SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 30 June 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
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(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 610-481-4911
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Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
--- --
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at 7 August 1998
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Common Stock, $1 par value 231,439,538
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
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Part I. Financial Information
Consolidated Balance Sheets -
30 June 1998 and 30 September 1997 ......................... 3
Consolidated Income -
Three Months and Nine Months Ended 30 June 1998 and 1997 ... 4
Consolidated Cash Flows -
Nine Months Ended 30 June 1998 and 1997 .................... 5
Summary by Business Segments -
Three Months and Nine Months Ended 30 June 1998 and 1997..... 6
Notes to Consolidated Financial Statements ..................... 7
Management's Discussion and Analysis ........................... 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ...................... 16
Signatures ..................................................... 17
REMARKS:
The consolidated financial statements of Air Products and Chemicals, Inc. and
its subsidiaries (the "Company" or "Registrant") included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented not
misleading. Such adjustments are of a normal, recurring nature unless otherwise
disclosed in the notes to consolidated financial statements. However, the
results for the periods indicated herein reflect certain adjustments, such as
the valuation of inventories on the LIFO cost basis, which can only be finally
determined on an annual basis. It is suggested that these consolidated condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's latest annual report on Form 10-K.
Results of operations for any three month period are not necessarily indicative
of the results of operations for a full year.
2
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Millions of dollars, except per share)
30 June 30 September
1998 1997
ASSETS -------------- --------------
------
CURRENT ASSETS
Cash and cash items $ 110.8 $ 52.5
Trade receivables, less allowances for
doubtful accounts 852.2 879.6
Inventories 424.4 386.5
Contracts in progress, less progress billings 97.3 121.3
Other current assets 197.8 184.4
--------- --------
TOTAL CURRENT ASSETS 1,682.5 1,624.3
--------- --------
INVESTMENTS 361.3 576.8
--------- --------
PLANT AND EQUIPMENT, at cost 9,189.1 8,727.3
Less - Accumulated depreciation 4,569.5 4,286.1
--------- --------
PLANT AND EQUIPMENT, net 4,619.6 4,441.2
--------- --------
GOODWILL 299.4 248.6
--------- --------
OTHER NONCURRENT ASSETS 385.5 353.2
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TOTAL ASSETS $7,348.3 $7,244.1
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Payables, trade and other $ 530.3 $ 616.6
Accrued liabilities 280.3 315.7
Accrued income taxes 74.5 15.9
Short-term borrowings 186.7 100.9
Current portion of long-term debt 130.8 75.5
--------- --------
TOTAL CURRENT LIABILITIES 1,202.6 1,124.6
--------- --------
LONG-TERM DEBT 2,305.0 2,291.7
--------- --------
DEFERRED INCOME AND OTHER
NONCURRENT LIABILITIES 524.9 449.7
--------- --------
DEFERRED INCOME TAXES 688.7 730.0
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TOTAL LIABILITIES 4,721.2 4,596.0
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SHAREHOLDERS' EQUITY
Common stock, par value $1 per share 249.5 124.7
Capital in excess of par value 329.4 453.0
Retained earnings 3,308.3 2,990.2
Unrealized gain on investments 7.4 6.9
Cumulative translation adjustments (264.8) (186.1)
Treasury stock, at cost (577.0) (297.3)
Shares in trust (425.7) (443.3)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 2,627.1 2,648.1
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,348.3 $7,244.1
========= ========
3
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME
(Millions of dollars, except per share)
Three Months Ended Nine Months Ended
30 June 30 June
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
SALES AND OTHER INCOME
Sales $1,225.3 $1,150.3 $3,668.7 $3,424.3
Other income, net 10.8 .7 9.2 20.5
-------- -------- -------- --------
1,236.1 1,151.0 3,677.9 3,444.8
------- ------- ------- --------
COSTS AND EXPENSES
Cost of sales 708.7 663.4 2,131.3 2,042.4
Selling, distribution, and administrative 287.4 266.8 834.6 773.0
Research and development 28.7 27.9 82.0 83.1
