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 September 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 September 30, 1999
- ---------------------------------------- ---------------------------------
Common Stock, par value $0.10 per share 30,590,309
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 Nine Months
Ended September 30 Ended September 30
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Sales $1,034.3 $1,110.7 $3,079.4 $3,262.5
Costs and expenses:
Cost of sales 775.0 824.6 2,255.2 2,402.4
Selling, general and
administrative expenses 135.8 143.3 434.7 459.4
Research and development 36.8 37.0 112.7 112.9
Asset impairments (Note 7) 29.1 - 29.1 -
Restructuring and other
charges (Note 7) 14.7 - 14.7 -
-------- -------- -------- --------
Total costs and expenses 991.4 1,004.9 2,846.4 2,974.7
-------- -------- -------- --------
Income from continuing operations
before minority interests, interest
expense, interest income, income
taxes and cumulative effect of
change in accounting principle 42.9 105.8 233.0 287.8
(Gains) on sales of process
additives and bioproducts
businesses (Note 8) (55.5) - (55.5) -
Minority interests 1.9 2.5 3.8 4.3
Interest expense 28.5 30.7 89.5 88.2
Interest income (1.7) (2.2) (8.0) (6.9)
-------- -------- -------- --------
Income from continuing operations
before income taxes and
cumulative effect of change in
accounting principle 69.7 74.8 203.2 202.2
Provision for income taxes 5.6 19.3 40.0 52.4
-------- -------- -------- --------
Income from continuing operations
before cumulative effect of
change in accounting principle 64.1 55.5 163.2 149.8
Discontinued operation, net of
income taxes (Note 4) - - 18.0 -
-------- -------- -------- --------
Income before cumulative effect
of change in accounting principle 64.1 55.5 181.2 149.8
Cumulative effect of change in
accounting principle, net of
income taxes (Note 3) - - - (36.1)
-------- -------- -------- --------
Net income $ 64.1 $ 55.5 $ 181.2 $ 113.7
======== ======== ======== ========
(continued)
PAGE 3
FMC Corporation and Consolidated Subsidiaries
- ---------------------------------------------
Consolidated Statements of Income (Unaudited) (Continued)
- ----------------------------------------------------------
(In millions, except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic earnings per common share:
Continuing operations $2.04 $1.64 $5.13 $ 4.36
Discontinued operation (Note 4) - - 0.57 -
Cumulative effect of change
in accounting principle (Note 3) - - - (1.05)
----- ----- ----- ------
Net income per common share $2.04 $1.64 $5.70 $ 3.31
===== ===== ===== ======
Average number of shares used
in basic earnings per share
computations 31.4 33.8 31.8 34.4
===== ===== ===== ======
Diluted earnings per common share:
Continuing operations $1.98 $1.60 $4.99 $ 4.24
Discontinued operation (Note 4) - - 0.55 -
Cumulative effect of change in
accounting principle (Note 3) - - - (1.02)
----- ----- ----- ------
Net income per common share $1.98 $1.60 $5.54 $ 3.22
===== ===== ===== ======
Average number of shares used in
diluted earnings per share
computations 32.3 34.7 32.7 35.3
===== ===== ===== ======
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)
September 30
1999 December 31
Assets: (Unaudited) 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 76.0 $ 61.7
Trade receivables, net of allowance for doubtful
accounts of $16.6 in 1999 and $11.9 in 1998 781.1 840.6
Inventories 490.0 517.7
Other current assets 159.1 136.4
Deferred income taxes 111.9 125.3
-------- --------
Total current assets 1,618.1 1,681.7
Investments 215.7 186.5
Property, plant and equipment at cost 3,727.5 3,824.7
Less -- accumulated depreciation 2,039.4 2,097.2
-------- --------
Net property, plant and equipment 1,688.1 1,727.5
Goodwill and intangible assets (Note 9) 515.0 399.1
Other assets 108.4 118.9
Deferred income taxes 22.1 52.7
-------- --------
Total assets $4,167.4 $4,166.4
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Short-term debt (Note 2) $ 198.8 $ 150.6
Current portion of long-term debt (Note 2) 0.9 4.7
Accounts payable, trade and other 623.8 685.8
Accrued and other current liabilities 518.8 492.6
Current portion of accrued pensions and
other postretirement benefits 10.4 12.1
Income taxes payable 39.7 66.1
-------- --------
Total current liabilities 1,392.4 1,411.9
Long-term debt, less current portion (Note 2) 1,396.3 1,326.4
Accrued pension and other postretirement
benefits, less current portion 233.3 228.1
Reserve for discontinued operations (Note 4) 208.5 237.4
Other liabilities 158.3 159.7
Minority interests in consolidated companies 44.9 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 38,326,249 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 165.5 158.4
