654.5) $ (544.0)
Additional benefits based on
estimated future salary levels (116.5) (94.5)
- ----------------------------------------------------------------
Projected benefit obligation (771.0) (638.5)
Plan assets at fair value/1/ 860.6 643.3
- ----------------------------------------------------------------
Projected benefit obligation
less than plan assets 89.6 4.8
Unrecognized net gain (127.7) (24.2)
Unrecognized prior service cost 25.1 10.5
Unrecognized net transition asset (84.1) (95.0)
- ----------------------------------------------------------------
Accrued pension liability $ (97.1) $ (103.9)
================================================================
/1/ Primarily equities, bonds and participating annuities.
In 1997, the company adopted SFAS No. 87, "Employers" Accounting for
Pensions," for its pension plan for employees in the United Kingdom. The
adoption increased 1997 pension income by $2.0 million. The financial impact of
compliance with SFAS No. 87 for other non-U.S. pension plans is not materially
different from the locally reported pension expense. The cost of providing those
pension benefits for foreign employees was $6.9 million in 1997, $9.5 million in
1996 and $8.6 million in 1995.
EMPLOYEES' THRIFT AND STOCK PURCHASE PLAN. The FMC Employees' Thrift and
Stock Purchase Plan is a qualified salary-reduction plan under Section 401(k) of
the Internal Revenue Code in which all salaried and non-union hourly employees
of the company may participate by contributing a portion of their compensation.
The company matches contributions up to specified percentages of each employee's
compensation depending on profits and fund elections. Charges against income for
FMC's matching contributions, net of forfeitures, were $16.2 million in 1997,
$14.8 million in 1996 and $13.4 million in 1995.
NOTE [14] POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
FMC provides retiree health care and life insurance benefits for substantially
all domestic employees. There are no significant plans for international
employees. Employees generally become eligible for retiree benefits when they
meet minimum retirement age and service requirements. The cost of providing most
of these benefits is shared with retirees. The company has reserved the right to
change or eliminate these benefit plans.
As a result of divestitures described in Note 3, the 1996 and 1995 net
periodic postretirement benefit cost (income) and the December 31, 1996 accrued
postretirement benefit obligation have been restated to exclude plans no longer
sponsored by FMC.
During 1997 and 1996, the company's medical contributions for certain
hourly employees were capped. The changes, effective January 1, 1997 and 1996,
reduced the company's benefit obligation by $4.7 million and $9.0 million in
1997 and 1996, respectively, amortizable over the remaining years of service to
full eligibility. As a result, postretirement benefit cost in 1997 and 1996 was
reduced by $1.0 million and $2.0 million, respectively.
For measurement purposes, the assumed rate of future increases in per
capita cost of health care benefits was 7 and 10 percent in 1997 and 1996,
respectively, decreasing gradually to 5 percent by the year 2001 and remaining
at that level thereafter. The health care cost trend rate assumption has a
significant effect on amounts recorded. Increasing the health care cost trend
rates by one percentage point would increase the accumulated postretirement
benefit obligation by $1.1 million and would increase annual service and
interest costs by $0.1 million.