-------- -------- -------- --------
OPERATING INCOME 211.3 192.9 630.0 546.3
Income from equity affiliates,
net of related expenses 11.0 17.3 24.6 49.5
Gain on Ref-Fuel Sale and
Contract Settlements 28.3 -- 103.5 --
Interest expense 42.0 39.4 121.2 121.8
-------- -------- -------- --------
INCOME BEFORE TAXES 208.6 170.8 636.9 474.0
Income taxes 70.5 54.8 217.8 152.1
-------- -------- -------- --------
NET INCOME $ 138.1 $ 116.0 $ 419.1 $ 321.9
======== ======== ========= ========
BASIC EARNINGS PER COMMON SHARE $.64 $.53 $1.94 $1.46
-------- -------- -------- --------
DILUTED EARNINGS PER COMMON SHARE $.63 $.52 $1.89 $1.43
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (in millions) 214.9 219.8 216.4 220.2
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES (in millions) 219.9 224.6 221.3 224.9
-------- -------- -------- --------
DIVIDENDS DECLARED PER
COMMON SHARE - Cash $.17 $.15 $.47 $.425
-------- -------- -------- --------
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED CASH FLOWS
(Millions of dollars)
Nine Months Ended
30 June
-----------------
1998 1997
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OPERATING ACTIVITIES
Net Income $419.1 $321.9
Adjustments to reconcile income to cash
provided by operating activities:
Depreciation 359.0 339.4
Deferred income taxes 48.4 40.3
Ref-Fuel divestiture deferred income taxes (80.4) --
Impairment loss -- 9.3
Undistributed losses (earnings) of
unconsolidated affiliates 6.9 (14.8)
Gain on sale of assets and investments (85.4) (24.9)
Other 103.1 51.6
Working capital changes that provided
(used) cash, net of effects of acquisitions:
Trade receivables 22.7 (107.1)
Other receivables 30.9 50.7
Inventories and contracts in progress (5.9) (45.9)
Payables, trade and other (86.6) 94.5
Accrued liabilities (47.0) (30.9)
Accrued income taxes 82.0 32.5
Other (23.9) (3.9)
Cash used for discontinued operations (3.8) --
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CASH PROVIDED BY OPERATING ACTIVITIES 739.1 712.7
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INVESTING ACTIVITIES
Additions to plant and equipment (507.2) (653.2)
Acquisitions, less cash acquired (185.7) (300.0)
Investment in and advances to unconsolidated
affiliates (18.5) (31.8)
Proceeds from sale of assets and investments 283.8 89.9
Other (26.2) 5.0
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CASH USED FOR INVESTING ACTIVITIES (453.8) (890.1)
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FINANCING ACTIVITIES
Long-term debt proceeds 102.0 527.5
Payments on long-term debt (49.7) (155.7)
Net increase in commercial paper 110.2 .2
Net decrease in other short-term borrowings (16.7) (12.2)
Dividends paid to shareholders (97.7) (93.4)
Purchase of Treasury Stock (285.0) (125.0)
Other 11.9 28.5
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CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (225.0) 169.9
------ -------
Effect of Exchange Rate Changes on Cash (2.0) (.6)
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Increase (Decrease) in Cash and Cash Items 58.3 (8.1)
Cash and Cash Items - Beginning of Year 52.5 78.7
------ -------
Cash and Cash Items - End of Period $110.8 $ 70.6
====== =======
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Millions of dollars)
Three Months Ended Nine Months Ended
30 June 30 June
---------------------- -------------------
1998 1997 1998 1997
---------- ---------- --------- --------
Sales:
Industrial Gases $ 725.9 $ 684.8 $2,168.2 $1,970.3
Chemicals 393.6 366.3 1,152.9 1,071.0
Equipment/Services 105.8 99.2 347.6 381.8
Corporate/Other -- -- -- 1.2
- -------------------------- -------- -------- -------- --------
CONSOLIDATED $1,225.3 $1,150.3 $3,668.7 $3,424.3
- -------------------------- -------- -------- -------- --------
Operating Income:
Industrial Gases $ 135.7 $ 140.6 $ 427.6 $ 384.4
Chemicals 65.4 59.7 191.4 157.6 (a)
Equipment/Services 20.4 8.0 50.4 24.1
Corporate/Other (10.2) (15.4) (39.4) (19.8)(b)
- -------------------------- -------- -------- -------- --------
CONSOLIDATED $ 211.3 $ 192.9 $ 630.0 $ 546.3
- -------------------------- -------- -------- -------- ---------
Equity Affiliates' Income:
Industrial Gases $ 5.1 $ 3.5 $ 8.3 $ 24.0
Chemicals 0.1 0.2 0.5 0.4
Equipment/Services 4.9 3.2 13.2 10.2
Corporate/Other 0.9 10.4 2.6 14.9 (c)
- -------------------------- -------- -------- -------- --------
CONSOLIDATED $ 11.0 $ 17.3 $ 24.6 $ 49.5
- -------------------------- -------- -------- -------- --------
(a) Operating income for the nine month period ended 30 June 1997 includes a
$9.3 million impairment loss.
