PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from__________ to_________
Commission File Number 1-2376
FMC Corporation
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-0479804
------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Randolph Drive, Chicago, Illinois 60601
-----------------------------------------------------
(Address of principal executive offices) (Zip code)
(312) 861-6000
------------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1999
- --------------------------------------- ----------------------------
Common Stock, par value $0.10 per share 31,790,195
PAGE 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Consolidated Statements of Income (Unaudited)
- ---------------------------------------------
(In millions, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
---------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales $1,070.4 $1,129.4 $2,045.1 $2,151.8
Costs and expenses:
Cost of sales 761.5 820.4 1,480.1 1,577.7
Selling, general and
administrative expenses 149.4 150.9 299.1 316.1
Research and development 38.8 37.8 75.9 76.0
-------- -------- -------- --------
Total costs and expenses 949.7 1,009.1 1,855.1 1,969.8
-------- -------- -------- --------
Income from continuing operations
before minority interests, interest
expense, interest income, income
taxes and cumulative effect of
change in accounting principle 120.7 120.3 190.0 182.0
Minority interests 1.2 0.9 1.8 1.8
Interest expense 30.8 30.8 61.0 57.5
Interest income (4.0) (2.6) (6.3) (4.7)
-------- -------- -------- --------
Income from continuing operations
before income taxes and
cumulative effect of change in
accounting principle 92.7 91.2 133.5 127.4
Provision for income taxes 23.8 23.6 34.3 33.0
-------- -------- -------- --------
Income from continuing operations
before cumulative effect of
change in accounting principle 68.9 67.6 99.2 94.4
Discontinued operation, net of
income taxes (Note 4) 18.0 - 18.0 -
-------- -------- -------- --------
Income before cumulative effect
of change in accounting
principle 86.9 67.6 117.2 94.4
Cumulative effect of change in
accounting principle, net of
income taxes (Note 3) - - - (36.1)
-------- -------- -------- --------
Net income $ 86.9 $ 67.6 $ 117.2 $ 58.3
======== ======== ======== ========
(continued)
PAGE 3
FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Consolidated Statements of Income (Unaudited)(Continued)
- --------------------------------------------------------
(In millions, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic earnings per common share:
Continuing operations $2.17 $1.95 $3.09 $ 2.72
Discontinued operation 0.56 - 0.56 -
Cumulative effect of change
in accounting principle - - - (1.04)
----- ----- ----- ------
Net income per common share $2.73 $1.95 $3.65 $ 1.68
===== ===== ===== ======
Average number of shares used
in basic earnings per share
computations 31.8 34.6 32.1 34.7
===== ===== ===== ======
Diluted earnings per common share:
Continuing operations $2.10 $1.89 $3.01 $ 2.64
Discontinued operation 0.55 - 0.55 -
Cumulative effect of change in
accounting principle - - - (1.01)
----- ----- ----- ------
Net income per common share $2.65 $1.89 $3.56 $ 1.63
===== ===== ===== ======
Average number of shares used in
diluted earnings per share
computations 32.8 35.7 32.9 35.7
===== ===== ===== ======
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 4
FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Consolidated Balance Sheets
- ---------------------------
(In millions, except share and per share data)
June 30
1999 December 31
Assets: (Unaudited) 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 90.1 $ 61.7
Trade receivables, net of allowance for
doubtful accounts of $15.9 in 1999 and
$11.9 in 1998 858.3 840.6
Inventories 562.7 517.7
Other current assets 169.4 136.4
Deferred income taxes 117.0 125.3
-------- --------
Total current assets 1,797.5 1,681.7
Investments 184.6 186.5
Unallocated purchase price (Note 8) 154.5 -
Property, plant and equipment at cost 3,901.3 3,824.7
Less -- accumulated depreciation 2,129.5 2,097.2
-------- --------
Net property, plant and equipment 1,771.8 1,727.5
Goodwill and intangible assets 373.2 399.1
Other assets 112.6 118.9
Deferred income taxes 34.2 52.7
-------- --------
Total assets $4,428.4 $4,166.4
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Short-term debt (Note 2) $ 463.6 $ 150.6
Accounts payable, trade and other 639.8 685.8
Accrued and other current liabilities 481.9 492.6
Current portion of long-term debt (Note 2) 0.9 4.7
Current portion of accrued pensions and
other postretirement benefits 12.5 12.1
Income taxes payable 63.1 66.1
------- -------
Total current liabilities 1,661.8 1,411.9
Long-term debt, less current portion (Note 2) 1,346.0 1,326.4
Accrued pension and other postretirement
benefits, less current portion 235.6 228.1
Reserve for discontinued operations (Note 4) 216.7 237.4
Other liabilities 168.4 159.7
Minority interests in consolidated companies 45.6 73.5
Stockholders' equity:
Preferred stock, no par value, authorized
5,000,000 shares; no shares issued in
1999 or 1998 - -
Common stock, $0.10 par value, authorized
130,000,000 shares; issued 38,301,295
shares in 1999 and 38,188,586 shares
in 1998 (Note 6) 3.8 3.8
Capital in excess of par value
of common stock 164.3 158.4
Retained earnings 1,192.9 1,075.7
Accumulated other comprehensive loss (177.6) (134.1)
Treasury stock, common, at cost;
6,511,100 shares in 1999 and 5,485,947
shares in 1998 (Note 6) (429.1) (374.4)
-------- --------
Total stockholders' equity 754.3 729.4
-------- --------
Total liabilities and stockholders' equity $4,428.4 $4,166.4
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 5
FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
- -------------------------------------------------
(In millions)
Six Months
Ended June 30
----------------------
1999 1998
-------- ----
Reconciliation from income from continuing
operations before cumulative effect of change
in accounting principle to cash (required) provided
by operating activities of continuing
operations:
Income from continuing operations before cumulative
effect of change in accounting principle $ 99.2 $ 94.4
Adjustments for non-cash components of
income from continuing operations:
Depreciation and amortization 89.2 102.4
Deferred income taxes 26.8 9.5
Minority interests 1.8 1.8
Other (43.7) (27.6)
(Increase) decrease in assets:
Trade receivables (17.7) 20.1
Inventories (45.0) (68.1)
Other current assets and other assets (162.9) (14.8)
(Decrease) increase in liabilities:
Accounts payable, accrued and other
current liabilities and other liabilities (75.0) (20.8)
Income taxes payable (3.0) (46.8)
Accrued pension and other
postretirement benefits, net 20.1 (4.4)
------- ------
Cash (required) provided by operating activities
of continuing operations $(110.2) $ 45.7
======= ======
(continued)
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FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)(Continued)
- ------------------------------------------------------------
(In millions)
Six Months
Ended June 30
-----------------------------
1999 1998
------- -------
Cash (required) provided by operating activities
of continuing operations $(110.2) $ 45.7
------- -------
Cash required by discontinued operations (2.8) (31.0)
------- -------
Cash provided (required) by investing
activities:
Capital spending (147.6) (121.2)
Disposal of property, plant and equipment 18.0 28.5
Decrease in investments 0.5 4.2
------- -------
(129.1) (88.5)
------- -------
Cash provided (required) by financing
activities:
Net proceeds from issuance (repayments)
of commercial paper 239.0 (158.5)
Net increase (decrease) in other
short-term debt 312.9 (12.1)
Net borrowings under credit facilities 5.0 144.8
Proceeds from issuance of long-term debt 34.9 169.1
Repayment of long-term debt (269.2) (23.3)
Distributions to limited partner (2.6) (2.8)
Repurchases of common stock (55.3) (48.9)
Issuance of common stock 6.4 15.8
------- ------
271.1 84.1
Effect of exchange rate changes on cash
and cash equivalents (0.6) (3.0)
------- ------
Increase in cash and cash equivalents 28.4 7.3
Cash and cash equivalents, beginning
of period 61.7 62.7
------- -------
Cash and cash equivalents, end of period $ 90.1 $ 70.0
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized, was $70.2 million and $55.9
million, and net cash paid for income taxes (including taxes paid related to
Defense Systems operations) was $14.9 million and $65.3 million for the six-
month periods ended June 30, 1999 and 1998, respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
PAGE 7
FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
Note 1: Financial Information and Accounting Policies
- -------------------------------------------------------
The consolidated balance sheet of FMC Corporation ("FMC" or "the company") as of
June 30, 1999, and the related consolidated statements of income and cash flows
for the interim periods ended June 30, 1999 and 1998 have been reviewed by FMC's
independent accountants. The review is described more fully in their report
included herein. In the opinion of management, these financial statements have
been prepared in conformity with generally accepted accounting principles and
reflect all adjustments necessary for a fair statement of the results of
operations and cash flows for the interim periods ended June 30, 1999 and 1998
and of its financial position as of June 30, 1999. All such adjustments are of a
normal recurring nature. The results of operations for the three-month and six-
month periods ended June 30, 1999 and 1998 are not necessarily indicative of the
results of operations for the full year.