-49-
The following table summarizes the assumptions used and the components of
net periodic postretirement benefit cost (income):
- ----------------------------------------------------------------
Year ended December 31
- ----------------------------------------------------------------
Assumptions: 1997 1996 1995
- ----------------------------------------------------------------
Weighted average discount rate 8.0% 8.0% 8.0%
- ----------------------------------------------------------------
Components (in millions):
- ----------------------------------------------------------------
Service cost of benefits earned $ 2.4 $ 2.4 $ 2.8
Interest cost on accumulated
postretirement benefit
obligation 8.3 9.2 9.6
Net amortization and deferral:
Plan amendment amortization (8.3) (7.8) (12.7)
Net loss amortization 0.1 0.2 --
- ----------------------------------------------------------------
Net periodic postretirement
benefit cost (income) $ 2.5 $ 4.0 $ (0.3)
================================================================
The accrued postretirement benefits recognized in the company's
consolidated financial statements as of December 31 are as follows:
- ----------------------------------------------------------------
(In millions) 1997 1996
- ----------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $ (64.9) $ (75.1)
Fully eligible active participants (11.5) (12.5)
Other active participants (33.3) (34.4)
- ----------------------------------------------------------------
APBO (109.7) (122.0)
Unamortized plan amendments (47.4) (51.3)
Unrecognized net gain (9.3) (1.6)
- ----------------------------------------------------------------
Accrued postretirement benefits $(166.4) $(174.9)
================================================================
NOTE [15] ENVIRONMENTAL
FMC is subject to various federal, state and local environmental laws and
regulations that govern emissions of air pollutants, discharges of water
pollutants, and the manufacture, storage, handling and disposal of hazardous
substances, hazardous wastes and other toxic materials. The most significant
environmental liabilities of the company consist of obligations relating to the
remediation and/or study of sites at which the company is alleged to have
disposed of hazardous substances. In particular, the company is subject to
liabilities arising under CERCLA and similar state laws that impose
responsibility on persons who arranged for the disposal of hazardous substances
and on current and previous owners and operators of a facility for the cleanup
of hazardous substances released from the facility into the environment. In
addition, the company is subject to liabilities under the corrective action
provisions of the Resource Conservation and Recovery Act ("RCRA") and analogous
state laws that require owners and operators of facilities that treat, store or
dispose of hazardous waste to clean up releases of hazardous waste constituents
into the environment associated with past or present practices. The company has
been named a PRP at 30 sites on the government's National Priority List. In
addition, the company also has received notice from the EPA or other regulatory
agencies that the company may be a PRP, or PRP equivalent, at other sites,
including 48 sites at which the company has determined that it is reasonably
possible that it has an environmental liability. The company, in cooperation
with appropriate government agencies, is currently participating in, or has
participated in, RI/FS or their equivalent at most of the identified sites, with
the status of each investigation varying from site to site. At certain sites,
RI/FS have just begun, providing limited information, if any, relating to cost
estimates, timing, or the involvement of other PRPs; whereas, at other sites,
the studies are complete, remedial action plans have been chosen, or Records of
Decision have been issued.
In the fourth quarter of 1997, FMC provided $45.0 million for environmental
costs at discontinued operations. The company has provided reserves for
potential environmental obligations which management considers probable and for
which a reasonable estimate of the obligation could be made. Accordingly, total
reserves of $263.8 million and $264.4 million, respectively, before recoveries,
were recorded at December 31, 1997 and 1996, of which $132.7 million and $116.8
million, respectively, are included in the reserve for discontinued operations
at December 31, 1997 and 1996. The company's total environmental reserves
include $247.4 million and $242.4 million for remediation activities and $16.4
million and $22.0 million for RI/FS costs at December 31, 1997 and 1996,
respectively. In addition, the company has estimated that reasonably possible
environmental loss contingencies may exceed amounts accrued by as much as $150
million at December 31, 1997.
An environmental inspection was conducted in July 1993 at FMC's Phosphorus
Chemicals Division ("PCD") plant in Pocatello, Idaho. In August 1994, the EPA
(Region 10) formally notified FMC of a number of alleged violations of the RCRA
and related environmental regulations governing the management of hazardous
waste generated by the plant, including the operations of hazardous waste
storage and treatment units without interim status, the failure to submit timely
closure plans, the failure to comply with related reporting requirements and the
existence of several other improper treatment and disposal practices. Although
there are no legal proceedings pending at this time, FMC has been advised that
the matter has been referred to the United States Department of Justice for an
evaluation of whether to file a civil enforcement action. If such a civil action
is filed, the government is likely to demand both injunctive relief and civil
penalties. FMC has had extensive discussions with the Department
-50-
of Justice and the EPA concerning substantial proposed environmental projects
involving pond closure and remediation, changes to waste handling practices and
additional air control in an effort to settle this matter in advance of
litigation. As described in Note 4, an expected increase in capital costs for
environmental compliance contributed to an impairment in the value of PCD's
assets during the fourth quarter of 1997.
