Business Context and Reporting Period
This Form 8-K, dated July 23, 1999, reports the third-quarter and nine-month financial results for Air Products & Chemicals, Inc. The company operates in three primary segments: Industrial Gases, Chemicals, and Equipment & Services. The report covers the period ended June 30, 1999, and includes a significant subsequent event regarding a proposed acquisition.
Key Financial Metrics
| Metric | Q3 1999 | Q3 1998 | 9M 1999 | 9M 1998 |
|---|---|---|---|---|
| Sales | $1,237.8M | $1,225.3M | $3,765.7M | $3,668.7M |
| Net Income | $94.6M | $138.1M | $327.9M | $419.1M |
| Diluted EPS | $0.44 | $0.63 | $1.52 | $1.89 |
| Operating Income | $167.7M | $211.5M | $539.4M | $630.9M |
| Operating Margin (Gases) | 19.3% | N/A | N/A | N/A |
| Cash from Operations (9M) | $790.7M (vs $739.1M prior year) | |||
| Capital Expenditures (9M) | $671.8M (vs $507.2M prior year) | |||
| Total Debt (Short + Long Term) | $2,834.7M (as of June 30, 1999) |
Material Changes vs. Prior Period
- Revenue: Sales increased 1% year-over-year in Q3 to $1.2 billion. Industrial Gas sales were flat, while Chemicals sales rose 6% due to acquisitions. Equipment and Services sales declined due to reduced business activity.
- Profitability: Net income decreased significantly in Q3 ($94.6M vs $138.1M) and for the nine-month period ($327.9M vs $419.1M). This decline is largely attributed to one-time gains in the prior year (e.g., sale of American Ref-Fuel interest) and current year restructuring charges.
- Segment Performance:
- Industrial Gases: Operating profit increased 3% despite softer global markets, driven by cost reduction and improved Asian operations.
- Chemicals: Operating profit declined due to margin pressure and customer outages in polyurethane intermediates and amines businesses.
- Equipment & Services: Reported lower sales and operating income as expected, following record performance in the prior year.
- Special Items: Q3 results included a $9 million after-tax charge for global cost reduction programs. The nine-month period included a $21.3 million gain from the formation of Air Products Polymers, offset by $21.9 million in cost reduction charges and $6.4 million in facility closure costs.
Outlook, Risks, and Unusual Items
Management Commentary and Guidance
CEO Harold A. Wagner expects sequential improvement in the fourth quarter. Management noted that the company weathered an expected decline in the equipment business and customer outages. The focus remains on cost reduction and readiness for market recovery.
Subsequent Event: Acquisition of BOC
On July 13, 1999, Air Products and Air Liquide agreed to acquire BOC Group plc for approximately $11.2 billion. Air Products has secured a £3.95 billion credit agreement to fund its 50% share. Regulatory clearances are expected within six months.
Risk Factors
- Worldwide economic growth and customer demand fluctuations.
- Pricing volatility of raw materials (e.g., electricity) and products.
- Customer outages and operational problems.
- Foreign currency and interest rate fluctuations.
- Regulatory approvals for the BOC acquisition.
Investor Verification Checklist
- Adjusted Earnings: Verify the impact of the $9 million Q3 restructuring charge and the $21.3 million gain from the Air Products Polymers venture on true operating performance.
- Acquisition Financing: Confirm the status of the £3.95 billion credit facility and the timeline for regulatory approval of the BOC acquisition.
- Cost Reduction Progress: Monitor the execution of the global cost reduction program, which includes a total staffing reduction of 348 employees (206 in Q1, 142 in Q3) to be completed by June 2000.
- Chemicals Segment Recovery: Assess the resolution of customer operating problems and outages impacting the polyurethane intermediates and amines businesses.
- Cash Flow Sustainability: Review the increase in capital expenditures ($671.8M for 9M 1999) against operating cash flow to ensure liquidity remains sufficient for the proposed acquisition.