Certain prior period balances have been reclassified to conform with the current
period's presentation.
The company's accounting policies are set forth in Note 1 to the company's
consolidated 1998 financial statements, which are incorporated by reference in
the company's 1998 Annual Report on Form 10-K.
Note 2: Debt
- -------------
The company has $800.0 million in committed credit facilities consisting of a
$350.0 million, 364-day non-amortizing revolving credit agreement due in July
2000 and a $450.0 million, five-year non-amortizing revolving credit agreement
due in December 2001. No amounts were outstanding under these facilities at
either June 30, 1999 or December 31, 1998.
The company's short-term commercial paper program is supported by the committed
facilities. Outstanding commercial paper borrowings totaled $394.9 million at
June 30, 1999 ($149.9 million at December 31, 1998).
Advances under uncommitted U.S. credit facilities were $274.8 million and $68.0
million at June 30, 1999 and December 31, 1998, respectively.
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, $55.1 million of borrowings
under uncommitted U.S. credit facilities have been classified as long-term debt
at June 30, 1999. At December 31, 1998, $149.9 million of outstanding commercial
paper, $50.1 million of borrowings under uncommitted U.S. credit facilities and
$250.0 million of senior debt were classified as long-term debt.
During the second quarter of 1999, the company retired $250.0 million of
currently due senior debt bearing interest at 8.75 percent. On June 29, 1999,
the company entered into a Euro-denominated loan of 109,375,500 Euros
(approximately $114.0 million). The loan bears interest at a variable rate based
upon Libor and is due November 30, 1999. The proceeds of the loan were used to
finance a portion of the purchase price of the company's acquisition of Pronova
Biopolymer AS (Note 8).
PAGE 8
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 this registration statement, the company issued $70.0
million of medium-term notes during 1997 for net proceeds of $69.6 million and
$170.0 million of medium-term notes during 1998 for net proceeds of $169.0
million.
In August 1998, a new universal shelf registration statement became effective,
under which $500.0 million of debt and/or equity securities may be offered,
including up to $500.0 million of medium-term debt. This registration statement
incorporates $160.0 million of unused capacity from the company's 1995 shelf
registration statement.
Under the August 1998 registration statement, the company issued $120.0 million
of medium-term notes during 1998 for net proceeds of $119.6 million, $25.0
million of medium-term notes in February 1999 for net proceeds of $24.9 million,
and $10.0 million of medium-term notes in April 1999 for net proceeds of $10.0
million. The net proceeds under the shelf registration statements were used to
retire other borrowings and repurchase the company's common stock.
Note 3: Recent Accounting Pronouncements
- -----------------------------------------
Effective December 31, 1998, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 established 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. All prior period segment
disclosures have been restated to conform to the new segment presentation.
AICPA Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-
Up Activities", was adopted by the company effective January 1, 1998. SOP 98-5
requires costs of start-up activities, including organizational costs, to be
expensed as incurred. In the period of adoption, the company charged $46.5
million ($36.1 million after tax, or $1.01 per share on a diluted basis) to
expense, which was reported as the cumulative effect of a change in accounting
principle. The expense represented the write-off of costs related to the start-
up of manufacturing at the Salar del Hombre Muerto lithium facility in
Argentina, the Baltimore, Maryland sulfentrazone facility, and the Bayport,
Texas hydrogen peroxide plant expansion.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", is
effective for financial statements for fiscal years beginning after June 15,
2000, but may be adopted in earlier periods. SFAS No. 133 will require the
company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivative will either be offset against the change in
fair value of the hedged item through earnings or recognized in other
comprehensive income until the change in value of the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value will
be recognized in earnings immediately. The company is evaluating the new
standard's provisions and has not yet determined the date on which it will adopt
the standard or what the effect of SFAS No. 133 will be on the earnings and
financial position of the company.
PAGE 9
Note 4: Discontinued Operations
- --------------------------------
Reserves for discontinued operations at June 30, 1999 and December 31, 1998 were
$216.7 million and $237.4 million, respectively. At June 30, 1999, substantially
all reserves related to environmental, benefit plan, self-insurance and other
long-term obligations associated with operations discontinued between 1976 and
1997. See Note 3 to the company's December 31, 1998 consolidated financial
statements and Note 5 below.
Earnings from discontinued operations, net of income taxes, representing the
gain on the sale for $33.5 million in cash of real estate parcels previously
used by the company's discontinued defense systems operations, were $18.0
million, or $0.55 per share on a diluted basis, in the second quarter of 1999.
Note 5: Environmental Obligations
- ----------------------------------
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, reserves of $268.6 million and $294.0
million, before recoveries, have been provided at June 30, 1999 and December 31,
1998, respectively, of which $182.8 million and $198.1 million are included in
the reserve for discontinued operations at June 30, 1999 and December 31, 1998,
respectively.
The company has estimated that reasonably possible contingent environmental
losses may exceed amounts accrued by as much as $90 million at June 30, 1999.
Obligations that have not been reserved for 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 materially adverse effect on the company's liquidity or financial
condition and may be satisfied over the next twenty years or longer.