In a separate matter, the EPA issued a draft Risk Assessment on August 17,
1995 for the Eastern Michaud Flats Superfund site, which includes FMC's
Pocatello phosphorus facility, identifying potential risks from contamination
potentially associated with FMC. Release of the Risk Assessment allowed FMC to
complete a draft of the Remedial Investigation documenting the nature and extent
of contamination from the site. The company submitted its draft Remedial
Investigation to the EPA on September 28, 1995. On April 21, 1997, the EPA
issued for public comment its proposed remediation plan for the site. The EPA's
preferred remediation alternative is a combination of capping, surface runoff
controls and institutional controls for soils, and extraction and recycling for
hydraulic control of groundwater. While the company is still reviewing the EPA's
proposed plans, FMC believes its reserve at December 31, 1997 of $66.1 million
for future environmental costs at the Eastern Michaud Flats site adequately
provides for the estimated costs of the proposed Superfund remediation plan for
the site.
Although potential environmental remediation expenditures in excess of the
current reserves and estimated loss contingencies could be significant, the
impact on the company's future financial results is not subject to reasonable
estimation due to numerous uncertainties concerning the nature and scope of
contamination at many sites, identification of remediation alternatives under
constantly changing requirements, selection of new and diverse clean-up
technologies to meet compliance standards, the timing of potential expenditures,
and the allocation of costs among PRPs as well as other third parties.
The liability arising from potential environmental obligations that have
not been reserved for at this time may be material to any one quarter's or
year's results of operations in the future. Management, however, believes the
liability arising from the potential environmental obligations is not likely to
have a material adverse effect on the company's liquidity or financial condition
and may be satisfied over the next 20 years or longer.
To ensure FMC is held responsible only for its equitable share of site
remediation costs, FMC has initiated, and will continue to initiate, legal
proceedings for contributions from other PRPs, and for a determination of
coverage against its comprehensive general liability insurance carriers. The
Supreme Court of California has determined that FMC's clean-up costs are insured
damages under its liability insurance policies, subject to a determination of
the application of certain policy exclusions and conditions. Recoveries of
$104.9 million ($36.9 million as other assets and $68.0 million as an offset to
the reserve for discontinued operations) and $107.2 million ($37.0 million as
other assets and $70.2 million as an offset to the reserve for discontinued
operations), have been recorded as probable realization on claims against
insurance companies and other third parties at December 31, 1997 and 1996,
respectively. The majority of recorded assets related to recoveries from PRPs
are associated with existing contractual arrangements with U.S. government
agencies and amounts due from insurance carriers.
Regarding current operating sites, the company spent $29.9 million, $21.8
million and $16.6 million for the years 1997, 1996 and 1995, respectively, on
capital projects relating to environmental control facilities, and expects to
spend additional capital of approximately $53 million and $40 million in 1998
and 1999, respectively. Additionally, in 1997, 1996, and 1995, FMC spent $60.1
million, $54.9 million and $48.2 million, respectively, for environmental
compliance costs.
Regarding current operating, previously operated (including discontinued
operations) and other sites for the years 1997, 1996 and 1995, FMC charged $29.0
million, $22.0 million and $13.8 million, respectively, against established
reserves for remediation spending, and $18.7 million, $12.0 million and $11.8
million, respectively, against reserves for spending on RI/FS. Recoveries from
third parties of $3.3 million, $13.1 million and $4.5 million, respectively,
were received in 1997, 1996 and 1995. FMC anticipates that the expenditures for
current operating, previously operated and other sites will continue to be
significant for the foreseeable future.
NOTE [16] COMMITMENTS AND CONTINGENT LIABILITIES
FMC leases office space, plants and facilities, and various types of
manufacturing, data processing and transportation equipment. Capital leases are
not significant. Total rent expense under operating leases amounted to $49.9
million, $45.6 million and $50.2 million in 1997, 1996 and 1995, respectively.
Minimum future rentals under noncancellable leases aggregated approximately $348
million as of December 31, 1997 and are estimated to be payable as follows: $43
million in 1998, $38 million in 1999, $35 million in 2000, $25 million in 2001,
$23 million in 2002 and $184 million thereafter. The real estate leases
generally provide for payment of property taxes, insurance and repairs by FMC.