Retained earnings 1,257.0 1,075.7
Accumulated other comprehensive loss (194.1) (134.1)
Treasury stock, common, at cost;
7,735,940 shares in 1999 and 5,485,947
shares in 1998 (Note 6) (498.5) (374.4)
-------- --------
Total stockholders' equity 733.7 729.4
-------- --------
Total liabilities and stockholders' equity $4,167.4 $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)
Nine Months
Ended September 30
--------------------
1999 1998
--------- ---------
Reconciliation from income from continuing
operations before cumulative effect of change
in accounting principle to cash provided by
operating activities of continuing operations:
Income from continuing operations before cumulative
effect of change in accounting principle $ 163.2 $ 149.8
Adjustments for non-cash components of
income from continuing operations:
Depreciation and amortization 134.3 154.1
Asset impairments (Note 7) 29.1 -
Restructuring and other charges (Note 7) 14.7 -
Deferred income taxes 44.0 21.5
Minority interests 3.7 4.3
Other (38.3) (26.9)
Changes in operating assets and liabilities:
Trade receivables, net 89.2 13.4
Inventories 52.2 (14.1)
Other current assets and other assets 19.8 45.9
Accounts payable, accrued payroll, other
current liabilities and other liabilities (105.7) 30.5
Income taxes payable (26.5) (40.4)
Accrued pension and other
postretirement benefits, net (8.4) (9.0)
------- -------
Cash provided by operating activities of
continuing operations $ 371.3 $ 329.1
======= =======
(continued)
PAGE 6
FMC Corporation and Consolidated Subsidiaries
- --------------------------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)(Continued)
- --------------------------------------------------------------
(In millions)
Nine Months
Ended September 30,
-----------------------
1999 1998
---- ----
Cash provided by operating activities
of continuing operations $ 371.3 $ 329.1
------- -------
Cash required by discontinued operations (11.0) (49.9)
------- -------
Cash provided (required) by investing
activities:
Acquisitions of businesses (235.0) -
Capital spending (167.9) (197.7)
Disposal of property, plant and equipment 103.7 64.5
Increase in investments (27.8) (120.1)
------- -------
(327.0) (253.3)
------- -------
Cash provided (required) by financing
activities:
Net proceeds from issuance (repayments)
of commercial paper 205.1 (109.4)
Net increase (decrease) in other
short-term debt 48.2 (19.4)
Net borrowings under credit facilities 33.6 122.8
Proceeds from issuance of long-term debt 84.6 169.0
Repayment of long-term debt (268.8) (34.6)
Distributions to limited partner (3.8) (4.8)
Repurchases of common stock (124.1) (135.1)
Issuance of common stock 7.1 16.4
------- -------
(18.1) 4.9
Effect of exchange rate changes on cash
and cash equivalents (0.9) (2.6)
------- -------
Increase in cash and cash equivalents 14.3 28.2
Cash and cash equivalents, beginning of period 61.7 62.7
------- -------
Cash and cash equivalents, end of period $ 76.0 $ 90.9
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized, was $92.2 million and $81.5
million, and net cash paid for income taxes (including taxes paid related to
Defense Systems operations) was $24.3 million and $67.9 million for the nine-
month periods ended September 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
September 30, 1999, and the related consolidated statements of income and cash
flows for the interim periods ended September 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 September 30,
1999 and 1998 and of its financial position as of September 30, 1999. All such
adjustments are of a normal recurring nature. The results of operations for the
three-month and nine-month periods ended September 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 September 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 $366.3 million at
September 30, 1999 ($149.9 million at December 31, 1998).
Advances under uncommitted U.S. credit facilities were $225.0 million and $68.0
million at September 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, $366.3 million of outstanding
commercial paper and $83.7 million of borrowings under uncommitted U.S. credit
facilities have been classified as long-term debt at September 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 bore interest at a variable rate based
upon LIBOR and was repaid in October 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 9).
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.
In August, 1999 the company borrowed $50 million at 6.45% interest with a
maturity of 2032 from the proceeds of Power County, Idaho's Solid Waste Disposal
Revenue Bonds. The proceeds are included in other investments and are being used
to fund phosphorus capital projects.