Recoveries of $104.6 million ($21.6 million as other assets and $83.0 million as
an offset to the reserve for discontinued operations) have been recorded as
probable realization of claims against third parties at June 30, 1999. Total
recoveries recorded at December 31, 1998 were $107.6 million. The recorded
assets relate to recoveries from other Potentially Responsible Parties, the
majority of which are associated with existing contractual arrangements with
U.S. government agencies and amounts due from insurance carriers.
On July 9, 1999, the company reached a settlement with the U.S. Environmental
Protection Agency ("EPA") and the U.S. Department of Justice ("DOJ") regarding
future clean-up work at the discontinued fiber manufacturing site in Front
Royal, Virginia. As part of a prior settlement, government agencies are expected
to reimburse FMC for approximately one third of the clean-up costs due to the
government's role at the site during World War II. FMC's $70 million portion of
the settlement has been provided for in prior periods as part of discontinued
operations, and no additional charges to earnings are expected.
On or about June 15, 1999, the Federal District Court in Idaho approved the
Consent Decree signed by the company, the EPA (Region 10) and the DOJ settling
outstanding alleged violations of the Resource Conservation and Recovery Act
("RCRA") at the company's Phosphorus Chemicals ("PCD") plant in Pocatello,
Idaho. The RCRA Consent Decree provides for injunctive relief covering
remediation expense for closure of existing ponds, estimated at $50 million, and
approximately $43 million of capital costs for waste treatment and other
compliance projects; these amounts will be expended over approximately four
years. The company also
PAGE 10
will spend approximately $65 million over the next four years to conduct a
number of supplemental environmental projects. These projects include
approximately $63 million in capital costs for air quality improvement, and an
additional $2 million for health studies with the Shoshone-Bannock Tribes, since
the plant is located on tribal land. The company has also paid a penalty of
$11.8 million. 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.
A more complete description of the company's environmental contingencies and the
nature of its potential obligations is included in the notes to FMC's December
31, 1998 consolidated financial statements.
Note 6: Capital Stock
- ----------------------
On August 28, 1997, the Board of Directors authorized a $500 million open-market
stock repurchase program for FMC common stock through the end of 1999. During
1997 and 1998, the company repurchased a total of 5.2 million of its common
shares at a cost of $365.7 million, of which 116,467 shares were purchased at a
cost of $6.7 million and contributed to an employee benefit trust. Depending on
market conditions, the company plans to continue purchasing shares of its common
stock on the open market from time to time, and expects to repurchase
approximately $135 million of the company's common stock during 1999. For the
six months ended June 30, 1999 the company repurchased 1.0 million of its common
shares at a cost of $55.3 million.
At June 30, 1999, the company had 31,790 million shares outstanding and 1,046
million additional shares assuming conversion of stock options and other common
stock equivalents (calculated under the treasury stock method).
Note 7: Dispositions
- --------------------
On July 9, 1999, the company completed the sale of its BioProducts business to
Cambrex Corporation for $38 million in cash. The BioProducts business is
included in the Specialty Chemicals segment and had 1998 sales of approximately
$25 million from its operations in Rockland, Maine and Copenhagen, Denmark.
On July 31, 1999, FMC completed the sale of its Process Additives business to
Great Lakes Chemical Corporation for $162 million in cash. The Process Additives
business is included in the Specialty Chemicals segment and had 1998 sales of
$166 million from its operations in Manchester, England and Nitro, West
Virginia.
The company expects to record a total after-tax gain of approximately $45 to $50
million during the quarter ended September 30, 1999 from the two sales.
On July 31, 1998, the company completed the sale of Crosby Valve to a subsidiary
of Tyco International Ltd. for cash and Tyco International Ltd. ("Tyco")
preferred stock. The preferred stock is guaranteed by Tyco and can be sold to
either the issuing subsidiary or Tyco three years after issuance. Crosby Valve
was included in the Energy Systems segment.
Note 8: Business Combinations
- ------------------------------
On June 30, 1999, FMC acquired the assets of TG Soda Ash, Inc. ("TgSA") from Elf
Atochem North America, Inc. for $50 million in cash, acquisition costs and a
contingent payment due at year-end 2003. The contingent payment amount, which
will be
PAGE 11
based on the financial performance of the combined soda ash operations between
2001 and 2003, cannot currently be determined but could be as much as $100
million. The initial purchase price has been allocated to the assets acquired
and the liabilities assumed, based on the estimated fair values of such assets
and liabilities at the date of acquisition. No goodwill was recorded as a result
of this transaction. In conjunction with the transaction, the interest of the
minority shareholders in FMC's existing soda ash business was diluted effective
July 1, 1999 to 12.5 percent from 20 percent as a result of FMC's
disproportionate investment in TgSA'a mineral ore reserves and certain future
capital projects. Results of the acquired business will be included in the
Industrial Chemicals segment from the date of acquisition.
Also on June 30, 1999, the company completed the acquisition of the assets of
Pronova Biopolymer AS ("Pronova") from a wholly-owned subsidiary of Norsk Hydro
for $184 million in cash plus acquisition costs. Pronova, headquartered in
Drammen, Norway, is a leading producer of alginates used in the pharmaceutical,
food and industrial markets. The acquisition will be accounted for under the
purchase method of accounting and, accordingly, the purchase price will be
allocated to the assets acquired and liabilities assumed based on the estimated
fair values of such assets and liabilities at the date of acquisition. Due to
the timing of the transaction, however, FMC's consolidated balance sheet at June
30, 1999 includes the historical accounts of Pronova as of the acquisition date,
adjusted only for certain known elements of purchase accounting. The remaining
excess purchase price at June 30, 1999 is classified as "unallocated purchase
price" on the company's consolidated balance sheet and will be allocated to the
assets acquired (which will include goodwill and other intangible assets to be
amortized over periods not exceeding 40 years) and liabilities assumed based on
the results of appraisals and other analyses which are currently in process.
Results of the acquired business will be included in the Specialty Chemicals
segment from the date of acquisition.
On April 30, 1999, FMC and Solutia, Inc. announced an agreement to form a joint
venture, which will include the North American and Brazilian phosphorus chemical
operations of both companies. The joint venture will be a limited liability
company owned equally by FMC and Solutia, Inc., and it must receive government
approvals prior to formation, which is expected to be completed in the fourth
quarter of 1999.
On August 14, 1998, the company acquired a controlling interest in CBV Industria
Mecanica S.A., the leading wellhead manufacturer in Brazil. With the acquisition
and its previous minority equity position, the company owns 98 percent of CBV's
voting shares as of June 30, 1999. CBV's operations are included in the
company's Energy Systems segment. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the purchase price was allocated
to the assets acquired and the liabilities assumed, based on the estimated fair
values of such assets and liabilities at the date of acquisition. In addition, a
portion of the purchase price was allocated to goodwill.
The company's acquisitions did not have a material pro forma effect on the
company's consolidated results of operations.