The company also has certain other contingent liabilities resulting from
litigation, claims, performance guarantees, and other commitments incident to
the ordinary course of business. Management believes that the probable
resolution of such contingencies will not materially affect the financial
position, results of operations or cash flows of FMC.
-51-
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
The Board of Directors and Stockholders, FMC Corporation:
We have audited the accompanying consolidated balance sheets of FMC Corporation
and consolidated subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows and changes in stockholders'
equity for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. With respect to information as of
December 31, 1996, and for each of the years in the two-year period ended
December 31, 1996, we did not audit the net assets of discontinued operations
and results of discontinued operations of United Defense, L.P. Those net assets
and results of discontinued operations were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for United Defense, L.P., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors,
the accompanying consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FMC Corporation and
consolidated subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 20, 1998
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements and related information have been prepared
by management, which is responsible for the integrity and objectivity of that
information. Where appropriate, they reflect estimates based on judgments of
management. The statements have been prepared in conformity with accounting
principles generally accepted in the United States and are generally consistent
with standards issued by the International Accounting Standards Committee.
Financial information included elsewhere in this annual report is consistent
with that contained in the consolidated financial statements.
FMC maintains a system of internal control over financial reporting and
over safeguarding of assets against unauthorized acquisition, use or disposition
which is designed to provide reasonable assurance as to the reliability of
financial records and the safeguarding of such assets. The system is maintained
by the selection and training of qualified personnel, by establishing and
communicating sound accounting and business policies, and by an internal
auditing program that constantly evaluates the adequacy and effectiveness of
such internal controls, policies and procedures.
The Audit Committee of the Board of Directors, composed of directors who
are not officers or employees of the company, meets regularly with management,
with the company's internal auditors, and with its independent auditors to
discuss their evaluation of internal accounting controls and the quality of
financial reporting. Both the independent auditors and the internal auditors
have free access to the Audit Committee to discuss the results of their audits.
The company's independent auditors have been engaged to render an opinion
on the consolidated financial statements. They review and make appropriate tests
of the data included in the financial statements. As independent auditors, they
also provide an objective, outside review of management's performance in
reporting operating results and financial condition.
/s/ Michael J. Callahan /s/ Ronald D. Mambu
Michael J. Callahan Ronald D. Mambu
Executive Vice President Vice President
and Chief Financial Officer and Controller
Chicago, Illinois
January 20, 1998
-52-
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Robert N. Burt/1/
Chairman of the Board and
Chief Executive Officer
LARRY D. BRADY/4/
President
B. A. BRIDGEWATER, JR./1/2/5/
Chairman of the Board,
President and Chief Executive Officer,
Brown Group, Inc.
PATRICIA A. BUFFLER/3/4/
Dean, Professor of Epidemiology,
School of Public Health,
University of California, Berkeley
ALBERT J. COSTELLO/2/3/
Chairman, President and
Chief Executive Officer,
W.R. Grace & Co.
