APD

Business Context and Reporting Period

Company: Air Products & Chemicals, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001 (Third Quarter of Fiscal 2001)
Business Overview: The company operates in three primary segments: Gases, Equipment, and Chemicals. The report covers the three and nine months ended June 30, 2001, comparing results to the same periods in 2000.

Key Financial Metrics

Segment Performance (9 Months 2001):

• Gases: Sales $3,019.3M; Operating Income $523.4M.
• Equipment: Sales $177.9M; Operating Income $7.3M.
• Chemicals: Sales $1,158.3M; Operating Income $95.2M.

Material Changes vs. Prior Period

Revenue and Profitability:

• Quarterly Sales: Increased 1% ($9.5M) year-over-year.
• Quarterly Operating Income: Increased 16% ($29.0M) year-over-year.
• Net Income Turnaround: The company reported a net income of $132.3M for the quarter, compared to a net loss of $192.5M in the prior year quarter. This reversal is primarily due to the absence of a $482.5M pre-tax charge related to the failed BOC transaction in the prior year.
• Year-to-Date Sales: Increased 8% ($337.5M) compared to the prior nine months.

Segment Dynamics:

• Gases: Sales grew 10% quarterly, driven by natural gas cost pass-throughs and higher HYCO shipments, though electronics demand slowed in the quarter.
• Chemicals: Sales declined 16% quarterly due to volume drops from economic slowdowns and customer outages, excluding the impact of a divested business.
• Equipment: Sales declined 12% quarterly due to unfavorable product mix, though backlog increased to $132M.

Costs and Expenses:

• Restructuring: The current period included a $30.9M pre-tax charge for a global cost reduction plan (311 positions). The prior year included a $46.7M charge for a similar plan.
• Interest Expense: Decreased 8% quarterly to $48.7M due to lower average debt.

Guidance, Outlook, and Risks

Management Commentary:

• Capital Expenditures: Expected to be approximately $800M for fiscal 2001, funded by cash from operations. YTD spending was $538.5M.
• Share Repurchases:
  The company reactivated its share repurchase program in January 2001, purchasing $75M of shares YTD. It expects to purchase approximately $100M total in fiscal 2001.
• Divestitures: Agreements are in place to sell power generation facilities in Pennsylvania and Florida, expected to close by September 30, 2001.

Risks and Contingencies:

• Market Conditions: Sensitivity to overall economic conditions, demand for industrial gases, and competitive factors.
• Input Costs: Risk regarding the ability to recover increased natural gas and raw material costs from customers.
• Regulatory and Utility: Changes in government regulations and availability of utilities (specifically noted electrical power in California).
• Accounting Changes: The company is reviewing the impact of new FASB standards (SFAS No. 141 and 142) regarding business combinations and goodwill amortization.

Investor Verification Checklist

• BOC Transaction Impact: Verify the extent to which the prior year's loss was driven by the $730.4M pre-tax charge related to the failed BOC merger to accurately assess organic growth.
• Electronics Sector Exposure: Confirm the severity of the slowdown in the electronics manufacturing sector and its impact on the Gases segment's future volumes.
• Chemicals Volume Recovery: Assess the timeline for recovery in the Chemicals segment, which faced a 12% volume decline excluding divestitures.
• Restructuring Completion: Monitor the completion of the global cost reduction plan and the anticipated additional $11M charge for the Carburos initiative in Spain.
• Debt Levels: Review the debt-to-capitalization ratio (48% at June 30, 2001) and the company's ability to service debt amidst fluctuating interest rates.