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 $1.02 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 September 30, 1999 and December 31, 1998
were $208.5 million and $237.4 million, respectively. At September 30, 1999,
substantially all reserves were 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 of $18.0 million (net of income taxes of
$11.5 million, or $0.55 per share on a diluted basis), consist of the gain on
the sale of real estate parcels previously used by the company's discontinued
defense systems operations. The properties were sold in the second quarter of
1999 for $33.5 million in cash.
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 $257.5 million and $294.0
million, before recoveries, have been provided at September 30, 1999 and
December 31, 1998, respectively, of which $179.0 million and $198.1 million are
included in the reserve for discontinued operations at September 30, 1999 and
December 31, 1998, respectively.
The company has estimated that reasonably possible contingent environmental
losses may exceed amounts accrued at September 30, 1999 by as much as $90
million. 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 $101.1 million ($20.5 million as other assets and $80.6 million as
an offset to the reserve for discontinued operations) have been recorded as
probable realization of claims against third parties at September 30, 1999.
Total recoveries recorded at December 31, 1998 were $107.6 million. The recorded
assets relate to contractual arrangements with insurance companies, U.S.
government agencies, and other Potentially Responsible Parties.
On October 21, 1999 the Federal District Court for the Western District of
Virginia approved the Consent Decree signed by the company, the EPA (Region III)
and the U.S. Department of Justice ("DOJ") regarding past response costs and
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. FMC's $70 million portion of the settlement was
provided for in prior periods as part of discontinued operations, and no
additional charge to earnings was recorded in 1999.
In June 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
PAGE 10
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
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. The company provided for the penalty and other estimated
expenses related to the Consent Decree in prior periods.
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. For the nine
months ended September 30, 1999 the company repurchased 2.3 million of its
common shares at a cost of $124.4 million, for a total of 7.5 million shares at
a cost of $490.1 million under the program. The repurchased shares are recorded
as treasury stock at cost on the company's consolidated balance sheet.
On August 27, 1999, the Board of Directors authorized an additional $50 million
of open-market repurchases of FMC common stock, which the company had not
commenced as of September 30, 1999. The company has not determined the timing
of repurchases, if any, under this authorization.
At September 30, 1999, the company had 30.6 million shares outstanding and 0.8
million additional shares assuming conversion of stock options and other common
stock equivalents (calculated under the treasury stock method).
Note 7: Asset Impairments and Restructuring and Other Charges
- -------------------------------------------------------------
In the third quarter of 1999, FMC recorded asset impairments of $29.1 million
($17.8 million after tax, or $0.55 per share on a diluted basis), and
restructuring and other one-time charges of $14.7 million ($9.0 million after
tax, or $0.28 per share).
Asset impairments of $20.7 million were required to write off the remaining net
book values of two U.S. lithium facilities. Both facilities were constructed to
run pilot and development quantities for new lithium-based products. During the
third quarter of 1999, management determined that it would not be feasible to
use the facilities as currently configured.
Additionally, an impairment charge of $8.4 million was required to write off the
remaining net book value of a small caustic soda facility in Green River,
Wyoming. Estimated future cash flows related to this facility indicated that an
impairment of the full value had occurred.
Restructuring and other one-time charges of $14.7 million resulted primarily
from strategic decisions to divest or restructure a number of businesses and
support departments, including certain food machinery, agricultural products,
and energy systems operations and certain corporate and shared service support
departments.
PAGE 11
Of the total charge, $2.9 million related to actions, including headcount
reductions, required to achieve planned synergies from recently acquired
businesses in Specialty Chemicals and Energy Systems. All amounts accrued under
these programs are expected to be utilized within one year.
Note 8: Dispositions
- --------------------
On July 9, 1999, the company completed the sale of its bioproducts business to
Cambrex Corporation for $38 million in cash, resulting in a pre-tax gain of
$20.1 million ($12.2 million after tax, or $0.38 per share). The bioproducts
business was 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, resulting in a gain
of $35.4 million on both a pre-tax and after-tax basis ($1.09 per share). The
process additives business was included in the Specialty Chemicals segment and
had 1998 sales of $166 million from its operations in Manchester, England and
Nitro, West Virginia.
