Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 31, 1999 for Air Products & Chemicals, Inc. The Company operates in three primary segments: Industrial Gases, Equipment, and Chemicals. The reporting period is characterized by the ongoing preparation for the joint acquisition of BOC (British Oxygen Company) with Air Liquide, which significantly impacted financial results through hedging charges.
Key Financial Metrics
| Metric | Q1 2000 (Dec 31, 1999) | Q1 1999 (Dec 31, 1998) |
|---|---|---|
| Sales | $1,264.4 million | $1,274.6 million |
| Operating Income | $196.2 million | $189.0 million |
| Net Income | $50.6 million | $126.4 million |
| Diluted EPS | $0.23 | $0.59 |
| Cash from Operations | $248.8 million | $273.1 million |
| Total Debt | $3,095.0 million | $2,842.2 million (Sep 30, 1999) |
| Cash and Cash Items | $79.5 million | $61.6 million (Sep 30, 1999) |
Segment Performance:
- Gases: Sales $780.6 million; Operating Income $153.3 million.
- Equipment: Sales $50.6 million; Operating Income $1.2 million.
- Chemicals: Sales $433.2 million; Operating Income $51.6 million.
Material Changes vs. Prior Period
Revenue and Profit: Consolidated sales decreased slightly (less than 1%) year-over-year. However, operating income increased by 4% to $196.2 million. Net income dropped significantly to $50.6 million from $126.4 million in the prior year.
Primary Drivers of Change:
- BOC Acquisition Charges: The current quarter included a pre-tax charge of $113.2 million ($70.6 million after-tax) related to the BOC acquisition. This consisted primarily of a $109.3 million loss on currency hedges and $3.9 million in pre-acquisition expenses.
- Prior Year Special Items: The prior year quarter included a $31.2 million gain on the formation of a polymer venture and a $20.3 million charge for a global cost reduction plan.
- Excluding Special Items: Adjusted net income was $121.2 million, a 3% increase over the prior year's adjusted net income of $117.9 million. Adjusted diluted EPS was $0.56, up 2% from $0.55.
Segment Dynamics:
- Gases: Sales grew 4% (7% excluding currency), driven by volume growth in electronics and chemical process markets. Operating income rose 11% excluding prior year cost reduction charges.
- Equipment: Sales fell 58% to $50.6 million due to lower project activity and delays in customer capital spending. Backlog decreased to $144 million.
- Chemicals: Sales increased 8% on broad-based volume gains, but operating income declined slightly due to raw material cost increases and price reductions.
Guidance, Outlook, and Risks
BOC Transaction: The joint acquisition of BOC by Air Products and Air Liquide is expected to close in mid-fiscal 2000 at a cost of approximately $6 billion to Air Products. The transaction is expected to be modestly accretive to earnings per share before goodwill amortization but approximately 10% dilutive after amortization. The Company has hedged 100% of the currency exposure related to the share purchase.
Capital Resources:
- Capital expenditures for the quarter were $404.8 million, including $162.7 million for acquisitions (notably the remaining 51.1% of Korea Industrial Gases Ltd.).
- Total debt increased to $3,095.0 million. The debt-to-capitalization ratio rose to 51%.
- The Company maintains $900.0 million in revolving credit commitments and has executed a specific facility to fund the BOC acquisition.
Risks and Contingencies:
- Regulatory Approval: The BOC transaction is subject to regulatory clearances expected in the first quarter of calendar year 2000.
- Market Risks: Fluctuations in interest rates, foreign currencies, and raw material prices (e.g., natural gas, electricity) impact margins.
- Strategic Review: The Company has engaged Goldman, Sachs & Co. to assess strategic alternatives for its Polyvinyl Alcohol (PVOH) business, which generated approximately $200 million in sales in fiscal 1999.
Investor Verification Checklist
- BOC Closing Status: Verify the timeline and regulatory approval status of the BOC acquisition, as this is the primary driver of current debt levels and future earnings dilution.
- Adjusted Earnings: Confirm the Company's definition of "adjusted" earnings, as reported net income is heavily distorted by non-cash hedging losses.
- Equipment Backlog: Monitor the Equipment segment's backlog ($144 million) and order intake, as this segment is currently underperforming due to delayed customer capital spending.
- Debt Financing: Review the terms of the permanent financing for the BOC acquisition, as the Company currently relies on commercial paper and bridge financing.
- PVOH Strategy: Watch for announcements regarding the strategic alternatives for the PVOH business, which could involve divestiture or restructuring.