1
UNITED STATES
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 31 March 1998
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to_____________
Commission file number 1-4534
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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 May 1998
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Common Stock, $1 par value 117,111,744
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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
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Part I. Financial Information
Consolidated Balance Sheets -
31 March 1998 and 30 September 1997 .............................. 3
Consolidated Income -
Three Months and Six Months Ended 31 March 1998 and 1997 ......... 4
Consolidated Cash Flows -
Six Months Ended 31 March 1998 and 1997 .......................... 5
Notes to Consolidated Financial Statements ......................... 6
Management's Discussion and Analysis ............................... 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ....... 16
Item 6. Exhibits and Reports on Form 8-K .......................... 17
Signatures ......................................................... 18
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.
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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
31 March 30 September
ASSETS 1998 1997
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CURRENT ASSETS
Cash and cash items $85.0 $52.5
Trade receivables, less allowances for doubtful
accounts 865.3 879.6
Inventories 407.5 386.5
Contracts in progress, less progress billings 86.1 121.3
Other current assets 166.2 184.4
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TOTAL CURRENT ASSETS 1,610.1 1,624.3
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INVESTMENTS 354.3 576.8
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PLANT AND EQUIPMENT, at cost 8,996.4 8,727.3
Less - Accumulated depreciation 4,460.9 4,286.1
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PLANT AND EQUIPMENT, net 4,535.5 4,441.2
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GOODWILL 277.2 248.6
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OTHER NONCURRENT ASSETS 382.7 353.2
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TOTAL ASSETS $7,159.8 $7,244.1
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Payables, trade and other $543.9 $616.6
Accrued liabilities 278.5 315.7
Accrued income taxes 84.9 15.9
Short-term borrowings 88.5 100.9
Current portion of long-term debt 124.3 75.5
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TOTAL CURRENT LIABILITIES 1,120.1 1,124.6
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LONG-TERM DEBT 2,254.2 2,291.7
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DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES 510.4 449.7
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DEFERRED INCOME TAXES 674.4 730.0
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TOTAL LIABILITIES 4,559.1 4,596.0
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SHAREHOLDERS' EQUITY
Common stock, par value $1 per share 124.7 124.7
Capital in excess of par value 453.4 453.0
Retained earnings 3,206.4 2,990.2
Unrealized gain on investments 8.7 6.9
Cumulative translation adjustments (266.8) (186.1)
Treasury stock, at cost (492.0) (297.3)
Shares in trust (433.7) (443.3)
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TOTAL SHAREHOLDERS' EQUITY 2,600.7 2,648.1
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,159.8 $7,244.1
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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME
(Millions of dollars, except per share)
Three Months Ended Six Months Ended
31 March 31 March
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1998 1997 1998 1997
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SALES AND OTHER INCOME
Sales $1,208.6 $1,153.1 $2,443.4 $2,274.0
Other income, net 3.7 10.4 (1.6) 19.8
---------- ---------- ---------- ----------
1,212.3 1,163.5 2,441.8 2,293.8
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COSTS AND EXPENSES
Cost of sales 701.9 686.3 1,422.6 1,379.0
Selling, distribution, and
administrative 277.3 264.7 547.2 506.2
Research and development 27.0 28.5 53.3 55.2
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OPERATING INCOME 206.1 184.0 418.7 353.4
Income from equity affiliates, net of
related expenses 7.9 13.5 13.6 32.2
Gain on Ref-Fuel Sale and Contract
Settlement -- -- 75.2 --
Interest expense 39.0 42.5 79.2 82.4
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INCOME BEFORE TAXES 175.0 155.0 428.3 303.2
Income taxes 54.5 49.0 147.3 97.3
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NET INCOME $120.5 $106.0 $281.0 $205.9
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BASIC EARNINGS PER COMMON SHARE $1.12 $.96 $2.59 $1.87
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DILUTED EARNINGS PER COMMON SHARE $1.09 $.94 $2.53 $1.83
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES (in millions) 107.9 109.9 108.6 110.2
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES (in millions) 110.4 112.4 110.9 112.5
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DIVIDENDS DECLARED PER COMMON
SHARE - Cash $.30 $.275 $.60 $.55
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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED CASH FLOWS
(Millions of dollars)
Six Months Ended
31 March
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1998 1997
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OPERATING ACTIVITIES
Net Income $281.0 $205.9
Adjustments to reconcile income to cash provided
by operating activities:
Depreciation 238.2 223.5