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 9: 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 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 and certain future capital projects. Results
of the acquired business are 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 has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on a preliminary
estimation of fair values of such assets and liabilities at the date of
acquisition, pending the results of appraisals and other analyses which are
currently in process. The company has recorded goodwill (to be amortized over 30
years) and other intangible assets totalling approximately $135.0 million on a
preliminary basis related to the acquisition. Results of the acquired business
are included in the Specialty Chemicals segment from the date of acquisition.
PAGE 12
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, which will be named Astaris
LLP, will be a limited liability partnership owned equally by FMC and Solutia,
Inc. Formation of Astaris LLP is subject to a government approval process, which
is expected to be completed in the fourth quarter of 1999. FMC's portion of the
joint venture's results will be included in the company's Industrial Chemicals
segment.
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 September 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.
Note 10: 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 nine-month periods
ended September 30, 1999 and 1998 consisted of the following:
Three months ended Nine months ended
September 30 September 30
------------------- --------------------
1999 1998 1999 1998
------------------- --------------------
Net income $ 64.1 $55.5 $181.2 $113.7
Other comprehensive loss:
Foreign currency
translation adjustment (16.5) 13.1 (60.0) 3.8
------ ----- ------ ------
Comprehensive income $ 47.6 $68.6 $121.2 $117.5
====== ===== ====== ======
Note 11: 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
PAGE 13
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. No
provision for this matter has been made in the company's consolidated financial
statements.
Note 12: Segment Information
- -----------------------------
(In millions)
Three Months Nine Months
Ended September 30 Ended September 30
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Sales
- -----
Energy Systems $ 251.1 $ 330.5 $ 835.4 $ 936.3
Food and Transportation
Systems 220.0 223.8 618.8 644.4
Agricultural Products 177.2 178.5 498.9 531.4
Specialty Chemicals 139.2 147.4 440.9 457.6
Industrial Chemicals 251.7 238.9 703.1 717.2
Eliminations (4.9) (8.4) (17.7) (24.4)
-------- -------- -------- --------
$1,034.3 $1,110.7 $3,079.4 $3,262.5
======== ======== ======== ========
Income from continuing operations before income
- ------------------------------------------------
taxes and cumulative effect of change in accounting principle
- -------------------------------------------------------------
Energy Systems $ 22.9 $ 27.0 $ 64.3 $ 64.2
Food and Transportation
Systems 18.5 22.5 48.0 50.5
Agricultural Products 9.9 29.0 61.5 79.3
Specialty Chemicals 17.2 14.9 57.5 59.8
Industrial Chemicals 30.2 23.6 101.5 88.4
------ ------ ------ ------
Operating profit from
continuing operations 98.7 117.0 332.8 342.2
Asset impairments (Note 7) (29.1) -- (29.1) --
Restructuring and other
charges (Note 7) (14.7) -- (14.7) --
Gains on sales of
process additives and
bioproducts businesses
(Note 8) 55.5 -- 55.5 --
Corporate (19.7) (19.0) (58.9) (62.3)
Other income and
(expense), net 5.8 5.3 (0.9) 3.6
Net interest expense (26.8) (28.5) (81.5) (81.3)
------ ------ ------ ------
Income from continuing
operations before income
taxes and cumulative
effect of change in
accounting principle $ 69.7 $ 74.8 $203.2 $202.2
====== ====== ====== ======
Asset impairments relate to Specialty Chemicals ($20.7 million) and Industrial
Chemicals ($8.4 million).
PAGE 14
Restructuring and other charges are related to Energy Systems ($1.5 million),
Food and Transportation Systems ($7.1 million), Agricultural Products ($2.2
million),
Specialty Chemicals ($1.3 million), Industrial Chemicals ($0.6 million) and
Corporate ($2.0 million).
Gains on sales of the process additives ($35.4 million) and bioproducts ($20.1
million) businesses are attributable to Specialty Chemicals.
As described in Note 3, FMC adopted SFAS 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
September 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 15
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 September 30, 1999 and December 31, 1998 were
$76.0 million and $61.7 million, respectively.
As of September 30, 1999 and December 31, 1998, respectively, the company had
total borrowings of $1,596.0 million and $1,481.7 million. During the nine
months ended September 30, 1999, the company used increased commercial paper
borrowings of $216.4 million (net of discount), increased borrowings under
uncommitted U.S. credit facilities of $225.0 million, and the proceeds from
$35.0 million of medium-term notes issued during 1999 under the universal shelf
registration discussed below, 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 used net proceeds from the sales of its process additives and
bioproducts businesses of approximately $198 million 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 September 30, 1999, the company had no
borrowings under the revolving credit agreements and had commercial paper
borrowings (supported by committed credit facilities) of $366.3 million and
borrowings under uncommitted U.S. credit facilities of $225.0 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
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
PAGE 16
$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.