(b) Operating income for the nine month period ended 30 June 1997 includes a
pre-tax gain of $9.5 million on the sale of the landfill gas recovery
business, and a pre-tax gain of $7.3 million on the sale of 19% of a cost
based investment.
(c) Equity affiliates' income for the nine month period ended 30 June 1997
includes a pre-tax charge of $4.8 million from the refinancing of a joint
venture bond offering.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective for the first quarter of fiscal 1998, the Company adopted SFAS
No. 128, "Earnings Per Share" and SFAS No. 129 "Disclosure of Information about
Capital Structure." SFAS No. 129 does not change the currently reported
disclosures, while SFAS No. 128 establishes new accounting and disclosure for
earnings per share (EPS). The following table sets forth the computation of
basic and diluted EPS:
(Millions, except per share)
Three Months Ended Nine Months Ended
30 June 30 June
------------------------ ---------------------
1998 1997 1998 1997
------------ ---------- ----------- ----------
Numerator for basic EPS
and diluted EPS-net income $138.1 $116.0 $419.1 $321.9
Denominator for basic EPS
- -weighted average shares 214.9 219.8 216.4 220.2
Effect of dilutive securities:
Employee stock options 4.0 3.8 3.9 3.8
Other award plans 1.0 1.0 1.0 0.9
------------ ---------- ----------- ----------
5.0 4.8 4.9 4.7
Denominator for diluted EPS
- -weighted average shares and
assumed conversions 219.9 224.6 221.3 224.9
============ ========== =========== ==========
Basic EPS $.64 $.53 $1.94 $1.46
============ ========== =========== ==========
Diluted EPS $.63 $.52 $1.89 $1.43
============ ========== =========== ==========
In December 1997, the Company sold its 50% interest in American Ref-Fuel
Company, its former waste-to-energy joint venture with Browning-Ferris
Industries, Inc., to a limited liability company formed by Duke Energy Power
Services and United American Energy Corporation. The Company sold its interest
in American Ref-Fuel's five waste-to-energy facilities for $237 million, and
Duke Energy Capital Corporation, the parent company of Duke Energy Power
Services, assumed various parental support agreements. The income statement
for the nine months ended 30 June 1998 includes a gain of $62.6 million from
this sale, ($35.1 million after tax, or $.16 per share). Fiscal 1997 results
included equity affiliates' income related to American Ref-Fuel of
$21.4 million before taxes of which $2.3, $.8, $9.6 and $8.7 million was
included in the first through fourth quarters respectively.
Air Products retained a limited partnership interest in an American Ref-Fuel
project that was undergoing a power contract restructuring. The restructuring
was completed in June 1998. The three months ending 30 June 1998 includes a
gain, net of transaction costs, of $28.3 million ($15.4 million after tax, or
$.07 per share).
The results for the nine months ended 30 June 1998 also include a gain of $12.6
million from a cogeneration project contract settlement ($7.6 million after tax,
or $.03 per share).
On 6 May 1998, the Company's Board of Directors approved a two-for-one stock
split. The additional shares were issued on 15 June 1998, to shareholders of
record on 15 May 1998. The
7
earnings per share and shares outstanding amounts for the prior year and for the
prior two quarters of fiscal 1998 have been restated to reflect the stock split.
