Business Context and Reporting Period
Company: Air Products & Chemicals, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 1999 (Fiscal Year 1999)
Business Overview: The Company operates in three primary segments: Industrial Gases, Chemicals, and Equipment/Services. It provides industrial gases, chemicals, and equipment/services globally.
Key Financial Metrics
| Metric (Millions, except per share) | Q3 1999 | Q3 1998 | 9M 1999 | 9M 1998 |
|---|---|---|---|---|
| Sales | $1,237.8 | $1,225.3 | $3,765.7 | $3,668.7 |
| Operating Income | $167.7 | $211.5 | $539.4 | $630.9 |
| Net Income | $94.6 | $138.1 | $327.9 | $419.1 |
| Diluted EPS | $0.44 | $0.63 | $1.52 | $1.89 |
| Cash from Operations (9M) | $790.7 | $739.1 | ||
| Total Debt (June 30, 1999) | $2,834.7 (Short-term: $585.0; Long-term: $2,249.7) | |||
| Cash and Cash Items | $80.3 | |||
| Debt-to-Capital Ratio | 50% |
Material Changes vs. Prior Period
- Revenue: Consolidated sales increased 1% in Q3 and 3% for the nine months ended June 30, 1999, compared to the prior year. Growth was driven by the Chemicals segment and Industrial Gases outside North America, offset by declines in Equipment/Services and unfavorable currency effects.
- Profitability: Operating income declined 21% in Q3 and 14% for the nine months. Net income dropped 31% in Q3 and 22% for the nine months.
- Segment Performance:
- Industrial Gases: Sales flat in Q3; operating income down 5% due to softer steel and electronics markets.
- Chemicals: Sales up 6% in Q3; operating income down significantly due to customer outages, operating issues, and margin pressure.
- Equipment/Services: Sales down 9% and operating income down 89% in Q3 due to expected lower project activity.
- Special Items Impact:
- 1999 Charges: A global cost reduction plan resulted in a $13.9 million charge in Q3 ($34.2 million for nine months). A $10.3 million charge was recorded for Chemicals facility closures.
- 1999 Gains: A $31.1 million gain was recorded for the formation of the Air Products Polymers venture.
- 1998 Gains: The prior year included significant one-time gains from the sale of American Ref-Fuel ($62.6 million) and contract settlements ($28.3 million), which are not present in the current year.
Guidance, Outlook, and Risks
- Outlook: Management expects Q4 results to improve sequentially due to better market conditions and cost reduction efforts. Full-year 1999 earnings per share are expected to be 5-7% below the prior fiscal year.
- Capital Expenditures: Expected to be approximately $1.2 billion for fiscal 1999, funded by cash from operations and financing.
- Major Transaction (Subsequent Event): On July 13, 1999, Air Products and L'Air Liquide agreed to acquire The BOC Group plc for approximately $11.2 billion. The transaction is expected to be accretive to earnings per share two years post-completion.
- Year 2000 Readiness: The Company has spent approximately $30 million on Y2K readiness, with a total budget of $40 million. 97% of mission-critical systems are certified. Contingency plans are in place.
- Risks: Key risks include worldwide economic growth, raw material pricing (electricity), customer demand fluctuations, foreign currency exchange rates, and regulatory approvals for the BOC acquisition.
Investor Verification Checklist
- BOC Acquisition Status: Verify the progress of regulatory clearances for the $11.2 billion acquisition of The BOC Group plc and the associated financing arrangements.
- Cost Reduction Plan Execution: Confirm the implementation of the global cost reduction plan (348 total staff reductions) and the realization of the projected $14.0 million annualized savings.
- Chemicals Segment Recovery: Monitor the resolution of customer outages and operating issues in the Chemicals segment that impacted Q3 margins.
- Equipment Backlog: Track the sales backlog for the Equipment/Services segment, which declined to $103 million from $358 million a year prior.
- Year 2000 Contingencies: Review the finalization of contingency plans for key suppliers and process control systems scheduled for completion by September 1999.