APD

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 31, 1997 (First Quarter of Fiscal 1998) for Air Products & Chemicals, Inc., a Delaware corporation. The Company operates in three primary segments: Industrial Gases, Chemicals, and Equipment and Services. The financial statements are unaudited but reflect all normal recurring adjustments necessary for a fair presentation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 10% to a record $1,234.8 million, driven by strong volume growth in the U.S. and Europe and the full-quarter consolidation of Carburos Metalicos S.A.
• Profitability: Operating income rose 26% to $212.6 million. Net income increased 61% to $160.5 million.
• Special Items: The current quarter included a $62.6 million pre-tax gain ($35.1 million after-tax) from the sale of the Company's 50% interest in American Ref-Fuel Company and a $12.6 million pre-tax gain ($7.6 million after-tax) from a cogeneration project contract settlement.
• Foreign Exchange: Unfavorable currency impacts reduced net income growth by $19 million ($0.17 per share), primarily due to a stronger U.S. dollar affecting Asian equity affiliates and European operations.
• Segment Performance:
  • Industrial Gases: Sales up 18% to $727.0 million; Operating income up 24% to $147.2 million.
  • Chemicals: Sales up 10% to $380.9 million; Operating income up 54% to $68.4 million (excluding a $9.3 million impairment loss in the prior year).
  • Equipment: Sales declined to $126.9 million due to large project bookings in the prior year, though operating income increased to $12.6 million due to favorable project mix.

Guidance, Outlook, and Risks

• Capital Expenditures: Expected to be approximately $1.2 billion for Fiscal 1998, funded by cash from operations and financing activities.
• Liquidity: The Company maintains $600.0 million in revolving credit commitments with no borrowings outstanding. Unutilized shelf registrations for debt securities total $425.0 million.
• Share Repurchases: The Company repurchased 1.9 million shares for $150.0 million in the quarter. To date, 5.6 million shares have been repurchased for $385.3 million under the current program.
• Risks and Uncertainties:
  • Fluctuations in foreign currencies and interest rates.
  • Worldwide economic growth and competitive pricing pressures.
  • Asian currency impacts on exports and potential margin pressure from higher Asian imports in the Chemicals segment.
  • Cyclical nature of the Equipment and Services business, evidenced by a declining sales backlog ($277 million).
• Accounting Changes: The Company adopted SFAS No. 128 (Earnings Per Share) effective December 31, 1997, requiring restatement of prior period EPS data. It also ceased applying highly inflationary accounting to Brazil operations effective January 1, 1998.

Investor Verification Checklist

• Verify the sustainability of operating income growth excluding the $42.7 million in after-tax special gains (Ref-Fuel sale and contract settlement).
• Monitor the impact of foreign exchange rates on Asian equity affiliates and European operations, which reduced net income by $19 million in this quarter.
• Assess the trend in the Equipment segment sales backlog, which has declined from $431 million (Dec 1996) to $277 million (Dec 1997).
• Review the Company's ability to fund the projected $1.2 billion in capital expenditures for Fiscal 1998 given the current cash flow and debt levels.
• Confirm the status of the restructuring of the limited partnership interest retained in the American Ref-Fuel project.