The Company completed the sale of the landfill gas recovery business, GSF
Energy Inc., during the three months ended 31 December 1996. A gain of
$9.5 million ($5.9 million after tax, or $.03 per share) was recorded.
During the three months ended 31 December 1996, an impairment loss of $9.3
million ($6.0 million after tax, or $.03 per share) was recorded in the
chemicals segment. The write-down was related to production assets in the
performance chemicals division and the related goodwill.
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER FISCAL 1998 VS. THIRD QUARTER FISCAL 1997
---------------------------------------------------------------
RESULTS OF OPERATIONS
CONSOLIDATED
Sales in the third quarter of fiscal 1998 were $1,225.3 million, 7% higher than
in the same quarter of the prior year. Operating income of $211.3 million
increased 10%, or $18.4 million. Profits of equity affiliates decreased $6.3
million to $11.0 million. Net income was $138.1 million, up $22.1 million over
the prior year. Diluted earnings per share of $.63, was up 21% over the $.52
reported in the third quarter of fiscal 1997. Air Products retained a limited
partnership interest in an American Ref-Fuel Company (divested in December 1997)
project that was undergoing a power agreement restructuring. The restructuring
was completed in June 1998 resulting in a $28.3 million gain net of transaction
costs, $15.4 million after tax, or $.07 per diluted share. Diluted earnings per
share, excluding the gain, were $.56, or 8% over the $.52 reported in fiscal
1997.
Consolidated sales grew 7%, net of a 1% unfavorable currency impact. Overall
the impact on income from currency related effects was not significant.
Operating income grew 10%, led by record results in the equipment business.
Chemicals continued to achieve strong volume growth and productivity gains.
Industrial gases sales grew while operating income declined, as worldwide
volume growth slowed from recent quarters. Regional power shortages in the
United States impacted both energy costs and product availability.
Equity affiliates' income declined due to the divestiture of the American
Ref-Fuel Company in December 1997.
INDUSTRIAL GASES - Sales increased 6% to $725.9 million, while operating income
declined 3% to $135.7 million. Currency impacts reduced sales growth by 1%, with
no material impact on operating income.
In North America overall merchant volumes grew 3%, as LOX/LIN growth slowed to
2%, driven by demand in the foods and glass markets. Liquid hydrogen volume
was 7% lower as NASA volume in fiscal 1997 was extremely strong. Favorable
growth continued in electronics specialty gases and in cylinders. Tonnage
gases volume declined 3%, due to lower spot requirements and customer outages.
Average LOX/LIN pricing in the United States was approximately 2% lower than in
the prior year.
In Europe, both merchant and tonnage gases continued to show growth. Merchant
gases volume rose 4%. Carburos Metalicos volumes in both liquid gases and
cylinders grew significantly in the stronger Spanish economy. Tonnage gas volume
was up 19%, driven by loading at Rotterdam and a new facility at Wilton in the
United Kingdom. European LOX/LIN pricing was down 2%.
Operating income of $135.7 million, declined 3% from $140.6 million in the
prior year. In the United States, regional power shortages affected product
availability, energy costs and distribution costs. As a result of the slower
growth, higher power costs and dislocation costs, the operating margin of 18.7%
declined from 20.5% in the prior year.
9
Equity affiliates' income of $5.1 million was up $1.6 million from fiscal 1997.
While Asian results remained weak and infrastructure costs increased, there was
improved joint venture income in several areas.
CHEMICALS - Record sales of $393.6 million, were up 7%, or $27.3 million over
the $366.3 million in the prior year. Unfavorable currency impacts reduced sales
growth by 1%. Operating income of $65.4 million was up 10%. Overall volume was
up 13% with continued strong growth in polymers and intermediates. Intermediates
growth was 31%, led by amines with favorable base business growth and the impact
of acquisitions. Both emulsions and polyvinyl alcohol volumes were up for an
overall growth of 8%. The Asian impact was reflected in polyvinyl alcohol
margins and in epoxy and polyurethane additives volumes. Operating margin was
16.6%, up from 16.3% in fiscal 1997. Strong volume growth and productivity
gains were partially offset by lower methanol pricing and higher natural gas
costs.
