Business Context and Reporting Period
This Form 8-K filing by Air Products & Chemicals, Inc. reports financial results for the second quarter and first half of fiscal year 1998, ended March 31, 1998. The report highlights record operating income driven by volume gains and productivity initiatives, despite headwinds from foreign currency fluctuations and a difficult business environment in Asia.
Key Financial Metrics
| Metric | Q2 1998 | Q2 1997 | 6 Months 1998 | 6 Months 1997 |
|---|---|---|---|---|
| Sales | $1,208.6M | $1,153.1M | $2,443.4M | $2,274.0M |
| Operating Income | $206.1M | $184.0M | $418.7M | $353.4M |
| Net Income | $120.5M | $106.0M | $281.0M | $205.9M |
| Diluted EPS | $1.09 | $0.94 | $2.53 | $1.83 |
| Cash and Cash Items | $85.0M | $111.8M | As of March 31, 1998 | |
| Short-term Borrowings | $88.5M | $395.5M | As of March 31, 1998 | |
| Long-term Debt | $2,254.2M | $2,211.6M | As of March 31, 1998 |
Segment Performance (Q2 1998): Industrial Gases sales rose 7% (10% excluding currency); Chemicals sales rose 6%; Equipment and Services posted significantly higher profits due to favorable product mix.
Material Changes Versus Prior Period
- Earnings Growth: Q2 diluted EPS increased 16% year-over-year. First-half diluted EPS increased 17% year-over-year.
- Revenue Growth: Consolidated sales increased 5% in Q2 and 7% in the first half. Adjusted for currency, sales growth was 7% and 9% respectively.
- Operating Income: Increased 15% in Q2 and 18.5% in the first half compared to the prior year.
- Debt Reduction: Short-term borrowings decreased significantly from $395.5M to $88.5M year-over-year.
- Currency Impact: Foreign currency translation reduced Q2 EPS growth by $0.05 and first-half EPS growth by $0.22.
Guidance, Outlook, and Unusual Items
Management Commentary: Chairman H. A. Wagner stated the company is determined to deliver "premium top-line growth, double-digit earnings growth, and improved returns on total capital invested," despite concerns regarding the Asian economic impact on western economies.
Unusual Items (First Half 1998):
- Gain on Sale: Included a $35.1M after-tax gain ($0.32 per share) from the sale of a 50% interest in American Ref-Fuel Company.
- Contract Settlement: Included a $7.6M after-tax gain ($0.07 per share) from a cogeneration project contract settlement.
- Excluding Special Items: Adjusted first-half diluted EPS was $2.14.
Share Repurchase: The company acquired $50M of shares in Q2. Since the program's inception in April 1996, 6.3 million shares have been acquired for approximately $435M.
Risks: Forward-looking statements are subject to risks including worldwide economic growth, pricing fluctuations, interest rates, foreign currency volatility, and competitive pressures.
Investor Verification Checklist
- Verify the sustainability of volume gains in the Industrial Gases segment given the offsetting lower merchant selling prices in the U.S. and Europe.
- Assess the impact of the Asian business environment on Gas equity affiliate results, which were noted as "tempered."
- Confirm the timeline for the power agreement restructuring of the retained limited partnership interest in the American Ref-Fuel project.
- Monitor the progress of the $600M share repurchase program and its impact on future earnings per share.
- Review the "Other" geographic region equity affiliate income, which swung from a $4.1M gain in Q2 1997 to a $1.3M loss in Q2 1998.