PAUL L. DAVIES, JR./1/2/
President, Lakeside Corporation
a private real estate investment company
JEAN A. FRANOIS-PONCET
Member of the French Senate
EDWARD C. MEYER /1/4/5/
Chairman,
GRC International, Inc.,
former Chief of Staff,
United States Army
EDWARD J. MOONEY/3/
Chairman of the Board and
Chief Executive Officer,
Nalco Chemical Company
WILLIAM F. REILLY/1/2/3/
Chairman and Chief Executive Officer,
PRIMEDIA
JAMES R. THOMPSON/4/5/
Former Governor of Illinois;
Chairman, Chairman of the Executive Committee,
and Partner; Law Firm of Winston & Strawn
CLAYTON YEUTTER/4/5/
Of Counsel, Hogan & Hartson,
former U.S. Trade Representative,
and former Secretary,
U.S. Department of Agriculture
/1/Executive Committee
/2/Compensation and Organization Committee
/3/Audit Committee
/4/Public Policy Committee
/5/Nominating and Board Procedures Committee
OFFICERS
ROBERT N. BURT *
Chairman of the Board and
Chief Executive Officer
LARRY D. BRADY *
President
WILLIAM F. BECK *
Executive Vice President
MICHAEL J. CALLAHAN *
Executive Vice President and
Chief Financial Officer
WILLIAM J. KIRBY *
Senior Vice President
J. PAUL MCGRATH *
Senior Vice President,
General Counsel and
Corporate Secretary
ALFREDO BERNAD
Vice President;
President, FMC Europe
PATRICIA D. BROZOWSKI
Vice President
Communications
CHARLES H. CANNON, JR.*
Vice President;
General Manager
Food Machinery Group
ROBERT J. FIELDS
Vice President
Environment, Health, Safety
and Toxicology
W. REGINALD HALL
Vice President;
President Asia-Pacific
ROBERT I. HARRIES *
Vice President;
General Manager
Chemical Products Group
HENRY KAHN *
Vice President and
Treasurer
RONALD D. MAMBU *
Vice President and
Controller
JAMES A. MCCLUNG *
Vice President
Worldwide Marketing
MICHAEL W. MURRAY
Vice President
Human Resources
JOSEPH H. NETHERLAND *
Vice President;
General Manager
Energy and Transportation
Equipment Group
HAROLD S. RUSSELL
Vice President
Government Affairs
WILLIAM H. SCHUMANN *
Vice President;
General Manager
Agricultural Products Group
WILLIAM G. WALTER *
Vice President;
General Manager
Specialty Chemicals Group
CRAIG M. WATSON
Vice President and
Chief Information Officer
PETER E. WEBER
Vice President;
President
FMC Latin America/
Middle East/Africa
WILLIAM J. WHEELER *
Vice President
Chemical Development
and Shared Services
*Executive Officer
-53-
TEN-YEAR FINANCIAL SUMMARY
(In millions, except per share amounts) 1997 1996 1995
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SUMMARY OF EARNINGS
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Total revenue $ 4,312.6 4,030.3 3,518.1
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Income (loss) from continuing operations before minority interests,
net interest expense, gain on sale of FMC Wyoming stock, income
taxes, extraordinary items and cumulative effect of change in
accounting principle/1/ $ 58.0 338.4 134.5
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Income (loss) from continuing operations before special income and
expense items/4/, net interest expense, income taxes, extraordinary
items and cumulative effect of change in accounting principle/5/ $ 314.0 328.8 279.4
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Income (loss) from continuing operations before income taxes, extraordinary
items and cumulative effect of change in accounting principle/1//2/ $ (59.7) 235.8 152.7
Provision (benefit) for income taxes (35.2) 73.0 (2.0)
-----------------------------------------------
Income (loss) from continuing operations before extraordinary
items and cumulative effect of change in accounting principle/3/ (24.5) 162.8 154.7
Discontinued operations, net of income taxes 191.4 47.9 60.9
Extraordinary items, net of income taxes - - -
Cumulative effect of change in accounting principle, net of income taxes (4.5) - -
-----------------------------------------------
Net income (loss)/3/ $ 162.4 210.7 215.6
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Asset impairments and restructuring and other charges/1/ $ 264.9 - 150.0
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Gain on sale of FMC Wyoming stock/2/ $ - - 99.7
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Total dividends $ - - -
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SHARE DATA
Average number of shares used in earnings per share computations (thousands):
Basic 36,805 37,024 36,615
Diluted 36,805 38,058 37,721
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Basic earnings (loss) per share:
Continuing operations/3/ $ (0.67) 4.40 4.23
Discontinued operations 5.20 1.29 1.66
Extraordinary items - - -
Cumulative effect of change in accounting principle (0.12) - -
-----------------------------------------------
Net income (loss)/3/ $ 4.41 5.69 5.89
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Diluted earnings (loss) per share:
Continuing operations/3/ $ (0.67) 4.28 4.10
Discontinued operations 5.20 1.26 1.62
Extraordinary items - - -
Cumulative effect of change in accounting principle (0.12) - -
-----------------------------------------------
Net income (loss)/3/ $ 4.41 5.54 5.72
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After-tax income per share from continuing operations before
special income and expense items/4//5/
Basic $ 4.25 4.40 4.13
Diluted $ 4.13 4.28 4.01
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FINANCIAL POSITION AT YEAR-END
Total assets $ 4,113.1 4,467.4 3,751.8
Long-term debt (less current portion) $ 1,140.2 1,268.4 974.4
Stockholders' equity (deficit) $ 760.6 855.8 653.5
OTHER DATA
Capital expenditures $ 316.7 512.1 500.0
Provision for depreciation $ 218.3 205.7 182.6
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/1/ Includes pretax asset impairments of $224.0 million in 1997, $26.4 million
in 1995 and $8.1 million in 1993, pretax restructuring and other charges of
$40.9 million in 1997, $108.1 million in 1995 and $114.4 million in 1993,
and a write-off of acquired in-process research and development of $15.5
million in 1995.