EQUIPMENT AND SERVICES - Sales of $105.8 million were up $6.6 million, or 7%
over the prior year. Overall, broad based project activity remained strong.
Record operating income of $20.4 million was up $12.4 million over the prior
year. The growth in operating income was driven by improved product mix and
strong performance across several product areas. Sales backlog at 30 June 1998
was $358 million compared to $353 million at 30 June 1997. While the backlog is
comparable to the prior year the product mix is more heavily weighted toward air
separation equipment.
Equity affiliates' income of $4.9 million was up $1.7 million over the prior
year due to lower overhead costs in the power generation business.
CORPORATE AND OTHER - Operating expense of $10.2 million declined $5.2
million from fiscal 1997. The decrease is due to foreign exchange losses
recognized in the prior year.
Equity affiliates' income was $0.9 million compared to $10.4 million in
fiscal 1997. The decline results from the sale of the American Ref-Fuel
Company in December 1997.
INTEREST
Interest expense of $42.0 million is up 7% from the $39.4 million reported
in the prior year. The increase is due to lower capitalized interest and
slightly higher average interest rates.
INCOME TAXES
The consolidated effective tax rate on income is 33.8%. Excluding the tax
rate impact from a power agreement restructuring, the effective rate is
31.9%. There is a modest .2% reduction from the prior year rate of 32.1%.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or a liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and
requires that
10
a company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
This Statement is effective for fiscal years beginning after 15 June 1999,
and it may be implemented as of the beginning of any fiscal quarter after
15 June 1998. The Statement must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in contracts that were
issued, acquired, or substantially modified after 31 December 1997 (and, at
the Company's election, before 1 January 1998). The transition adjustments
resulting from adopting this statement shall be reported in net income or
other comprehensive income, as appropriate, as the effect of a change in
accounting principle, and presented in a manner similar to the cumulative
effect of a change in accounting principle.
The Company has not yet quantified the impacts of adopting this Statement
on the financial statements or the risk management processes. Additionally,
the Company has not yet determined the timing of the adoption of the
Statement.
STOCK SPLIT
On 6 May 1998, the Company's Board of Directors approved a two-for-one
stock split. The additional shares were issued on 15 June 1998 to
shareholders of record on 15 May 1998. The Company filed an 8-K on 29 June
1998, restating earnings per share amounts for the prior two quarters of
fiscal year 1998 and each quarter of fiscal years 1997 and 1996.
11
NINE MONTHS FISCAL 1998 VS. NINE MONTHS FISCAL 1997
-----------------------------------------------------
RESULTS OF OPERATIONS
CONSOLIDATED
Sales in the first nine months of fiscal 1998 of $3,668.7 million were 7% higher
than the $3,424.3 million reported in the prior fiscal year. Operating income
was up $83.7 million, or 15%, to $630.0 million. Profits of equity affiliates
decreased $24.9 million to $24.6 million for the nine months 30 June 1998. Net
income was $419.1 million, or $1.89 diluted earnings per share, compared to net
income of $321.9 million, or $1.43 diluted earnings per share in the prior year.
In the first fiscal quarter of 1998 there were two special items; an after tax
gain of $35.1 million ($.16 per share), from the divestiture of the American
Ref-Fuel Company, and a gain of $7.6 million ($.03 per share), from a
cogeneration project contract settlement. In the third fiscal quarter of 1998,
a power contract restructuring related to a retained interest in an American
Ref-Fuel project resulted in a gain of $15.4 million after tax, or $.07 per
share. Excluding these special gains, the net income of the current fiscal year
is $361.0 million, or $1.63 per share, up 14% on a diluted basis.
The favorable nine month results were achieved in spite of unfavorable foreign
currency impacts. For the nine months of fiscal 1998, foreign exchange and
currency related losses have the combined impact of reducing the diluted
earnings per share growth by approximately $.11.
Consolidated sales grew 7%, in spite of a 2% unfavorable currency related
impact. Due to a product mix change, equipment and services sales are down
even as project activity remains high. The nine months' volume growth in both
merchant and tonnage gases drove a 10% sales increase. Chemicals sales growth
is due to broad based volume growth of 13%. Operating income is up 15% due to
the volume growth, strong equipment project performance and overall
productivity gains.