PAGE 12
Note 9: Comprehensive Earnings
- -------------------------------
Comprehensive earnings includes all changes in stockholders' equity during the
period except those resulting from investments by owners and distributions to
owners. The company's comprehensive income for the three and six month periods
ended June 30, 1999 and 1998 consisted of the following:
Three-months ended June 30 Six-months ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $86.9 $67.6 $117.2 $58.3
Other comprehensive loss:
Foreign currency
translation adjustment (0.3) (4.0) (43.6) (9.3)
----- ----- ------ -----
Comprehensive income $86.6 $63.6 $ 73.6 $49.0
===== ===== ====== =====
Note 10: Legal Contingencies
- -----------------------------
On April 14, 1998, a jury returned a verdict against the company in the amount
of $125.0 million in conjunction with a federal False Claims Act action, in
which Mr. Henry Boisvert filed and ultimately took to trial allegations that the
company had filed false claims for payment in connection with its contract to
provide Bradley Fighting Vehicles to the U.S. Army between 1981 and 1996. Under
law, portions of the jury verdict were subject to doubling or trebling. On
December 24, 1998, the U.S. District Court for the Northern District of
California entered judgment for Mr. Boisvert in the amount of approximately $87
million. This was approximately $300 million less than the maximum judgment
possible under the jury verdict. The reduction resulted from several rulings by
the District Court in favor of the company in the post-trial motions. Cross-
appeals to the U.S. Court of Appeals for the Ninth Circuit are now pending. Both
sides are asserting arguments on appeal, and a number of those arguments, if
successful, would alter or eliminate the amount of the existing judgment. Any
legal proceeding is subject to inherent uncertainty, and it is not possible to
predict how the appellate court will rule. Therefore, the company's management
believes based on a review, including a review by outside counsel, that it is
not possible to estimate the amount of a probable loss, if any, to the company
that might result from some adverse aspects of the judgment ultimately standing
against the company. Accordingly, no provision for this matter has been made in
the company's consolidated financial statements.
During the second quarter of 1999, a federal judge set aside a $38 million jury
verdict against FMC and ordered a new trial in a chemical release case in West
Virginia, as a result of incorrect testimony by a major plaintiff witness.
PAGE 13
Note 11: Segment Information
- -----------------------------
(In millions)
Three-Months Ended Six-Months Ended
June 30 June 30
-------------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales
- -----
Energy Systems $ 294.1 $ 318.0 $ 584.3 $ 605.8
Food and Transportation
Systems 217.3 241.5 398.8 420.6
Agricultural Products 175.1 180.9 321.7 352.9
Specialty Chemicals 153.2 155.7 301.7 310.2
Industrial Chemicals 238.0 241.2 451.4 478.3
Eliminations (7.3) (7.9) (12.8) (16.0)
-------- -------- -------- --------
$1,070.4 $1,129.4 $2,045.1 $2,151.8
======== ======== ======== ========
Income from continuing operations before income
- -----------------------------------------------
taxes and cumulative effect of change in accounting principle
- -------------------------------------------------------------
Energy Systems $ 24.6 $ 22.5 $ 41.4 $ 37.2
Food and Transportation
Systems 19.0 19.8 29.5 28.0
Agricultural Products 36.9 35.5 51.6 50.3
Specialty Chemicals 21.5 25.3 40.3 44.9
Industrial Chemicals 36.8 32.3 71.3 64.8
-------- ------ -------- --------
Operating profit from
continuing operations 138.8 135.4 234.1 225.2
Corporate (19.1) (20.0) (39.2) (43.3)
Other income and
(expense), net (0.2) 4.0 (6.7) (1.7)
Net interest expense (26.8) (28.2) (54.7) (52.8)
-------- ------ -------- --------
$ 92.7 $ 91.2 $ 133.5 $ 127.4
======== ====== ======== ========
As described in Note 3, FMC adopted Statement of Financial Accounting Standards
No. 131 effective December 31, 1998. As a result, FMC has changed the number and
composition of its segments. The prior periods have been restated and are
presented on a comparable basis. A description of the company's segment
determination, composition and presentation is included in Note 1 to the
company's December 31, 1998 consolidated financial statements.
Business segment results are presented net of minority interests, reflecting
only FMC's share of earnings. Minority interests for the periods ended June 30,
1999 and 1998 were not significant. The corporate line primarily includes staff
expenses, and other income and expense consists of all other corporate items,
including LIFO inventory adjustments and certain components of employee benefit
plan cost (benefit).
PAGE 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF CONTINUING OPERATIONS
--------------------------------
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
---------------------------------------------------
Item 2 of this report contains certain forward looking statements that are based
on management's current views and assumptions regarding future events, future
business conditions and the outlook for the company based on currently available
information. Wherever possible, the company has identified these "forward-
looking statements" (as defined in Section 27A of the Securities Act and Section
21E of the Exchange Act) by using words and phrases such as "anticipates",
"plans", "believes", "estimates", "forecasts", "will continue to", "will likely
result", "projects", and "expects". Readers are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are subject to risks and uncertainties and future events, many of which cannot
be predicted or quantified, and all of which speak only as of the date hereof.
These risks and uncertainties and future events could cause the company's actual
results, performance or achievements to differ materially from those expressed
in, or implied by, these statements. These statements are qualified by reference
to the section "Forward Looking Statements-- Safe Harbor Provisions" in Item 1
of the company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, which lists important factors that may affect the company or its
operations or assets. The company assumes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
LIQUIDITY AND FINANCIAL CONDITION
---------------------------------
Total cash and cash equivalents at June 30, 1999 and December 31, 1998 were
$90.1 million and $61.7 million, respectively.
As of June 30, 1999 and December 31, 1998, respectively, the company had total
borrowings of $1,810.5 million and $1,481.7 million. Increased commercial paper
borrowings of $245.0 million (net of discount), increased borrowings under
uncommitted U.S. credit facilities of $206.8 million, increased foreign short-
term borrowings of $114.0 million and the proceeds from $35.0 million of medium-
term notes issued during 1999 under the universal shelf registration discussed
below, were used to purchase FMC common stock under the company's open-market
stock repurchase program, to retire $250.0 million of senior debt and to fund
the company's acquisitions of Pronova Biopolymer AS and TG Soda Ash, Inc. The
company expects to replace the $114.0 million of foreign short-term borrowings
with long-term financing before December 31, 1999 and to use the net proceeds
from the sales of its Process Additives and BioProducts businesses to reduce
short-term debt.
The company has $800.0 million in committed credit facilities consisting of a
$350.0 million, 364 day non-amortizing revolving credit agreement due in July
2000 and a $450.0 million, five-year non-amortizing revolving credit agreement
due in December 2001. As of June 30, 1999, the company had no borrowings under
the revolving credit agreements and had commercial paper borrowings (supported
by committed credit facilities) of $394.9 million and borrowings under
uncommitted U.S. credit facilities of $274.8 million.