/2/ Includes a nontaxable gain on the sale of FMC Wyoming stock of $99.7
million in 1995.
/3/ Includes asset impairments and restructuring and other charges of $(180.9)
million after tax in 1997 ($(4.92) per share-basic and diluted); after-tax
restructuring and other charges, a write-off of acquired in-process
research and development and a gain on the sale of FMC Wyoming stock of
$3.5 million, net, after tax in 1995 ($0.10 per share-basic and $0.09 per
share-diluted); and restructuring and other charges of $(73.5) million
after tax in 1993 ($(2.04) per share-basic and diluted).
-54-
1994 1993 1992 1991 1990 1989 1988
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2,898.3 2,700.2 2,712.2 2,593.4 2,513.5 2,356.1 2,206.5
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212.0 (17.3) 143.0 172.7 166.5 216.0 193.2
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210.4 104.7 142.8 171.2 164.9 214.6 191.8
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150.9 (79.9) 59.9 63.8 36.9 70.6 38.7
41.6 (62.8) 9.4 9.4 (4.3) 13.6 11.7
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109.3 (17.1) 50.5 54.4 41.2 57.0 27.0
64.1 58.1 68.9 118.7 114.1 99.8 102.2
- (4.7) (11.4) (9.2) - (20.4) -
- - (183.7) - - - -
- --------------------------------------------------------------------------------
173.4 36.3 (75.7) 163.9 155.3 136.4 129.2
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- 122.5 - - - - -
- --------------------------------------------------------------------------------
- - - - - - -
- --------------------------------------------------------------------------------
- - - - - - -
- --------------------------------------------------------------------------------
36,369 35,976 35,595 35,024 34,739 34,407 34,142
37,195 35,976 36,796 36,267 36,075 36,006 35,860
- --------------------------------------------------------------------------------
3.01 (0.48) 1.42 1.55 1.19 1.66 0.79
1.76 1.62 1.94 3.39 3.28 2.90 2.99
- (0.13) (0.32) (0.26) - (0.59) -
- - (5.16) - - - -
- --------------------------------------------------------------------------------
4.77 1.01 (2.12) 4.68 4.47 3.97 3.78
- --------------------------------------------------------------------------------
2.94 (0.48) 1.37 1.50 1.14 1.58 0.75
1.72 1.62 1.87 3.27 3.16 2.77 2.85
- (0.13) (0.31) (0.25) - (0.56) -
- - (4.99) - - - -
- --------------------------------------------------------------------------------
4.66 1.01 (2.06) 4.52 4.30 3.79 3.60
- --------------------------------------------------------------------------------
3.01 1.56 1.42 1.55 1.19 1.66 0.79
2.94 1.53 1.37 1.50 1.14 1.58 0.75
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2,857.1 2,532.1 2,565.3 2,393.6 2,484.8 2,421.3 2,392.8
901.2 749.8 843.4 928.6 1,158.6 1,325.6 1,468.0
416.6 216.9 219.0 309.8 149.6 (70.6) (223.6)
279.7 206.7 274.9 171.4 266.1 221.1 134.0
173.8 172.8 179.9 166.7 159.8 147.1 147.4
- --------------------------------------------------------------------------------
/4/ Excludes asset impairments and restructuring and other charges of $(264.9)
million, or $(180.9) million after tax in 1997 ($(4.92) per share-basic and
$(4.77) per share-pro forma diluted); restructuring and other charges, a
write-off of acquired in-process research and development and a gain on the
sale of FMC Wyoming stock of $50.3 million, or $3.5 million, net, after tax
in 1995 ($0.10 per share-basic and $0.09 per share-diluted); and
restructuring and other charges of $(122.5) million, or $(73.5) million
after tax in 1993 ($(2.04) per share-basic and $(1.99) per share-pro forma
diluted).
