APD

Business Context and Reporting Period

Company: Air Products & Chemicals, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: April 22, 1999
Reporting Period: Second quarter ended March 31, 1999 (Three and Six Months Ended March 31, 1999).

The registrant reported financial results for the second quarter of fiscal 1999, highlighting a challenging global manufacturing environment with soft conditions in electronics and metals markets. Management emphasized productivity improvements and cost containment initiatives to offset declines in the equipment business.

Key Financial Metrics

Adjusted Metrics (Excluding Special Items):
For Q2 1999, adjusted net income was $113.3 million ($0.53 diluted EPS), excluding a $6.4 million after-tax charge for facility closures.
For YTD 1999, adjusted net income was $231.3 million ($1.07 diluted EPS), excluding gains from the Air Products Polymers venture and charges for cost reduction plans and facility closures.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 4% year-over-year in Q2 1999 ($1.25 billion vs. $1.21 billion). Industrial gas sales rose 2%, driven by growth outside North America. Chemicals revenues increased 10% due to the consolidation of Air Products Polymers and other acquisitions.
• Profitability Decline: Net income decreased 11% in Q2 1999 compared to the prior year. Operating income declined 12% to $182.7 million. This was driven by a significant decline in the Equipment and Services segment and soft market conditions in electronics and metals.
• Segment Performance:
  • Industrial Gases: Operating income declined 1% to $142.6 million, though operating margin improved to 19.6% due to cost controls.
  • Chemicals: Operating income declined 5% to $44.2 million, impacted by Asian market pressures and capacity expansion costs.
  • Equipment & Services: Operating income dropped significantly to $8.2 million from $17.4 million in the prior year.
• Balance Sheet: Total assets increased to $7.79 billion from $7.16 billion. Short-term borrowings increased to $288.3 million from $88.5 million.

Guidance, Outlook, and Risks

Management Commentary: Chairman H. A. Wagner noted that while the first half of the fiscal year faced a challenging global manufacturing environment, there are signs of recovery in electronics, metals, and chemicals processing. Management expects "modest earnings growth in 1999" as key markets recover.

Cost Reduction Plan: On December 21, 1998, the company committed to a global cost reduction plan involving the reduction of 206 employees. Total charges of $20.3 million ($12.9 million after-tax) were recognized, with completion expected by December 31, 1999.

Risks and Contingencies:

• Impact of worldwide economic growth and customer demand.
• Fluctuations in interest rates and foreign currencies.
• Pricing of raw materials, specifically electricity.
• Success of cost control programs and competitive pricing pressures.
• Regulatory changes in tax and other legislation.

Investor Verification Checklist

• Special Items Impact: Verify the exclusion of the $6.4 million facility closure charge and the $21.3 million gain from the Air Products Polymers venture when assessing core operating performance.
• Equipment Segment Volatility: Confirm the sustainability of the Equipment and Services segment, which saw operating income drop by over 50% year-over-year.
• Cost Reduction Execution: Monitor the execution of the global cost reduction plan and its impact on future operating margins.
• Market Recovery: Assess the validity of management's expectation of recovery in the electronics and metals sectors to support the "modest earnings growth" outlook.
• Liquidity Position: Review the increase in short-term borrowings ($288.3 million) against the strong operating cash flow ($549.7 million YTD) to understand working capital management.