Business Context and Reporting Period
This Form 10-Q covers Air Products & Chemicals, Inc. for the quarterly period ended June 30, 1998 (Third Quarter of Fiscal 1998) and the nine-month period ended June 30, 1998. The Company operates in three primary segments: Industrial Gases, Chemicals, and Equipment/Services. During the quarter, the Company completed a two-for-one stock split effective June 15, 1998, and finalized the restructuring of a retained interest in a former joint venture (American Ref-Fuel).
Key Financial Metrics
| Metric | Q3 1998 | Q3 1997 | 9M 1998 | 9M 1997 |
|---|---|---|---|---|
| Sales | $1,225.3M | $1,150.3M | $3,668.7M | $3,424.3M |
| Operating Income | $211.3M | $192.9M | $630.0M | $546.3M |
| Net Income | $138.1M | $116.0M | $419.1M | $321.9M |
| Diluted EPS | $0.63 | $0.52 | $1.89 | $1.43 |
| Cash from Operations (9M) | $739.1M (vs $712.7M prior year) | |||
| Total Debt | $2,622.5M (vs $2,468.1M at Sept 1997) | |||
| Cash & Cash Items | $110.8M (vs $52.5M at Sept 1997) | |||
| Debt-to-Capitalization | 50% (vs 48% at Sept 1997) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 7% in Q3 and 7% for the nine-month period, driven by volume growth in Industrial Gases (10% YTD) and Chemicals (8% YTD), partially offset by a 9% decline in Equipment/Services sales due to product mix changes.
- Profitability: Operating income rose 10% in Q3 and 15% YTD. The Chemicals segment saw a 21% increase in operating income YTD, while Industrial Gases operating income grew 11% YTD despite regional power shortages in the U.S. impacting margins.
- Unusual Items:
- Q3 1998: Included a $28.3 million pre-tax gain ($15.4M after-tax) from the restructuring of a power contract related to a retained interest in the American Ref-Fuel project.
- 9M 1998: Included a $62.6 million pre-tax gain ($35.1M after-tax) from the December 1997 divestiture of American Ref-Fuel and a $12.6 million pre-tax gain from a cogeneration project contract settlement.
- Equity Affiliates: Income from equity affiliates declined significantly ($24.9M decrease YTD) primarily due to the divestiture of American Ref-Fuel and weak Asian economic conditions.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects fiscal 1998 capital expenditures to be approximately $1.0 billion, funded by cash from operations and financing activities. YTD capital expenditures were $725.1 million.
- Stock Repurchase: The Company is executing a $600 million share repurchase program. As of June 30, 1998, $520 million had been utilized. The remainder is expected to be completed by September 30, 1998.
- Accounting Changes: The Company has not yet quantified the impact of adopting SFAS No. 133 (Accounting for Derivative Instruments), effective for fiscal years beginning after June 15, 1999.
- Risks: Key uncertainties include worldwide economic growth, raw material pricing (specifically electricity and natural gas), interest rate fluctuations, foreign currency exchange rates, and competitive pricing pressures.
Investor Verification Checklist
- Adjusted Earnings: Verify core earnings by excluding the $55.1 million in after-tax special gains (Ref-Fuel divestiture, contract settlements, and restructuring) to assess organic performance.
- Industrial Gases Margins: Monitor the impact of U.S. regional power shortages on energy costs and product availability, which reduced the Q3 operating margin to 18.7% from 20.5%.
- Debt Structure: Review the mix of fixed vs. variable rate debt and the fair value of interest rate swaps ($117.1M notional principal) to assess interest rate risk exposure.
- Stock Split Impact: Confirm that all prior period EPS and share count data have been restated on a post-split basis (2-for-1 split effective June 15, 1998).
- Asian Exposure: Assess the continued impact of the Asian economic downturn on Chemicals margins and Industrial Gases equity affiliate income.