APD

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2000, for Air Products & Chemicals, Inc. The Company operates in three primary segments: Industrial Gases, Equipment, and Chemicals. The financial statements are unaudited and reflect normal recurring adjustments, though certain inventory valuations (LIFO) are subject to final annual determination.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 7% ($93.9 million) for the quarter and 3% for the six-month period compared to the prior year. Growth was driven by the Gases and Chemicals segments, partially offset by a 53% decline in the Equipment segment due to reduced project activity.
• Profitability Decline: Reported Net Income dropped significantly from $106.9 million (Q2 1999) to $47.6 million (Q2 2000). This decline is primarily attributed to a $247.9 million pre-tax charge related to the proposed acquisition of The BOC Group.
• BOC Transaction Impact: The charge includes $232.7 million in losses on currency hedges and $15.2 million in other transaction expenses. Excluding special items, adjusted net income for the quarter was $133.2 million, an 18% increase over the prior year.
• Segment Performance:
  • Gases: Sales up 15%; Operating income up 20% (excluding special items) driven by electronics demand and acquisitions in Asia.
  • Chemicals: Sales up 8%; Operating income up 15% (excluding special items) despite raw material cost pressures.
  • Equipment: Sales down 47% due to anticipated decline in project activity.

Guidance, Outlook, and Risks

• BOC Transaction Termination: On May 10, 2000, the Company announced the joint offer to acquire The BOC Group would not be extended due to the likelihood of FTC non-approval.
  • Subsequent Charges: The Company anticipates an additional after-tax charge of approximately $300 million related to deferred expenses, breakup fees, and unrecognized currency losses, bringing the total after-tax charge to ~$450 million.
  • Cash Impact: Estimated remaining cash outlay is approximately $385 million after-tax, to be funded by commercial paper.
• Cost Reduction Plans: A global cost reduction plan in the Chemicals segment initiated in Q2 2000 involves 103 staff reductions, with a total charge of $8.7 million. Annualized savings are expected to be $9.3 million.
• Capital Expenditures: Expected to be approximately $1.1 billion for fiscal year 2000, funded by cash from operations and financing activities.
• Risks: Key risks include fluctuations in foreign currency exchange rates, raw material cost pressures (particularly natural gas and diesel), and the timing of customer capital spending in the Equipment segment.

Investor Verification Checklist

• BOC Transaction Costs: Verify the final magnitude of the breakup fees and currency hedge losses post-March 31, 2000, as the filing estimates an additional $300 million after-tax charge.
• Adjusted Earnings: Confirm the Company's "adjusted" earnings figures (excluding BOC charges) to assess underlying operational performance, which showed growth in Gases and Chemicals.
• Liquidity Position: Review the Company's ability to fund the estimated $385 million cash outlay for the BOC termination via commercial paper and existing credit lines ($1.1 billion total commitments).
• Equipment Backlog: Monitor the Equipment segment's sales backlog ($155 million at March 31, 2000) for signs of recovery in project activity.
• Foreign Currency Exposure: Assess the impact of the British Pound's decline on future earnings, noting that currency losses on remaining hedges are capped but subject to market movement.