In August, 1999 the company borrowed $50 million at 6.45% interest with a
maturity of 2032 from the proceeds of Power County, Idaho's Solid Waste Disposal
Revenue Bonds. The proceeds are included in other investments and are being used
to fund phosphorus capital projects.
Capital spending (excluding acquisitions) of $165.6 million for the nine months
ended September 30, 1999 decreased $20.3 million versus the first nine months of
1998. The decrease is primarily driven by lower capital spending in the
company's lithium business. Acquisition spending of $243.2 million for the first
nine months of 1999 included $45.6 million of fixed assets. As discussed in Note
9 to the company's September 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. In the
third quarter of 1998, the company acquired a controlling interest in CBV
Industria Mecanica S.A.
In addition to a planned joint venture with Solutia, Inc. (Note 9 to the
September 30, 1999 consolidated financial statements) and the divestitures of
its process additives and bioproducts divisions (Note 8 to the September 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 nine months
ended September 30, 1999, the company repurchased approximately 2.3 million
shares at a cost of $124.4 million. 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 $10 million of the company's
common stock during the remainder of 1999.
On August 27, 1999, the Board of Directors authorized an additional $50 million
of open-market repurchases of FMC common stock, which the company had not
commenced at September 30, 1999. The company has not determined the timing of
repurchases, if any, under this authorization.
Other expected cash requirements for the remainder of 1999 include approximately
$50 million to $75 million for planned capital expenditures (excluding potential
acquisitions), approximately $20 million for environmental remediation
expenditures and approximately $20 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.
PAGE 17
The company's foreign currency translation adjustment in accumulated other
comprehensive loss increased from $134.1 million at December 31, 1998 to $194.1
million at September 30, 1999, primarily as a result of the weakening of the
Brazilian real against the U.S. dollar.
The company's ratios of earnings to fixed charges were 3.0x and 2.9x for the
nine months ended September 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. At
September 30, 1999, only foreign currency forward contracts were used as
derivatives by the company.
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 September 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 September 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 June 30, 1999 and September
30, 1998, and in the company's Annual Report on Form 10-K for the year ended
December 31, 1998.
PAGE 18
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. As of September 30, 1999, all 70
of the company's key sites have 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.
The company's critical systems include business application technology ("IT")
systems, such as desktop PCs and telecommunications systems, and manufacturing
and facilities systems, such as embedded technologies, process controls and
programmable logic devices. Substantially all 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.
A Y2K project is defined as an individual Y2K compliance item or logical
collection of such items requiring compliance attention of any kind. At
September 30, 1999, approximately 97 percent of the company's Y2K projects,
including all of the projects of nine divisions, had been substantially
completed. The remaining 3 percent of the company's Y2K projects are scheduled
to be completed before the end of 1999. As of September 30, 1999, the operations
reported that substantially all of their planned renovation projects had been
completed. The company expects to complete any remaining projects by November
30, 1999. Testing and redeployment of renovated systems currently constitutes
the bulk of the company's current compliance efforts.
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 September 30, 1999, the company had spent
approximately $20 million on Y2K compliance, of which approximately half was
PAGE 19
expensed and half was capitalized. The company expects to incur approximately $1
million to $2 million in expense in the last quarter of 1999, and to capitalize
up to $1 million of additional costs. FMC has not completed its estimates
related to post-1999 spending, but does not expect such costs to be significant.
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. All sites have prepared a detailed
contingency plan which the company will continue to evaluate and test for the
remainder of 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 developed an incident reporting and follow up system, the
purpose of which is to monitor company site conditions around the world at time
of entry to the year 2000. To date, when tested, the system has performed
consistent with its intended application.
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.
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
PAGE 20
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 21
RESULTS OF OPERATIONS
---------------------
Industry segment financial data is included in Note 12 to the company's
September 30, 1999 consolidated financial statements.