Equity affiliates' income declined due to the unfavorable business environment
in Asia, the divestiture of the American Ref-Fuel Company in December 1997, and
the seven weeks of Carburos Metalicos income included in the prior years' first
quarter.
INDUSTRIAL GASES - Sales of $2,168.2 million in the first nine months of fiscal
1998 increased 10%, or $197.9 million over the $1,970.3 million reported in
fiscal 1997. Unfavorable currency impacts reduced year-to-year sales growth by
2%. Merchant gases volumes showed strong growth of 8% in the United States and
7% in Europe. LOX/LIN pricing is down about 2% in both the United States and
Europe. Tonnage gases volumes increased 3% in the United States and 19% in
Europe. The growth in Europe was driven by loading of recent investments.
Operating income of $427.6 million is up 11%, or $43.2 million. Operating
margin of 19.7% is up slightly over the prior year. Third quarter cost impacts
from regional power shortages as well as slower growth in the United States has
tempered the year-to-year margin gains. Asset management and productivity
program improvements are favorable, while year-to-year pricing declines in
LOX/LIN are unfavorable to the operating margin change.
Equity affiliates' income of $8.3 million is down $15.7 million, or 65% from the
prior year. The decline is due to the weak Asian business conditions and the
seven weeks of Carburos income included in the prior years' first quarter.
12
CHEMICALS - Sales of $1,152.9 million were up 8%, or $81.9 million over fiscal
1997. Operating income of $191.4 million was up 21%. Excluding a prior year
impairment loss, operating income grew $24.5 million, or 15%. Overall volume
growth was 13%, led by chemicals intermediates and polymers. Chemicals
intermediates growth was driven by amines that had both solid base business
increases and contributions from acquisitions. Operating margin of 16.6% is up
from 15.6% in fiscal 1997. The improved results are a result of broad based
volume growth and the impact of productivity programs. Methanol price decline
and higher natural gas cost has a modest unfavorable impact on the margin
change. The unfavorable Asian economic environment impacts margins and export
volumes.
EQUIPMENT AND SERVICES - Sales decreased to $347.6 million from $381.8 million
in the prior year due to a change in product mix. Overall, project activity
remained strong. Operating income of $50.4 million was up $26.3 million over the
prior year. Good project performance and the favorable product mix of higher
natural gas liquefaction sales drove the change in operating income. Sales
backlog is $358 million compared to $353 million for the prior year at 30 June.
The current year backlog is more heavily weighted toward air separation
equipment.
Equity affiliates' income of $13.2 million was up $3.0 million over fiscal 1997.
Power generation facilities performance drove the increase.
CORPORATE AND OTHER - Operating expense increased $19.6 million over the prior
year. The prior year results included a $9.5 million gain on the sale of the
landfill gas recovery business and a $7.3 million gain on the sale of 19% of the
shares in a cost based investment. Excluding these gains, operating expense grew
$2.8 million, or 8% over fiscal 1997.
Equity affiliates' income was $2.6 million compared to $14.9 million in fiscal
1997. The prior year includes a $4.8 million charge related to refinancing a
joint venture bond offering. Excluding this charge, equity affiliates' income is
down $17.1 million, due to the sale of the American Ref-Fuel Company in December
1997.
INTEREST
Interest expense of $121.2 million is slightly lower than the $121.8 million
reported in fiscal 1997. Lower average debt is partially offset by lower
capitalized interest.
INCOME TAXES
The consolidated effective tax rate on income is 34.2%. Excluding the tax rate
impact from the gains on the sale of the American Ref-Fuel Company, the
cogeneration project contract settlement, and the American Ref-Fuel project
power contract restructuring, the effective tax rate is 32.3%. There is a
slight increase of 0.2% from the prior year rate of 32.1%.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first nine months of fiscal 1998 totaled $725.1
million compared to $989.0 million in the corresponding period of the prior
year. Additions to plant and equipment decreased from $653.2 million during the
first nine months of fiscal 1997 to $507.2 million during the current period.