/5/ Supplemental financial information. Should not be considered in isolation
nor as an alternative for income from continuing operations or net income
determined in accordance with generally accepted accounting principles, nor
as the sole measure of the company's profitability.
-55-
MAJOR OPERATING UNITS SUBSIDIARIES AND AFFILIATES IN OTHER NATIONS
Performance Chemicals Angola
FMC Subsea Services, Inc.
Agricultural Products Argentina
FMC Argentina, S.A.
Specialty Chemicals Minera Del Altiplano, S.A.
Food Ingredients Australia
Lithium FMC (Australia), Ltd.
Pharmaceutical Frigoscandia Equipment Pty. Ltd.
Process Additives Austria
BioProducts FMC Chemikalien
Handelsgesellschaft m.b.H.
Bangladesh
Industrial Chemicals FMC International A.G.
Barbados
Chemical Products FMC International Sales Corporation
Active Oxidants Moorco Foreign Sales Corporation
Alkali Chemicals Belgium
FMC Foret, S.A. FMC Europe N.V.
Peroxygen Chemicals Brazil
Phosphorus Chemicals CBV Industria Mecanica, S.A.
Crosby Valve & Gage Participacoes Ltda.
FMC do Brasil, Ltda.
Machinery and Equipment Jetway Systems Equipamentos
Aeroportuarios Ltda.
Energy and Transportation Canada
Equipment FMC of Canada, Ltd.
Crosby Valve FMC Offshore Canada Inc.
Energy Transportation Chile
and Measurement FMC Corporation, Inc. Chile Limitada
Petroleum Equipment Neogel, S.A.
and Systems China
Smith Meter FMC Asia Pacific Inc.
SOFEC FMC Hong Kong Limited
Airport Products and Systems Suzhou Fu Mei-Shi Crop Care
Material Handling Systems Company, Ltd.
Huzou FMC Chemical Company, Ltd.
FMC FoodTech Colombia
Agricultural Machinery FMC Latino America, S.A.
Citrus Systems Czech Republic
Food Processing Systems F&N Agro Ceska Republica, S.r.o.
Food Systems and Handling Denmark
Frigoscandia Freezer FMC A/S
Frigoscandia Equipment A/S
Egypt
FMC International, A.G.
Equatorial Guinea
FMC Subsea Services, Inc.
France
FMC Europe, S.A.
FMC Food Machinery
FMC France S.A.
FMC Overseas, S.A.
Frigoscandia Equipment S.A.
Gabon
FMC Gabon, S.A.R.L.
EXECUTIVE OFFICES Germany
FMC G.m.b.H.
FMC Corporation Frigoscandia Equipment G.m.b.H.
200 E. Randolph Drive Jetway G.m.b.H.
Chicago, Illinois 60601 F.A. Sening G.m.b.H.
Internet: www.fmc.com Smith Meter G.m.b.H.
Greece
FMC Hellas, EPE
FMC International, A.G.
Guatemala
FMC Guatemala, S.A.
Hong Kong
FMC Asia Pacific, Inc.
FMC Hong Kong Ltd.
Friendship Minerals and Chemicals, Ltd.
India
FMC Sanmar Limited
FMC Asia Pacific, Inc.
Frigoscandia Equipment AB
Indonesia
FMC Hong Kong Limited
P.T. Bina Guna Kimia Indonesia
P.T. FMC Santana Petroleum
Equipment Indonesia
Ireland
FMC International, A.G.
Italy
FMC Italy, S.p.A.
Japan
Asia Lithium Corporation
FMC Asia Pacific, Inc.
FMC K.K.
Honjo-FMC Energy Systems, Inc.
L.H. Company, Ltd.