Third Quarter of 1999 Compared with Third Quarter of 1998
---------------------------------------------------------
General
- -------
Sales from continuing operations of $1.0 billion were 7 percent lower than last
year's third quarter sales of $1.1 billion. Operating profit from continuing
operations (net of minority interests), excluding certain one-time gains and
losses, decreased to $99 million from $117 million in last year's third quarter
as lower sales and margins for agricultural products, the continuing impact of
lower oil prices on some energy systems businesses and lower airport products
results more than offset improved industrial chemical earnings, increased FMC
FoodTech profits and reduced costs across all businesses. Income from continuing
operations increased to $64 million, or $1.98 per share on a diluted basis, in
the third quarter of 1999 from $56 million, or $1.60 per share, in the third
quarter of 1998.
During the third quarter of 1999, the company recorded one-time gains of $55.5
million ($47.6 million after tax, or $1.47 per share) from the sales of its
process additives and bioproducts operations. In addition, the company recorded
asset impairments of $29.1 million ($17.8 million after tax, or $0.55 per share)
and restructuring and other charges of $14.7 million ($9.0 million after tax, or
$0.28 per share) during the third quarter of 1999.
Average shares outstanding used in the quarters' diluted earnings per share
calculations decreased to 32.3 million in 1999 from 34.7 million in the prior
year's quarter due to the company's ongoing share repurchase program.
Gains on Sales of Process Additives and BioProducts Businesses
- --------------------------------------------------------------
On July 31, 1999, FMC completed the sale of its process additives business to
Great Lakes Chemical Corporation for $162 million in cash, resulting in a gain
of $35.4 million on both a pre-tax and after-tax basis ($1.09 per share). The
process additives business was included in the Specialty Chemicals segment and
had 1998 sales of $166 million from its operations in Manchester, England and
Nitro, West Virginia.
On July 9, 1999, the company completed the sale of its bioproducts business to
Cambrex Corporation for $38 million in cash, resulting in a pre-tax gain of
$20.1 million ($12.2 million after tax, or $0.38 per share). The bioproducts
business was included in the Specialty Chemicals segment and had 1998 sales of
approximately $25 million from its operations in Rockland, Maine and Copenhagen,
Denmark.
Asset Impairments and Restructuring and Other Charges
- -----------------------------------------------------
In the third quarter of 1999, FMC recorded asset impairments of $29.1 million
($17.8 million after tax, or $0.55 per share on a diluted basis), and
restructuring and other one-time charges of $14.7 million ($9.0 million after
tax, or $0.28 per share).
Asset impairments of $20.7 million were required to write off the remaining net
book values of two U.S. lithium facilities. Both facilities were constructed to
run pilot and development quantities for new lithium-based products. During the
third quarter of 1999, management determined that it would not be feasible to
use the facilities as currently configured.
PAGE 22
Additionally, an impairment charge of $8.4 million was required to write off the
remaining net book value of a small caustic soda facility in Green River,
Wyoming. Estimated future cash flows related to this facility indicated that an
impairment of the full value had occurred.
Restructuring and other one-time charges of $14.7 million resulted primarily
from strategic decisions to divest or restructure a number of businesses and
support departments, including certain food machinery, agricultural products,
and energy systems operations and certain corporate and shared service support
departments. Of the total charge, $2.9 million related to actions, including
headcount reductions, required to achieve planned synergies from recently-
acquired businesses in Specialty Chemicals and Energy Systems. All amounts
accrued under these programs are expected to be utilized within one year.
Energy Systems
- --------------
Third quarter 1999 energy systems sales of $251 million decreased from $330
million in the third quarter of 1998. Earnings of $23 million decreased from $27
million in the prior-year quarter. Reduced sales of land wellheads and fluid
control equipment due to continuing uncertainty about future oil prices, as well
as timing of deliveries of subsea systems, were partly offset in earnings by
continued cost reductions.
Petroleum equipment and systems sales decreased significantly in the third
quarter of 1999, primarily due to lower sales of surface wellhead equipment,
partly offset by the addition of CBV Brazil which was acquired in August 1998.
Earnings improved, however, largely due to cost reductions. 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.
Reduced sales and earnings of energy transportation and measurement equipment
continue to reflect customer uncertainty concerning oil prices. The impact of
lower sales was partially offset by continuing cost reductions. Although oil
price uncertainty continues to affect order levels, customer inquiries began to
increase in the third quarter of 1999.