Deferred income taxes 37.6 31.3
Ref-Fuel divestiture deferred income taxes (80.3) --
Impairment loss -- 9.3
Undistributed (earnings) of unconsolidated affiliates 15.9 (27.5)
Gain on sale of assets and investments (83.7) (22.5)
Other 65.1 21.0
Working capital changes that provided (used) cash, net
of effects of acquisitions:
Trade receivables 9.7 (71.1)
Other receivables 34.0 72.7
Inventories and contracts in progress 18.6 (69.8)
Payables, trade and other (66.9) 65.6
Accrued liabilities (48.8) (17.9)
Accrued income taxes 89.0 21.0
Other (10.9) (2.0)
Cash provided by (used for) discontinued operations (3.4) .7
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CASH PROVIDED BY OPERATING ACTIVITIES 495.1 440.2
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INVESTING ACTIVITIES
Additions to plant and equipment (332.7) (488.9)
Acquisitions, less cash acquired (125.0) (292.2)
Investment in and advances to unconsolidated affiliates (10.0) (24.3)
Proceeds from sale of assets and investments 285.9 82.7
Other (13.8) 4.1
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CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (195.6) (718.6)
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FINANCING ACTIVITIES
Long-term debt proceeds 52.2 527.5
Payments on long-term debt (54.0) (52.1)
Net increase (decrease) in commercial paper 10.2 (31.0)
Net increase (decrease) in other short-term borrowings (15.1) 8.5
Dividends paid to shareholders (65.4) (60.6)
Purchase of Treasury Stock (200.0) (100.0)
Other 7.1 19.8
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CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (265.0) 312.1
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Effect of Exchange Rate Changes on Cash (2.0) (.6)
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Increase in Cash and Cash Items 32.5 33.1
Cash and Cash Items - Beginning of Year 52.5 78.7
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Cash and Cash Items - End of Period $85.0 $111.8
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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On 1 October 1997, the Company adopted Statement of Position 96-1,
"Environmental Remediation Liabilities." This statement had minimal impact on
the financial statements.
Effective 31 December 1997, 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 earnings per
share:
(Millions, except per share) Three Months Ended Six Months Ended
31 March 31 March
---------------------------------------------
1998 1997 1998 1997
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Numerator for basic EPS
and diluted EPS-net income $120.5 $106.0 $281.0 $205.9
Denominator for basic EPS
- -weighted average shares 107.9 109.9 108.6 110.2
Effect of diluted securities:
Employee stock options 1.9 2.0 1.9 1.9
Other award plans 0.6 0.5 0.4 0.4
---------------------------------------------
2.5 2.5 2.3 2.3
Denominator for diluted EPS
- -weighted average shares and
assumed conversions 110.4 112.4 110.9 112.5
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Basic EPS $1.12 $.96 $2.59 $1.87
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Diluted EPS $1.09 $.94 $2.53 $1.83
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Options on 2.5 million shares of common stock were not included in computing
diluted EPS because their effects were antidilutive. The potential dilutive
effect of these options can not be estimated based on current information.
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 six months ended 31 March 1998 includes a gain of $62.6 million from this
sale, ($35.1 million after tax or $.32 per share.) Air Products retained a
limited partnership interest in one project which is undergoing a power
agreement restructuring. The restructuring is expected to be completed within
the calendar year. 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.
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The results for the six months ended 31 March 1998 also include a gain of $12.6
million from a cogeneration project contract settlement ($7.6 million after tax
or $.07 per share.)
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 $.05 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 $.05 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.
Shareholder Rights Plan
On 19 March 1998, the Board of Directors unanimously approved a shareholder
rights plan to replace the Company's previous rights plan, which expired 16
March 1998. Under the plan, the Board of Directors declared a dividend of one
Right for each share of Common Stock outstanding at the close of business on 19
March 1998 and with respect to Common Shares issued thereafter until the
Distribution Date (as defined below). Each Right, when it becomes exercisable as
described below, will entitle its holder to purchase one one-thousandth of a
share of Series A Participating Cumulative Preferred Stock, par value $1 per
share, of the Company (the "Preferred Shares") at a price of $345.00 (the
"Purchase Price").
Until the earlier of (i) such time as the Company learns that a person or group
has acquired, or obtained the right to acquire, beneficial ownership of more
than 15% of the outstanding Common Shares (such person or group being called an
"Acquiring Person"), and (ii) such date, if any, as may be designated by the
Board of Directors following the commencement of, or first public disclosure of
an intention to commence, a tender or exchange offer for outstanding Common
Shares which could result in such person or group becoming the beneficial owner
of more than 15% of the outstanding Common Shares, (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced by
certificates for Common Shares and not by separate Right certificates.