Jordan
FMC International, A.G.
Kenya
FMC International, A.G.
Korea
FMC Korea Limited
Malaysia
FMC Wellhead Equipment, Bhd.
FMC Petroleum Equipment (Malaysia)
Sdn. Bhd.
Jetway Systems Asia, Inc.
Mexico
Electro Quimica Mexicana, S.A. de C.V.
E.M.D., S.A. de C.V.
Fabricacion, Maquinaria y Ceras,
ES.A. de C.V.
FMC Agroquimica de Mexico
ES. de R.L. de C.V.
FMC Equipo Petrolero, S.A. de C.V.
FMC Ingredientes Alimenticios
Netherlands
FMC Fluid Control (Nederland) B.V.
FMC Industrial Chemicals
(Netherlands), B.V.
Norway
Kongsberg Offshore, A/S
Oman
FMC ETEG & Partners LLC
Pakistan
FMC International, S.A.
FMC United (Private) Ltd.
Panama
FMC Latino America S.A.
Philippines
FMC International, S.A.
Marine Colloids (Philippines) Inc.
Poland
FMC Corporation Poland
Puerto Rico
FMC-KOS International
FMC International, A.G.
Russia
A/O FMC Overseas
A/O FMC Siberia Petroleum Equipment
Singapore
Crosby Valve Pte. Ltd.
FMC Singapore Pte. Ltd.
FMC Southeast Asia Pte., Ltd.
Frigoscandia Equipment Pte. Ltd
Slovakia
F&N Agro Slovensko, S.R.O.
South Africa
FMC (South Africa)(Proprietary) Ltd.
Spain
FMC Airline Equipment Europe, S.A.
FMC Foret, S.A.
Forel, S.L.
Foreneto, S.L.
Forsean, S.A.
Frigoscandia Equipment Iberica, S.A.
Peroxidos Organicos, S.A.
Sibelco Espanola, S.A.
Valentin Herraiz, S.A.
Sweden
Frigoscandia Equipment Holding AB
Frigoscandia Equipment AB
Frigoscandia Equipment International AB
Frigoscandia Equipment Norden AB
Frigoscandia Freezer AB
Potato Processing Machinery AB
Switzerland
FMC International, A.G.
Kongsberg Offshore G.m.b.H.
Thailand
FMC Thailand Ltd.
Thai Peroxide Company, Ltd.
Ukraine
FMC Kiev
FMC International, A.G.
United Arab Emirates
FMC International, S.A. (Dubai)
United Kingdom
FMC Corporation (UK), Ltd.
Frigoscandia Equipment Ltd.
Lewis Freezing Systems Ltd.
Potato Processing Machinery Ltd.
SOFEC, Ltd.
Uruguay
Lanfor Investment, S.A.
Venezuela
Tripoliven, C.A.
FMC Wellhead de Venezuela, S.A.
Virgin Islands
FMC International Sales Corporation
-56-
Stockholder Data
Annual Meeting of Stockholders
- ------------------------------
FMC's annual meeting of stockholders will
be held at 2 p.m. on Friday, April 24, 1998, at
200 E. Randolph Drive, Chicago.
Notice of the meeting, together with proxy
material, will be mailed approximately 40 days
prior to the meeting to stockholders of record
as of March 6, 1998.
Transfer Agent and Registrar of Stock
- -------------------------------------
Harris Trust and Savings Bank
P.O. Box 755, Chicago, Illinois 60690
Questions concerning FMC common stock
should be sent to the above address.
Stock Exchange Listing
- ----------------------
New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
Stock Exchange Symbol
- ----------------------
FMC
Form 10-K
- ---------
A copy of the company's annual report to the
Securities and Exchange Commission on
Form 10-K for 1997 is available upon written
request to:
FMC Corporation
Communications Department
200 E. Randolph Drive
Chicago, Illinois 60601
However, most information required under
Parts II and III of Form 10-K has been
incorporated by reference to the annual
report to stockholders or the proxy
statement.
FMC was incorporated in Delaware in 1928.
-57-
FMC
FMC Corporation
200 East Randolph Drive
Chicago, Illinois 60601