Prior year numbers included the acquisition of an additional 49.1% of the
outstanding shares of Carburos at a cost of $288.4 million. Investments in
unconsolidated affiliates were $18.5 million during the first nine months of
fiscal 1998 versus $31.8 million last year. Capital expenditures are expected to
be approximately $1.0 billion in fiscal 1998. It is anticipated that these
expenditures will be funded with cash from operations supplemented with proceeds
from financing activities.
13
Cash provided by operating activities during the first nine months of fiscal
1998 ($739.1 million) combined with proceeds from the sale of assets and
investments ($283.8 million) and cash provided by debt financing ($212.2
million) were used largely for capital expenditures ($725.1 million), purchase
of common stock for treasury ($285.0 million), debt repayments ($66.4 million)
and cash dividends ($97.7 million). Cash and cash items increased $58.3 million
from $52.5 million at the beginning of the fiscal year to $110.8 million at 30
June 1998. The net increase in commercial paper was $110.2 million.
Total debt at 30 June 1998 and 30 September 1997, expressed as a percentage of
the sum of total debt and shareholders' equity, was 50% and 48%, respectively.
Total debt increased from $2,468.1 million at 30 September 1997 to $2,622.5
million at 30 June 1998. During the second quarter of fiscal 1998, the Company
issued $50.0 million in notes due in 2010 with a fixed coupon rate of 6.24%.
During the third quarter of fiscal 1998, the Company issued $50.0 million in
notes due in 2016, with a one-time put option exercisable by the investor after
three and a half years. The coupon rate on this note is indexed to LIBOR for the
first three and a half years.
There was $245.2 million of commercial paper outstanding at 30 June 1998. The
Company's revolving credit commitments amounted to $600.0 million at 30 June
1998 with funding available in 13 currencies. No borrowings were outstanding
under these commitments. Additional commitments totaling $94.0 million are
maintained by the Company's foreign subsidiaries, of which $1.2 million was
utilized at 30 June 1998.
At 30 June 1998, the Company had unutilized shelf registrations for $325.0
million of debt securities.
The Company enters into interest rate swap agreements to change the fixed/
variable interest rate mix of the debt portfolio to maintain the percentage
of fixed and variable rate debt within certain parameters set by management.
In accordance with these parameters, the agreements are used to reduce interest
rate risks and costs inherent in the Company's debt portfolio. Accordingly,
the Company enters into agreements to both effectively convert variable-rate
debt to fixed-rate debt and to effectively convert fixed-rate debt to
variable-rate debt, which is principally indexed to LIBOR rates. The Company
has also entered into interest rate swap contracts to effectively convert the
stated variable rates to interest rates based on LIBOR. The fair value gain
(loss) on the variable to variable swaps is equally offset by a fair value loss
(gain) on the related debt agreements.
The notional principal and fair value of interest rate swap agreements at
30 June 1998 and 30 September 1997 were as follows:
(Millions of dollars)
30 June 1998 30 September 1997
--------------------------- ---------------------------
Notional Fair Value Notional Fair Value
Amount Gain (Loss) Amount Gain (Loss)
------------ ----------- ----------- -------------
Fixed to Variable $511.0 $ 19.9 $461.0 $9.6
Variable to Variable 60.0 97.2 60.0 68.9
------------ ----------- ----------- ------------
Total $571.0 $117.1 $521.0 $78.5
============ =========== =========== ============
A $46.9 million asset has been recognized in the financial statements related to
the above variable to variable interest rate swap agreements. Additionally, a
$46.9 million liability has been recognized in the financial statements related
to the corresponding debt agreements.
14
The Company is also party to interest rate and currency swap contracts. These
contracts effectively convert the currency denomination of a debt instrument
into another currency in which the Company has a net equity position while
changing the interest rate characteristics of the instrument. The notional
principal of interest rate and currency swap agreements outstanding at 30 June
1998 was $419.3 million. The fair value of the agreements was a gain of $18.7
million, of which a $42.1 million gain related to the currency component was
recognized in the financial statements. The remaining $23.4 million loss was
related to the interest component and has not been recognized in the financial
statements. This loss reflects that current interest rates are generally lower
than the interest rates paid under the interest rate and currency swap
agreements. As of 30 September 1997, interest rate and currency swap agreements
were outstanding with a notional principal amount and fair value of $354.1
million and a gain of $7.2 million, respectively.
