APD

Air Products & Chemicals, Inc. - 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Air Products & Chemicals, Inc. for the period ended March 31, 1999. The Company operates in three primary segments: Industrial Gases, Chemicals, and Equipment/Services. The financial statements are unaudited and reflect normal recurring adjustments, though certain inventory valuations (LIFO) are subject to final annual determination.

Key Financial Metrics

Note: Total debt includes short-term borrowings ($288.3M), current portion of long-term debt ($201.7M), and long-term debt ($2,231.7M).

Material Changes vs. Prior Period

• Sales Growth: Consolidated sales increased 4% in the quarter and 3% for the six-month period compared to the prior year, driven by growth in Chemicals and Industrial Gases outside North America.
• Profit Decline: Operating income decreased 11% in the quarter ($23.7M decline) and 11% for the six months ($47.7M decline). This was primarily due to slowing activity in the Equipment/Services segment and softer end-market conditions in Industrial Gases and Chemicals.
• Net Income: Net income fell 11% in the quarter and 17% for the six months. Excluding special items, adjusted net income for the six months declined only 3% ($7.0M) compared to the prior year.
• Segment Performance:
  • Industrial Gases: Sales up 2%; Operating income slightly down due to lower volumes in steel and electronics markets.
  • Chemicals: Sales up 10%; Operating income down 23% (excluding special items, down 5%) due to new facility costs and Asian market impacts.
  • Equipment/Services: Sales down 5%; Operating income down 53% due to significantly less project activity and a declining backlog ($134M vs $302M at year-end).

Guidance, Outlook, and Unusual Items

• Special Items (Six Months 1999):
  • Gain: $31.1 million pre-tax ($21.3M after-tax) gain on the formation of the Air Products Polymers venture with Wacker-Chemie GmbH.
  • Charges: $20.3 million pre-tax ($12.9M after-tax) charge for a global cost reduction plan (206 employee reductions). $10.3 million pre-tax ($6.4M after-tax) charge for Chemicals facility closure costs.
• Cost Reduction Plan: A global plan initiated in December 1998 is expected to yield annualized savings of approximately $15 million by early fiscal year 2000.
• Capital Expenditures: Expected to be approximately $1.1 billion for fiscal 1999, funded by cash from operations and financing. This includes a new dinitrotoluene (DNT) facility in Louisiana.
• Year 2000 Readiness: Over 99% of mission-critical IT infrastructure is certified. The Company believes the $40 million cost estimate is sufficient and expects no material adverse impact.
• Legal Proceedings: A Notice of Violation was received from the Kentucky Department of Environmental Protection regarding VOC emissions. The Company does not expect a material adverse effect on financial position.

Investor Verification Checklist

• Special Item Impact: Verify the sustainability of earnings by excluding the $31.1M gain on the polymer venture and the $30.6M in charges (cost reduction and facility closure) to assess core operational performance.
• Equipment Backlog: Monitor the Equipment/Services segment backlog, which dropped significantly from $302M to $134M, potentially indicating future revenue volatility.
• Debt Levels: Confirm the debt-to-equity ratio (50% at March 31, 1999) and the utilization of the $600M revolving credit facility.
• Year 2000 Costs: Track actual Year 2000 remediation costs against the $40 million estimate to ensure no budget overruns.
• Foreign Exchange: Assess the impact of foreign currency fluctuations, which contributed to both favorable and unfavorable results in equity affiliates and operating income.