In January 1997, the company registered $400.0 million of medium-term debt
securities pursuant to a $500.0 million universal shelf registration statement
PAGE 15
filed in 1995. Under this registration statement, the company issued $70.0
million of medium-term notes during 1997 for net proceeds of $69.6 million and
$170.0 million of medium-term notes during 1998 for net proceeds of $169.0
million. In August 1998, a new universal shelf registration statement became
effective, under which $500.0 million of debt and/or equity securities may be
offered, including up to $500.0 million of medium-term debt. This registration
statement incorporated $160.0 million of unused capacity from the company's 1995
shelf registration statement.
Under the August 1998 registration statement, the company issued $120.0 million
of medium-term notes during 1998 for net proceeds of $119.6 million, $25.0
million of medium-term notes in February 1999 for net proceeds of $24.9 million,
and $10.0 million of medium-term notes in April 1999 for net proceeds of $10.0
million. The net proceeds under the shelf registration statements were used to
retire other borrowings and repurchase the company's common stock.
Capital spending of $102.0 million for the six months ended June 30, 1999
decreased $19.2 million versus the first half of 1998. The decrease is primarily
driven by lower capital spending in the company's lithium business. Acquisition
spending of $236.1 million for the first six months of 1999 included $45.6
million of fixed assets. As discussed in Note 8 to the company's June 30, 1999
consolidated financial statements, on June 30, 1999, FMC completed the
acquisitions of TG Soda Ash, Inc. and Pronova Biopolymer AS for cash of $50
million and $184 million, respectively. There was no acquisition spending in the
first half of 1998.
In addition to a planned joint venture with Solutia, Inc. (Note 8 to the June
30, 1999 consolidated financial statements) and the divestitures of its Process
Additives and BioProducts divisions (Note 7 to the June 30, 1999 consolidated
financial statements), the company continues to evaluate potential acquisitions,
divestitures and joint ventures on an ongoing basis.
On August 28, 1997, the Board of Directors authorized a $500 million open-market
stock repurchase program for FMC common stock through the end of 1999. During
1998, the company repurchased a total of 2.4 million shares at a cost of $150.0
million under this program and an additional 0.1 million shares at a cost of
$6.7 million which it contributed to a benefit plan trust. In the six months
ended June 30, 1999, the company repurchased approximately 1.0 million shares at
a cost of $55.3 million. The repurchased shares are recorded as treasury stock
at cost on the company's consolidated balance sheet. Depending on market
conditions, the company may purchase additional shares of its common stock on
the open market from time to time, and expects to repurchase approximately $79
million of the company's common stock during the remainder of 1999.
Other expected cash requirements for the remainder of 1999 include approximately
$125 million to $150 million for planned capital expenditures (excluding
potential acquisitions), approximately $35 million for environmental remediation
expenditures and approximately $35 million for net after-tax interest payments
based on current debt levels and interest rates. Cash to meet these requirements
will be provided primarily by the company's operations and, if necessary, by
existing cash balances and available short- or long-term credit facilities.
The company's foreign currency translation adjustment in accumulated other
comprehensive loss increased from $134.1 million at December 31, 1998 to $177.6
million at June 30, 1999, primarily as a result of the weakening of the
Brazilian real against the U.S. dollar during the first quarter of 1999.
PAGE 16
The company's ratios of earnings to fixed charges were 2.9x and 2.8x for the six
months ended June 30, 1999 and 1998, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISKS
-------------------------------------------------
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.
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 unable to use natural hedges. 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 a 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 June 30, 1999, 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 risks related to currency exchange rate
fluctuations.
During September 1998, the company entered into $65.0 million of forward
contracts to offset risks associated with the real-denominated portions of FMC's
Brazilian investments. During the first quarter of 1999, the Brazilian real
experienced a devaluation. The forward contracts matured in March 1999. Losses
from the decline in value of the company's real-denominated investments during
the 1999 devaluation, as well as actual and estimated 1999 economic losses
related to the Brazilian economic crisis, were offset by the forward contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
Recent accounting pronouncements that have affected or will affect the company
are discussed in Note 3 to the June 30, 1999 consolidated financial statements.
IMPACT OF THE YEAR 2000 ISSUE
-----------------------------
The following discussion should be read in conjunction with the description of
FMC's program for addressing potential Year 2000 ("Y2K") issues included in the
company's quarterly report on Form 10-Q for the period ended September 30, 1998.
Any new or updated information contained herein supersedes the information
contained in the Forms 10-Q for the periods ended September 30, 1998 and March
31, 1999, and in the company's Annual Report on Form 10-K for the year ended
December 31, 1998.
PAGE 17
The Y2K issue refers to the risk that systems, products and equipment using
date-sensitive software or computer chips with two digit date fields will
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in systems failures, miscalculations and business interruptions
that could have a materially adverse impact on the company.
The severity of problems to be confronted by the company for partial or complete
non-compliance of its own systems or those of its key suppliers, customers, or
business partners will depend on a variety of factors that are currently
unknown. Such problems, either individually (as in the case of a major utility
outage) or in combination (for example, if several critical suppliers and backup
sources fail to operate, or if infrastructure systems such as rail, road, or
port systems fail) may have a materially adverse impact on the company's results
of operations and financial condition.
The company closely tracks progress against Y2K compliance plans throughout its
businesses. A vital part of the company's compliance program is a detailed
corporate audit process designed to ensure sound Y2K planning and effective
execution at the business unit and plant level. Upon review of its compliance
program, the company determined that 67 individual plants required Y2K audits.
As of June 30, 1999, all 67 plants had been audited, and the company is
currently conducting follow-up audits to ensure that action items identified
during the initial audits are being addressed effectively.
Of the systems the company has identified as critical, 10 percent are business
application technology ("IT") systems, such as desktop PCs and
telecommunications systems, and 90 percent are manufacturing and facilities
systems, such as embedded technologies, process controls and programmable logic
devices. The number of Y2K projects has increased as the company has conducted
field audits specifically aimed at identifying Y2K issues, and tracked
performance against compliance plans.
The majority of the company's IT business applications are already Y2K-
compliant, and the company expects the remainder to be before December 31, 1999.
The company outsources most of its critical IT computing operations, including
its network operations, to professional outsource service providers. The company
has confirmed or is in the process of confirming that each of its outsourcers is
either already Y2K-compliant or has a detailed program in place to achieve
compliance within an acceptable time frame. Where appropriate, the company has
participated or continues to participate in joint planning and coordination to
ensure timely outsourcer compliance or to migrate FMC's processing to Y2K
compliant platforms.
With respect to its manufacturing and facilities systems, at June 30, 1999
approximately 90 percent of the company's projects, including all of the
projects of two divisions, had been substantially completed. A Y2K project is
defined as an individual Y2K compliance item or logical collection of such items
requiring compliance attention of any kind. The remaining 10 percent of the
company's Y2K projects are scheduled to be completed before the end of 1999. The
company targeted June 30, 1999 for completion of the renovation stage of the Y2K
program. As of that date, the operations reported that 98 percent of their
planned renovation projects had been completed. The company expects to complete
the remaining projects by December 31, 1999. Testing and redeployment of
renovated systems will constitute the bulk of the company's compliance effort
after June 30, 1999.