Food and Transportation Systems
- -------------------------------
Food and Transportation Systems 1999 sales of $220 million were down slightly
from $224 million in last year's quarter. Earnings of $18 million were down $4
million from the 1998 third 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 and earnings improved slightly from the third quarter
of 1998. Sales benefited from the timing of a large citrus equipment order as
well as the acquisition of a small distributor. Cost reductions and increased
margins associated with higher sales of citrus equipment and of freezing systems
in Europe more than offset continued softness in most major markets for material
handling equipment.
Third quarter 1999 sales and earnings for airport products and systems were
significantly lower than record 1998 levels, reflecting 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, partly offset by stronger
PAGE 23
European sales of transporters and other systems. The company's management
continues to address the decline in airport expenditures from the
record levels of the previous year.
Agricultural Products
- ---------------------
Agricultural Products sales for the 1999 third quarter of $177 million were down
slightly when compared with $178 million in the prior year quarter. However,
earnings of $10 million for the 1999 third quarter reflected a $19 million
decrease from the 1998 quarter. Significantly lower pest pressure in North
America resulted in reduced sales of pyrethroids to higher-margin rescue
markets, including corn in Texas and cotton in the southern and western United
States. Also, sales of other products such as clomazone were lower as a
result of smaller sugar cane plantings and competitive factors. Higher
sulfentrazone and carbamate sales partly offset these negative margin impacts.
In addition, expenses related to economic impacts in Brazil, marketing programs
and inventory valuations, some of which were timing issues, added to the
decline.
Specialty Chemicals
- -------------------
Specialty Chemicals sales were $139 million in the third quarter of 1999, down
$8 million from the 1998 period, while earnings (excluding gains on sales of
businesses) of $17 million in 1999 reflected a $2 million increase when compared
with the prior year period. Increased sales for both FMC BioPolymer (the
combined food ingredients and pharmaceutical business) and lithium were more
than offset by a $33 million reduction in sales arising from the July 1999
divestitures of the process additives and bioproducts operations. Higher
earnings in 1999 reflect increased sales volumes as well as the acquisition of
Pronova during the quarter. Norway-based Pronova is a major producer of
alginates, which are made from cold-water seaweeds. Alginates are used in both
food ingredient and pharmaceutical applications.
Industrial Chemicals
- --------------------
Industrial Chemicals third quarter 1999 sales of $252 million were up 5 percent
from last year's quarter, primarily as a result of increased soda ash sales
volume, including incremental sales of Tg Soda Ash, Inc. ("TgSA"), partially
offset by a reduction in the average price for soda ash. Earnings (net of
minority interest) of $30 million were up from $24 million in the prior year
period on higher soda ash volumes, higher hydrogen peroxide earnings and
continued cost reductions.
As more fully discussed in Note 9 to the September 30, 1999 consolidated
financial statements, on June 30, 1999, FMC acquired TgSA 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. Management believes the TgSA acquisition
will continue to favorably affect 1999 sales and earnings. Additionally, during
the third quarter of 1999, FMC announced a $4-per-ton price increase in soda
ash. Domestic pricing for the year 2000 will not be finalized until contract
negotiations are completed by the end of this year.
Phosphorus sales were down slightly in the third quarter of 1999 compared with
the 1998 quarter, despite increased sales of elemental phosphorus. Earnings were
down
PAGE 24
primarily due to higher operating expenses. As more fully discussed in Note 9 to
the September 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.
Hydrogen peroxide sales were up slightly compared to the prior year, and
earnings were higher in the third quarter, reflecting increased prices and cost
control efforts. Management is optimistic that modest market growth and price
increases will continue into 2000.
Spain-based FMC Foret's sales decreased slightly from the third quarter of 1998,
but 1999 earnings were up due primarily to continuing cost reductions.
Corporate
- ---------
Corporate expenses of $20 million in the third quarter of 1999 were up slightly
from $19 million in the third quarter of 1998, reflecting timing of expenses.
Interest expense
- ----------------
Net interest expense of $27 million in the second quarter of 1999 was down from
$29 million in the same quarter last year.
Effective tax rates
- -------------------
The effective tax rate applicable to income from continuing operations
(excluding 1999 one-time gains and losses) was 26 percent for both the quarter
ended September 30, 1999 and the quarter ended September 30, 1998. Including
one-time items, the 1999 effective rate was 8 percent, reflecting lower foreign
rates on portions of the gains on sale of two businesses and the non-taxable
gain on goodwill from the sale of one of those businesses, and the benefit of
higher U.S. rates associated with substantially all impairment and restructuring
charges.
