PHILADELPHIA – An Oklahoma-based firefighter pension fund has filed a class action lawsuit against agricultural sciences firm FMC Corporation, charging it with violating the Securities and Exchange Act by misrepresenting the value of its stock over a 20-month-long period and causing substantial losses for its shareholders.
Oklahoma Firefighters Pension and Retirement System (individually and on behalf of all others similarly-situated) of filed suit in the U.S. District Court for the Eastern District of Pennsylvania on Dec. 7 versus FMC Corporation, its President and CEO Mark A. Douglas and its Treasurer Andrew D. Sandifer, all of Philadelphia.
“FMC is an agricultural sciences company based in Philadelphia, Pennsylvania. Two of its key products are purportedly patented molecules used in insecticides named Rynaxypyr and Cyazypyr. FMC sells its insecticides (and the remainder of its products) directly through its own sales organization as well as through independent distributors and other partners. Throughout the class period, the company stated that it achieved ‘record results’ driven by sustainable, recurring factors such as the introduction of ‘new products and continued market expansion of Rynaxypyr and Cyazypyr.’ FMC also assured investors that demand for its products was ‘very, very strong…it’s very strong all over the world.’ FMC also consistently represented that its business was insulated from competition given a suite of ‘process patents’ that covered Rynaxypyr and Cyazypyr, providing further assurance to investors regarding the strength and sustainability of demand for the Company’s products,” the suit says.
When asked about the company’s “channel inventories” (i.e., the amount of product sitting with distributors that had not yet been sold) and whether FMC’s demand was driven by transitory factors like customer “pre-buying,” CEO Douglas dismissed the concerns, stating that “we are not concerned about channel inventories…we’re not seeing anything that we would say is concerning at all” and that once FMC began to acknowledge a buildup of inventory, Douglas said “the buildup was limited to ‘pockets’ in certain regions and attributed the buildup to routine business events such as being ‘in the planting season’ or ‘a drought.”
“CFO Sandifer stated that ‘there’s not a single legal competitor in Rynaxypyr in the world today’ and FMC repeatedly referenced significant legal victories with respect to its patent portfolio that it achieved in crucial markets like India and China. In truth, however, and unbeknownst to investors, demand for FMC’s products was artificially boosted by customer double-ordering after the dissipation of pandemic disruptions, a transitory occurrence that was unlikely to recur. FMC’s channel inventory was full of product due to this pull-forward of orders rather than channel inventory being, as Douglas described it, at ‘normal’ levels or due to cyclical business factors such as seasonality. What’s more, starting in or around September 2022, FMC had lost critical patent litigation in India and China which led to increased competition from generic producers, further exacerbating the company’s inventory buildup.”
The suit adds FMC “knew or recklessly disregarded these facts at the time given the company’s claimed oversight of its patent portfolio and in-depth supervision of its supply chain, where it supposedly had keen visibility into demand, inventory levels, and how customers used the products.”
“On July 10, 2023, FMC announced that it had experienced ‘abrupt and unprecedented reductions in channel inventory by customers in North America, Latin America and EMEA’ leading to ‘unprecedented volume declines’ across nearly all its business. As a result, FMC slashed its Q2 2023 adjusted earnings before interest, taxes, depreciation and amortization forecast by about 50% to a range of $185-$190 million (after raising full year EBITDA outlook just two months earlier). In addition, FMC announced that it imposed ‘significant cost mitigation actions,’ cutting operating expenses in the second half of the year by $60-$70 million to conserve costs,” the suit states.
“Wall Street analysts questioned whether FMC overstated demand in prior years as well as the company’s justification for the destocking. Morgan Stanley analyst Vincent Andrews wrote on July 10, 2023, that ‘key investor questions are likely to include…why is the destocking taking place given the company is calling out flat underlying grower consumption of FMC’s products? Does this mean that volume sales in prior years overstated underlying demand and therefore this is actually an earnings reset.’ Echoing Morgan Stanley’s concerns, Bank of America Global Research analyst Stephen V. Byrne also questioned the claimed strength and nature of FMC’s demand, writing in a July 11, 2023 report that the ‘most concerning point, in our view, is volumes last year were largely buoyed by customer double-ordering due to the supply chain constraints. This means ‘normalized’ CPC volumes could be well-below last year’s level.”
The news of the abrupt and unprecedented reductions in inventory caused the price of FMC common stock to decline $11.62 per share, or over 11%, from $104.25 per share on July 7, 2023 to $92.63 per share on July 10, 2023, according to the lawsuit.
“Roughly two months later, on Sept. 7, 2023, an activist investment firm named Blue Orca Capital issued a report claiming that FMC ‘concealed from investors the deterioration of its core business, resulting in an inescapable cycle of falling revenues, plummeting cash flows, and declining profits.’ Blue Orca further described how ‘FMC has concealed from investors that it has suffered a recent string of stunning legal defeats around the globe that have enabled competitors to now launch competing generics at prices up to 80% below the price of FMC’s flagship insecticide product. In response to this news, the price of FMC common stock declined $6.09 per share, or about 7%, from $82.19 per share on Sept. 6, 2023 to $76.10 per share on Sept. 7, 2023,” the suit says.
“Then, on Oct. 23, 2023, FMC cut its revenue and earnings outlook for Q3 and FY 2023 due to continued destocking throughout its entire business, with the reductions being particularly severe in Latin America. FMC also acknowledged that the ‘significant global destocking impacts are expected to persist into next year’ and are ‘not expected to improve in the near-term.’ This news caused the price of FMC common stock to decline $8.83 per share, roughly 13%, from $66.95 per share on Oct. 20, 2023, to $58.12 per share on Oct. 23, 2023. Finally, on Oct. 30, 2023, the company reported earnings for Q3 2023 and revealed that revenue for the quarter declined 29% as compared to the prior year, driven primarily by lower volumes from channel destocking. On this news, the price of the company’s common stock declined $4.76 per share, or over 8%, from $57.96 per share on Oct. 30, 2023 to $53.20 per share on Oct. 31, 2023.”
For violation of Section 10(b) of the Exchange Act and Rule 10(b)(5) against all defendants and violation of Section 20(a) of the Exchange Act against the individual defendants, the plaintiff is seeking, jointly and severally, compensatory damages in favor of the plaintiff and other class members against all defendants, for all damages sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; reasonable costs and expenses incurred in this action, including attorneys’ fees and expert fees, and such equitable/injunctive or other further relief as the Court may deem just and proper.
The plaintiff is represented by John S. Summers and Michael J. Masciandaro of Hangley Aronchick Segal Pudlin & Schiller in Philadelphia, plus Javier Bleichmar and Nancy A. Kulesa of Bleichmar Fonti & Auld, in New York, N.Y. and White Plains, N.Y.
The defendants have not yet obtained legal counsel.
U.S. District Court for the Eastern District of Pennsylvania case 2:23-cv-04842
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com