PAGE 18
Some funds budgeted by the company for operating projects have been, and will
be, spent on Y2K compliance, and some previously planned non-critical projects
have been deferred to future years. In addition, in order to address Y2K issues,
the company has accelerated certain system changes in its IT, manufacturing, and
facility systems that might otherwise have been made at a later date. From
inception of the Y2K program through June 30, 1999, the company had spent
approximately $16 million on Y2K compliance, of which approximately half was
expensed and half was capitalized. The company expects to incur approximately $4
million to $6 million in expense in the last half of 1999, and to capitalize up
to $3 million of additional costs. FMC has not completed its estimates related
to post-1999 spending.
The company is assessing or preparing to assess the compliance status of its
priority suppliers and is developing contingency plans to address potential Y2K
issues that might arise at year end or persist into the Year 2000.
Responsibility for supplier review is shared by the strategic sourcing
departments and the local plant purchasing operations within the business
groups. These assessments may take the form of telephone assessments, visits to
FMC facilities or discussions held at supplier sites. Both IT and embedded chip
manufacturing issues are addressed in the supplier reviews. Development of
contingency plans is a complex process, which in most cases must occur at the
control operator level within each facility. Approximately half of the detailed
contingency plans at the operating site level were completed by the target date
of June 30, 1999 as a result of a higher-priority focus on completion of
renovation projects and further discussion and shared learning on the scope and
content of effective contingency plans. The company expects to complete all
remaining contingency plans at the operating site level by October 31, 1999.
Contingency plans are unique for each operation, but typically include detailed
checklists of pre-planned sequential events to be executed in the event of an
operating or utility failure, provision for backup equipment and provision for
build-up of inventories of key supplies and products as appropriate.
The company has and will continue to devote substantial resources to address its
Y2K issues. However, there can be no assurances that the company's products,
production processes and internal systems do not contain undetected Y2K
problems. Further, there can be no assurances that the company's assessment of
suppliers' and vendors' Y2K compliance will be accurate. Customers of FMC could
be affected by Y2K issues, causing them to reduce purchases from the company. In
addition, many observers believe that there will be a significant amount of
litigation arising out of "year 2000 readiness" issues. Because of the
unprecedented nature of this litigation, it is impossible for the company to
predict the impact of any such litigation, although it could be significant to
the company. The company believes a reasonably likely worst case scenario
consists of: (i) the failure of infrastructure and utility services provided by
government agencies and other third-party suppliers (including communications,
energy, water and transport); (ii) potential health, environmental and safety
issues relating to its facilities; (iii) insufficient or inaccurate data
contained in the company's internal information systems; and (iv) computer
hardware failures. Any of these scenarios could cause the company's operations
to be interrupted, perhaps for a sustained period of time. These interruptions
could be more severe in certain countries outside the U.S., where the company
does significant business.
PAGE 19
The costs of Y2K compliance and the dates by which the company plans to complete
the Y2K modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans, the company's
ability to implement compliance in certain critical areas such as process
safety, the availability of Y2K-compliant replacement equipment from suppliers
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, the availability and
lead-time requirements for certain compliant equipment and similar
uncertainties.
PAGE 20
Results of Operations
---------------------
Industry segment financial data is included in Note 11 to the company's June 30,
1999 consolidated financial statements.
Second Quarter of 1999 Compared with Second Quarter of 1998
-----------------------------------------------------------
General
- -------
Sales from continuing operations of $1.1 billion were essentially even with last
year's second quarter. Operating profit from continuing operations (net of
minority interests) increased to $139 million from $135 million in last year's
second quarter as continued cost reductions across all businesses, an improved
sales mix in Energy Systems and Agricultural Products, and increased hydrogen
peroxide prices more than offset weaker airport products and systems markets,
continuing competitive pressures in the lithium business and production
difficulties in the pharmaceutical and food ingredients businesses. Income from
continuing operations increased to $69 million, or $2.10 per share on a diluted
basis, in the second quarter of 1999 from $68 million, or $1.89 per share, in
the second quarter of 1998.
Earnings from discontinued operations, net of income taxes, representing the
gain on the sale for $33.5 million in cash of real estate parcels previously
used by the company's discontinued defense systems operations, were $18 million,
or $0.55 per share on a diluted basis, in the second quarter of 1999. Net income
of $87 million, or $2.65 per share, in the second quarter of 1999 compared with
net income of $68 million, or $1.89 per share, in the second quarter of 1998.
Average diluted shares outstanding used in the quarters' earnings per share
calculations decreased to 32.8 million in 1999 from 35.7 million in the prior
year's quarter under the company's ongoing share repurchase program.
Energy Systems
- --------------
Energy Systems sales of $294 million decreased 8 percent from $318 million in
the second quarter of 1998. Earnings of $25 million increased 9 percent from $23
million in the prior-year quarter, reflecting higher subsea sales and continuing
cost controls, partially offset by reduced sales of land wellheads and fluid
control equipment due to uncertainty about oil prices.
Petroleum equipment and systems sales and earnings increased significantly in
the second quarter of 1999 primarily due to increased SOFEC sales to Canada,
higher sales and margins for subsea equipment, and the addition of CBV Brazil
which was acquired in August 1998. While oil prices have rebounded from their
lows at the beginning of the year, demand for surface equipment remains low and
new subsea project awards have been delayed.
Lower orders as customers await a sustained increase in oil prices resulted in
reduced sales of energy transportation and measurement equipment. Earnings were
also lower, but the impact of lower sales was partially offset by restructuring
activities and continuing cost reductions. Lower sales and earnings also reflect
the sale of Crosby Valve in July 1998.
Management expects orders to remain depressed until the uncertainty surrounding
oil prices is resolved and new exploration and production budgets are approved.
The company has successfully implemented cost reductions across its energy
businesses in an effort to maintain their profitability.
PAGE 21
Food and Transportation Systems
- -------------------------------
Food and Transportation Systems 1999 sales of $217 million were down from $242
million in last year's quarter. Earnings of $19 million were down $1 million
from the 1998 second quarter. Lower sales and earnings primarily reflected lower
sales and earnings from airport products, partially offset by strong
performances from Frigoscandia and Food Processing Systems.
FMC FoodTech's 1999 sales were down slightly from last year's quarter, while
1999 earnings improved significantly from 1998. Increased margins associated
with higher global sales of tomato processing systems in a number of countries
and of freezing systems in Europe more than offset lower sales of citrus
equipment due to smaller crops in Florida and California and continued softness
in most major markets for material handling equipment.
Sales and earnings for airport products and systems were significantly lower in
1999, reflecting timing issues, lower sales of airline cargo loaders in Asia and
North America, and lower sales volumes of passenger boarding bridges due to
delays in airport projects. The company's management remains concerned that
airport expenditures may decline from the record levels of the previous year.
