Business Context and Reporting Period
Company: Air Products & Chemicals, Inc.
Filing Type: Form 8-K (Current Report)
Reporting Period: Three months ended December 31, 1999 (First Quarter 2000)
Date of Report: January 21, 2000
The registrant reported financial results for the first quarter of fiscal year 2000. The period was significantly impacted by accounting charges related to currency hedging for the proposed acquisition of BOC (British Oxygen Company) and a planned global cost reduction initiative from the prior year.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Sales | $1,264.4 million | $1,274.6 million |
| Operating Income | $196.2 million | $189.0 million |
| Net Income (As Reported) | $50.6 million | $126.4 million |
| Net Income (Excl. Special Items) | $121.2 million | $117.9 million |
| Diluted EPS (As Reported) | $0.23 | $0.59 |
| Diluted EPS (Excl. Special Items) | $0.56 | $0.55 |
| Cash from Operating Activities | $248.8 million | $273.1 million |
| Capital Expenditures | $404.8 million | $245.4 million |
| Short-term Borrowings | $763.7 million | $252.7 million |
| Long-term Debt | $2,010.3 million | $2,123.2 million |
| Cash and Cash Items | $79.5 million | $57.8 million |
Material Changes vs. Prior Period
- Revenue: Sales decreased 1% to $1.26 billion, primarily due to a significant decline in the Equipment segment.
- Profitability: Reported Net Income dropped 60% to $50.6 million due to a $70.6 million after-tax charge related to the BOC acquisition. Excluding special items, operating income increased 3% to $121.2 million.
- Segment Performance:
- Gases: Sales up 4%; Operating income up 11% to $153.3 million. Margins improved to 19.6% driven by electronics and Asia.
- Chemicals: Sales up 8%; Operating income down 2% to $51.6 million due to raw material costs and plant turn costs.
- Equipment: Sales down 58% to $50.6 million; Operating income fell $24 million to $1.2 million due to reduced business activity.
- Liquidity and Debt: Short-term borrowings increased significantly to $763.7 million (from $252.7 million) to fund operations and the BOC transaction. Cash provided by operating activities decreased slightly to $248.8 million.
Guidance, Outlook, and Risks
- Outlook: Management increased confidence in achieving a projected earnings growth of approximately 10% for the year (before BOC impact), citing strong volume momentum and operating leverage.
- BOC Acquisition: The company is pursuing a joint acquisition of BOC with Air Liquide. The transaction is expected to be modestly accretive to earnings before goodwill amortization but approximately 10% dilutive after amortization. Regulatory clearances are expected in Q1 2000.
- Strategic Actions: Goldman Sachs & Co. has been engaged to assess strategic alternatives for the polyvinyl alcohol business. Price increases have been announced for select chemical products to offset raw material costs.
- Risks: Key risks include regulatory delays for the BOC deal, fluctuations in foreign currencies and interest rates, raw material pricing (specifically electricity), and global economic conditions.
Investor Verification Checklist
- BOC Transaction Status: Verify the timeline for regulatory approval and the final structure of the joint venture with Air Liquide.
- Special Items Impact: Confirm the non-recurring nature of the $113.2 million pre-tax charge related to currency hedges and pre-acquisition expenses.
- Equipment Segment Recovery: Assess the sustainability of the Equipment segment's decline and the timeline for recovery.
- Debt Levels: Monitor the increase in short-term borrowings and the company's ability to refinance or convert this to long-term debt.
- Chemical Margins: Track the effectiveness of announced price increases in offsetting rising raw material costs in the polymers division.