Order backlog
- -------------
FMC's backlog of unfilled orders of $618 million for Energy Systems was down
$260 million from the year-end backlog in 1998 and down $435 million from a
backlog of $1,053 million at September 30, 1998. The September 30, 1998 amount
included 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, Statoil and Elf Aquitaine. Food and Transportation Systems backlog
of $250 million decreased $16 million from the end of 1998 and $34 million from
backlog at September 30, 1998. Backlogs are not reported for Agricultural
Products, Specialty Chemicals or Industrial Chemicals due to the nature of these
businesses.
Nine Months of 1999 Compared with Nine Months of 1998
-----------------------------------------------------
Sales of $3.1 billion in the first three quarters of 1999 were down from $3.3
billion in the first nine months of 1998. Segment operating profits (net of
minority interest) before one-time gains and losses decreased to $333 million in
the 1999 nine-month period from $342 million in 1998 as lower sales in all
segments and unfavorable agricultural product mix more than offset continued
cost reductions across all businesses and recent industrial chemical price
recoveries. One-time gains and losses are described in the third quarter
comparison section.
PAGE 25
Corporate expenses of $59 million decreased $3 million from the prior year
reflecting ongoing cost control efforts. Net interest expense of $59 million was
flat compared to 1998.
Income from continuing operations before the cumulative effect of a change in
accounting principle increased to $163 million, or $4.99 per share on a diluted
basis, in the nine months of 1999 from $150 million, or $4.24 per share 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 1999.
Through September 30, 1999, net income was $181 million, or $5.54 per share on a
diluted basis, compared to $114 million or $3.22 per share on a diluted basis in
the corresponding 1998 period. As discussed in Note 3 to the company's September
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 the cumulative effect of a change in
accounting principle.
Energy Systems sales of $835 million in the first nine months of 1999 decreased
from $936 million in 1998, but earnings of $64 million in 1999 remained level
with 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 continued to be affected by uncertainty
surrounding oil prices.
Food and Transportation Systems sales decreased to $619 million in 1999 from
$644 million in 1998, and earnings of $48 million in 1999 decreased $2 million
from 1998 as higher earnings from Frigoscandia, Food Processing Systems and
citrus equipment did not fully offset lower sales and earnings of airport
products and systems.
Agricultural Products sales decreased by $33 million from 1998 to $499 million
in 1999, and earnings in 1999 decreased to $61 million in 1999 from $79 million
in 1998 as third-quarter losses from low pest infestation levels outpaced early-
year gains and the continuing impact of 1998 and 1999 cost reductions.
Specialty Chemicals sales of $441 million in 1999 decreased from $458 million in
1998, earnings of $57 million in 1999 decreased $3 million from $60 million in
1998, as the acquisition of Pronova in June 1999 and a slight recovery in
lithium only partially offset the impact of the sales of FMC's process additives
and bioproducts operations.
Industrial Chemical sales decreased to $703 million in the first three quarters
of 1999 from $717 million in 1998, but earnings (net of minority interest)
increased to $102 million in 1999 from $88 million in 1998 as higher hydrogen
peroxide earnings, the impact of the TgSA acquisition in 1999 and continued cost
reductions more than offset lower soda ash prices.
The effective tax rate applicable to income from continuing operations (before
1999 one-time gains and losses) for both the nine months ended September 30,
1999 and the nine months ended September 30, 1998 was 26 percent. Including one-
time items, the 1999 effective rate was 20 percent, reflecting lower foreign
rates on
PAGE 26
portions of the gains on sale of two businesses and the non-taxable gain on
goodwill from the sale of one of those businesses, and the benefit of higher
U.S. rates associated with substantially all impairment and restructuring
charges.
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.
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.
See Note 11 to the company's September 30, 1999 consolidated financial
statements for a discussion of the lawsuits.
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 Continuing Operations.
PAGE 27
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 September 30, 1999 is included on
page 28.
PAGE 28
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 September 30, 1999, and the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1999 and 1998 and the consolidated statements of cash flows
for the nine-month periods ended September 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
October 13, 1999
PAGE 29
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. No
provision for this matter has been made in the company's consolidated financial
statements.
PAGE 30
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
-------------------
Form 8-K dated September 7, 1999 announcing the Registrant's third quarter
and full year 1999 earnings expectations, one-time gains and losses, and
authorization by the Registrant's board of directors to repurchase additional
common stock.
PAGE 31
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: November 15, 1999 /s/ 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