Agricultural Products
- ---------------------
Agricultural Products sales for the 1999 quarter of $175 million were down 3
percent from the prior year quarter due to lower crop prices and lower Command
herbicide sales due to the wet planting season. Early-season sales in Brazil
also were down due to the continuing effects of that country's economic issues.
Earnings of $37 million for the 1999 quarter increased $1 million from the 1998
quarter as the lower sales levels were completely offset by the continuing
impact of 1998 and 1999 cost reductions as well as an improved sales mix. During
the 1999 quarter, sales of Capture, a premium pyrethroid, increased as a result
of product repositioning and label expansions, which expand a product's market
to include additional crops. In addition, FMC's new herbicide, carfentrazone-
ethyl, was introduced on corn and rice in North America.
Specialty Chemicals
- -------------------
Specialty Chemicals sales were $153 million in the second quarter of 1999, down
slightly from $156 million in the prior year period. Earnings of $22 million in
1999 were down approximately $4 million from the 1998 period. The 1999 quarter's
results reflected continued competitive pressures in the lithium business, as
well as production issues in the pharmaceutical and food ingredients businesses
which reduced profitability slightly.
Process additives sales increased 5 percent from the 1998 second quarter and
earnings increased to $3.9 million in 1999 from $1.5 million in 1998 as a result
of lower raw material prices and cost controls. As more fully discussed in Note
7 to the June 30, 1999 consolidated financial statements, on July 31, 1999, FMC
completed the sale of its process additives business to Great Lakes Chemical
Corporation for $162 million in cash. Process additives sales were $43 million
for the quarter ended June 30, 1999 and $166 million for the year ended December
31, 1998.
Lower sales and earnings in the lithium division reflected ongoing price
competition in the carbonate portion of the business and the beginning of
PAGE 22
additional price pressures on lithium hydroxide. During the quarter, FMC
announced an agreement to source lithium carbonate from SQM and took a
restructuring charge to suspend lithium carbonate production in Argentina until
market conditions improve. The longer term implications for FMC's existing asset
base of the current contract and other sourcing and restructuring alternatives
are being evaluated. Lithium carbonate quantities to be used by FMC under the
agreement are not in excess of the company's normal requirements.
As more fully discussed in Note 8 to the June 30, 1999 consolidated financial
statements, on June 30, 1999, the company completed the acquisition of Pronova
Biopolymer AS ("Pronova") from a wholly-owned subsidiary of Norsk Hydro for
approximately $184 million in cash. Pronova, headquartered in Drammen, Norway,
is a leading producer of alginates used in the pharmaceutical, food and
industrial markets.
As more fully discussed in Note 7 to the June 30, 1999 consolidated financial
statements, on July 9, 1999 the company completed the sale of its BioProducts
business to Cambrex Corporation for $38.0 million in cash. The BioProducts
business had sales of approximately $6 million and $23 million for the quarter
ended June 30, 1999 and the year ended December 31, 1998, respectively.
Industrial Chemicals
- --------------------
Industrial Chemicals second quarter sales of $238 million in 1999 were down
slightly, but earnings (net of minority interest) of $37 million were up 14
percent from the prior year period, as lower soda ash prices and volumes were
more than offset by higher hydrogen peroxide earnings and continued cost
reductions.
Sales of alkali products decreased compared to the second quarter of 1998, but
earnings (net of minority interest) increased slightly as lower prices and
worldwide sales volumes were more than offset by cost reductions. The company
believes the Asian economic slowdown has begun to level out and may show some
improvement in the next year. As more fully discussed in Note 8 to the June 30,
1999 consolidated financial statements, on June 30, 1999, FMC acquired TG Soda
Ash, Inc. from Elf Atochem North America, Inc. for $50 million in cash and a
contingent payment due at year-end 2003. The contingent payment amount, which is
based on the financial performance of the combined soda ash operations between
2001 and 2003, cannot currently be determined but could be as much as $100
million. In conjunction with the transaction, the interest of the minority
shareholders in FMC's existing soda ash business was diluted effective July 1,
1999 to 12.5 percent from 20 percent as a result of FMC's disproportionate
investment in TgSA's mineral ore reserves and certain future capital projects.
Phosphorus sales were essentially flat in the second quarter of 1999 compared
with the 1998 quarter, but earnings were down primarily due to reduced operating
expenses. Management expects prices to remain under pressure throughout the
second half of 1999. As more fully discussed in Note 8 to the June 30, 1999
consolidated financial statements, FMC and Solutia, Inc. have announced an
agreement to form a joint venture during 1999 which will include the North
American and Brazilian phosphorus chemical operations of both companies. Upon
formation of the joint venture, FMC expects the companies to benefit from
significant synergies through completion of plant rationalizations and other
restructuring activities.
Peroxygen sales were essentially flat compared to the prior year, but earnings
were higher in the second quarter, reflecting increased prices and cost control
efforts.
PAGE 23
Sales of Spain-based FMC Foret decreased slightly from the second quarter of
1998, but 1999 earnings were up 18 percent due primarily to continuing cost
reductions.
Corporate
- ---------
Corporate expenses of $19 million in the second quarter of 1999 were down from
$20 million in the second quarter of 1998, reflecting continued cost control.
Interest expense
- ----------------
Net interest expense of $27 million in the second quarter of 1999 was down $1
million compared to the same quarter last year.
Effective tax rates
- -------------------
The effective tax rate applicable to income from continuing operations before
income taxes for both the quarter ended June 30, 1999 and the quarter ended June
30, 1998 was 26 percent.
Order backlog
- -------------
FMC's backlog of unfilled orders of $692 million for Energy Systems was down
$186 million from the year-end backlog in 1998, and down $330 million from a
backlog of $1,022 million at June 30, 1998. The June 30, 1998 amount included
the recognition of the subsea and floating production equipment order for the
$230 million Terra Nova Project on the Grand Banks of Newfoundland, as well as
large orders from Shell and Statoil. Food and Transportation Systems backlog of
$269 million increased $13 million from the end of 1998 but decreased $50
million from backlog at June 30, 1998. Backlogs are not reported for
Agricultural Products, Specialty Chemicals or Industrial Chemicals due to the
nature of these businesses.
Legal contingencies
- -------------------
On April 14, 1998 a jury returned a verdict against the company in conjunction
with a False Claims Act action against the company. See Note 10 to the company's
June 30, 1999 consolidated financial statements for a discussion of the lawsuit.
During the second quarter of 1999, a federal judge set aside a $38 million jury
verdict against FMC and ordered a new trial in a chemical release case in West
Virginia, as a result of incorrect testimony by a major plaintiff witness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------ ---------------------------------------------------------
The information required by this item is provided in "Derivative Financial
Instruments and Market Risks", under ITEM 2 - Management's Discussion and
------------------------------------
Analysis of Financial Condition and Results of Operations.