The estimated fair value of the Company's long-term debt, including current
portion, as of 30 June 1998 is $2,711.6 million compared to a book value of
$2,435.8 million.
During the third quarter of fiscal 1998, 2.0 million shares (post-split basis)
of the Company's outstanding common stock were repurchased at a cost of $85.0
million. Under the current program, the Company has repurchased 14.5 million
shares (post-split basis) at a cost of $520.0 million to date. The remainder of
this $600.0 million program is expected to be completed by 30 September 1998.
FINANCIAL INSTRUMENTS
There has been no material change in the net financial instrument position or
sensitivity to market risk since the disclosure in the annual report.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. Important risk factors and uncertainties
include the impact of worldwide economic growth, pricing of both the Company's
products and raw materials such as electricity, and other factors resulting from
fluctuations in interest rates and foreign currencies, the impact of
competitive products and pricing, continued success of work process programs,
and the impact of tax and other legislation and other regulations in the
jurisdictions in which the Company and its affiliates operate.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(a)(27) Financial Data Schedule which is submitted electronically
to the Securities and Exchange Commission for information
only, and not filed.
(b) Current Report on Form 8-K dated 22 April 1998, 6 May 1998
and 29 June 1998 were filed by the registrant during the
quarter ended 30 June 1998 in which Item 5 of such forms
was reported.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Air Products and Chemicals, Inc.
--------------------------------
(Registrant)
Date: August 13, 1998 By: /s/ Leo J. Daley
-------------------------------
Leo J. Daley
Vice President - Finance and
Treasurer
(Chief Financial Officer)
17
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
EXHIBITS
To
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended 30 June 1998
Commission File No. 1-4534
-------------------
AIR PRODUCTS AND CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
===============================================================================
INDEX TO EXHIBITS
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(a)(27) Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only, and not filed.
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
Nine
Months
Ended
Year Ended 30 September 30 June
------------------------------------ -------
1993 1994 1995 1996 1997 1998
------- ------ ------ ------ ------ -------
(Millions of dollars)
EARNINGS:
Income before extraordinary
item and the cumulative
effect of accounting changes: $200.9 $233.5 $368.2 $416.4 $429.3 $419.1
Add (deduct):
Provision for income taxes 103.0 95.2 186.2 195.5 203.4 219.8
Fixed charges, excluding
capitalized interest 127.3 127.1 148.8 184.0 233.0 152.9
Capitalized interest
amortized during the period 7.7 8.0 9.1 9.4 8.3 5.0
Undistributed earnings of
less-than-fifty-percent-
owned affiliates (8.1) (2.8) (25.4) (40.6) (31.1) (15.7)
------- ------- ------ ------ ------- ------
Earnings, as adjusted $430.8 $461.0 $686.9 $764.7 $842.9 $781.1
======= ======= ======= ======= ======= ======
FIXED CHARGES:
Interest on indebtedness,
including capital lease
obligations $118.2 $118.6 $139.4 $171.7 $217.8 $141.2
Capitalized interest 6.3 9.7 18.5 20.0 20.9 12.7
Amortization of debt
discount premium and .7 .8 .2 1.5 1.8 1.4
expense
Portion of rents under
operating leases
representative of the
interest factor 8.0 8.1 9.2 10.8 13.4 10.3
------- ------- ------ ------ ------- ------
Fixed charges $133.6 $136.8 $167.3 $204.0 $253.9 $165.6
======= ======= ======= ======= ======= ======
RATIO OF EARNINGS TO
FIXED CHARGES: 3.2 3.4 4.1 3.7 3.3 4.7
======= ======= ======= ======= ======= ======
5
1,000,000
US DOLLARS
9-MOS
SEP-30-1998
OCT-01-1997
JUN-30-1998
1
111
0
872
20
424
1,682
9,189
4,569
7,348
1,203
2,305
0
0
249
2,378
7,348
3,669
3,669
2,131
2,131
82
5
121
637
218
419
0
0
0
419
1.94
1.89