- ---------------------------------------------------------
PAGE 24
Six Months of 1999 Compared with Six Months of 1998
---------------------------------------------------
Sales of $2,045 million in the first half of 1999 were down slightly from $2,152
million in the first half of 1998. Segment operating profits (net of minority
interest) increased to $234 million in the first half of 1999 from $225 million
in 1998 as continued cost reductions across all businesses, an improved sales
mix in Energy Systems and Agricultural Products, and increased hydrogen peroxide
prices more than offset lower airport products and systems sales, continuing
competitive pressures in the lithium business and lower soda ash prices and
volumes.
Corporate expenses of $39 million decreased $4 million from the prior year
reflecting ongoing cost control efforts. Net interest expense increased to $55
million from $53 million due to higher debt levels.
Income from continuing operations before the cumulative effect of a change in
accounting principle increased to $99 million, or $3.01 per share on a diluted
basis, in the first half of 1999 from $94 million, or $2.64 per share in the
first half of 1998. Earnings from discontinued operations, net of income taxes,
representing the gain on the sale for $33.5 million in cash of real estate
parcels previously used by the company's discontinued defense systems
operations, were $18 million, or $0.55 per share on a diluted basis, in the
first half of 1999.
In the first half of 1999, net income was $117 million, or $3.56 per share on a
diluted basis, compared to $58 million or $1.63 per share on a diluted basis in
the first half of 1998. As discussed in Note 3 to the company's June 30, 1999
consolidated financial statements, the company adopted AICPA Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities",
effective January 1, 1998. In conjunction with the adoption, the company charged
$46 million ($36 million after tax) of previously capitalized start-up costs to
expense. This change was recorded as a cumulative effect of a change in
accounting principle.
Energy Systems sales of $584 million in the first half of 1999 decreased from
$606 million in the first half of 1998, but earnings of $41 million in 1999
increased from $37 million in 1998, as continued cost cutting and strong subsea
shipments offset reduced sales of land wellheads and fluid control equipment.
Both land wellhead and fluid control equipment sales have been negatively
affected by uncertainty surrounding oil prices.
Food and Transportation Systems sales decreased to $399 million in 1999 from
$421 million in 1998, but earnings of $30 million in 1999 increased 5 percent
from 1998 as higher earnings from Frigoscandia and Food Processing Systems
offset lower sales and earnings of airport products and systems.
Agricultural Products sales decreased by $31 million from 1998 to $322 million
in 1999, but earnings in 1999 increased to $52 million in 1999 from $50 million
in 1998 as the continuing impact of 1998 and 1999 cost reductions as well as an
improved sales mix more than offset the lower sales levels.
Specialty Chemicals sales of $302 million in 1999 decreased from $310 million in
1998 and earnings decreased to $40 million in 1999 from $45 million in 1998
primarily due to continued competitive pressures in the lithium business.
PAGE 25
Industrial Chemical sales decreased to $451 million in the first half of 1999
from $478 million in 1998, but earnings (net of minority interest) increased to
$71 million in 1999 from $65 million in 1998 as lower soda ash prices and sales
volumes were more than offset by higher hydrogen peroxide earnings and continued
cost reductions.
The effective tax rate applicable to income from continuing operations before
income taxes for both the six months ended June 30, 1999 and the six months
ended June 30, 1998 was 26 percent.
PAGE 26
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
A report by KPMG LLP, FMC's independent accountants, on the financial statements
included in Form 10-Q for the quarter ended June 30, 1999 is included on page
27.
PAGE 27
Independent Accountants' Report
-------------------------------
The Board of Directors
FMC Corporation:
We have reviewed the accompanying consolidated balance sheet of FMC Corporation
and consolidated subsidiaries as of June 30, 1999, and the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1999 and 1998 and the consolidated statements of cash flows for the six-month
periods ended June 30, 1999 and 1998. These consolidated financial statements
are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of FMC Corporation and consolidated
subsidiaries as of December 31, 1998 and the related consolidated statements of
income, cash flows and changes in stockholders' equity for the year then ended
(not presented herein); and in our report dated January 20, 1999, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1998 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
Chicago, Illinois
July 16, 1999
PAGE 28
Part II - Other Information
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ------ -----------------
On April 14, 1998, a jury returned a verdict against the company in the amount
of $125.0 million in conjunction with a federal False Claims Act action, in
which Mr. Henry Boisvert filed and ultimately took to trial allegations that the
company had filed false claims for payment in connection with its contract to
provide Bradley Fighting Vehicles to the U.S. Army between 1981 and 1996. Under
law, portions of the jury verdict were subject to doubling or trebling. On
December 24, 1998, the U.S. District Court for the Northern District of
California entered judgment for Mr. Boisvert in the amount of approximately $87
million. This was approximately $300 million less than the maximum judgment
possible under the jury verdict. The reduction resulted from several rulings by
the District Court in favor of the company in the post-trial motions. Cross-
appeals to the U.S. Court of Appeals for the Ninth Circuit are now pending. Both
sides are asserting arguments on appeal, and a number of those arguments, if
successful, would alter or eliminate the amount of the existing judgment. Any
legal proceeding is subject to inherent uncertainty, and it is not possible to
predict how the appellate court will rule. Therefore, the company's management
believes based on a review, including a review by outside counsel, that it is
not possible to estimate the amount of a probable loss, if any, to the company
that might result from some adverse aspects of the judgment ultimately standing
against the company. Accordingly, no provision for this matter has been made in
the company's consolidated financial statements.
During the second quarter of 1999, a federal judge set aside a $38 million jury
verdict against FMC and ordered a new trial in a chemical release case in West
Virginia, as a result of incorrect testimony by a major plaintiff witness.
PAGE 29
PART II - OTHER INFORMATION (Continued)
---------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The Registrant's Annual Meeting of Stockholders was held on April 23, 1999. At
the meeting, stockholders voted on (i) the election of three directors; and (ii)
ratification of the appointment of KPMG LLP as the Registrant's independent
auditors for 1999. Voting on each such matter was as follows:
Votes Votes Withheld/ Broker
For Against Abstentions Non-Votes
----- ------- ----------- ---------
1. Election of Directors:
R. N. Burt 28,441,484 - 806,251 -
A. Larsen 28,410,615 - 837,120 -
E. J. Mooney 26,186,671 - 3,060,568 -
2. Ratification of Auditors 29,037,141 129,544 81,052 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits
--------
Number in
Exhibit Table Description
------------- -----------
11 Statement re: computation of diluted
earnings per share
12 Statement re: computation of ratios of
earnings to fixed charges
15 Letter re: unaudited interim financial
information
27 Financial data schedule
(b) Reports on Form 8-K
-------------------
None.
PAGE 30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FMC CORPORATION
---------------
(Registrant)
Date: August 10, 1999 /Ronald D. Mambu/
---------------- -----------------------------------
Vice President, Controller and duly authorized
officer
PAGE 1
EXHIBIT INDEX
---------------
Number in
Exhibit Table Description
------------- -----------
11 Statement re: computation of diluted
earnings per share
12 Statement re: computation of ratios of
earnings to fixed charges
15 Letter re: unaudited interim financial
information (KPMG LLP)
27 Financial data schedule