Therefore, until the Distribution Date, the Rights will be transferred with and
only with the Common Shares. The Rights are not exercisable until the
Distribution Date and will expire on 19 March 2008 (the "Expiration Date"),
unless earlier redeemed by the Company as described below.
Subject to the right of the Board of Directors to redeem the Rights, at such
time as there is an Acquiring Person, each Right (other than Rights held by an
Acquiring Person) will thereafter have the right to receive, upon exercise
thereof, for the Purchase Price, that number of one one-thousandths of a
Preferred Share equal to the number of Common Shares which at the time of such
transaction would have a market value of twice the Purchase Price. If the
Company is acquired in a merger or other business combination by an Acquiring
Person or 50% or more of the Company's assets or assets representing 50% or more
of the Company's earning power are sold, leased, exchanged or otherwise
transferred (in one or more transactions) to an Acquiring Person, each Right
(other than Rights held by an Acquiring Person) will entitle its holder to
purchase, for the Purchase Price, that number of common shares of such
corporation (or, if such corporation is not publicly traded, common shares of
any publicly traded affiliate of such corporation) which at the time of the
transaction would have a market value (or, if the Acquiring Person is not a
publicly traded corporation, having a book value) of twice the Purchase Price.
The Rights are redeemable by the Board of Directors at a redemption price of
$.01 per Right any time prior to the earlier of such time as there is an
Acquiring Person and Expiration Date.
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AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
SECOND QUARTER FISCAL 1998 VS. SECOND QUARTER FISCAL 1997
RESULTS OF OPERATIONS
Consolidated
Sales in the second quarter of fiscal 1998 were $1,208.6 million, 5% higher than
in the same quarter of the prior year. Operating income of $206.1 million
increased 12%, or $22.1 million. Profits of equity affiliates decreased $5.6
million to $7.9 million. Net income was $120.5 million, up $14.5 million over
the prior year. Diluted earnings per share of $1.09, on the record net income
from operations, was up 16% over the $.94 reported in the second quarter of
fiscal 1997.
The strong earnings growth continued for the sixth consecutive quarter at a
double digit rate. The increase of $.15 diluted earnings per share was achieved
net of various negative currency effects that restrained earnings per share
growth by $.05. The unfavorable currency impact occurred mainly due to the
year-to-year devaluation of continental European and Asian currencies.
Consolidated sales grew 5%, net of an unfavorable 2% currency impact. Strong
growth in merchant gases and in most chemicals businesses led the growth. While
equipment project activity remained high, a change in product mix caused a drop
in sales for the quarter.
The 5% growth in sales was leveraged into a strong 12% increase in operating
income. Excluding the gain on a sale of an investment in the prior year second
quarter, growth in operating income is 17%. In addition to the impact of broad
based volume gains, there were favorable results generated by productivity
programs across the Company as well as gains from asset management efforts,
particularly in the tonnage gas pipeline franchises.
Equity affiliates' income declined due to the unfavorable business environment
in Asia and the divestiture of the American Ref-Fuel Company in the first
quarter of this fiscal year.
Industrial Gases - Sales increased 7% to $715.3 million in the second quarter of
fiscal 1998 while operating income increased 15% to $144.7 million. Excluding a
3% negative impact from currency changes, sales and operating income grew 10%
and 18% respectively.
North America gases experienced growth in all major product lines. Merchant
gases were up 12% overall. LOX/LIN volumes grew 7% with higher end-use demand
across many markets. Liquid hydrogen grew 18%, driven by the additional NASA
supply contract, which will not continue to grow as significantly as the first
contract year completes in April, 1998. Specialty gases and Schumacher volumes
were driven by higher electronics demand. Cylinder volumes grew 10%, with
acquisitions adding to a same store sales growth of 5%. The average LOX/LIN
price in the United States fell 3% primarily due to growth of lower priced high
volume customer demand. Tonnage volume grew 3% in North America as some spot
HYCO business declined.
In Europe there was a fourth quarter of encouraging volume growth in both
merchant gases and tonnage businesses. Merchant gas volumes grew 7% (9%
including Carburos Metalicos) and tonnage gas volumes grew 12%. LOX/LIN volumes
grew 6% excluding Non-Cryo business and 10%
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including the strong growth in Non-Cryo business. Liquid Argon grew 8% due to
electronics growth in the United Kingdom and new business signings in France.
Tonnage gases growth benefited from the commencement of new facilities in
Rotterdam and at Wilton in the United Kingdom. LOX/LIN pricing was down 3% due
to customer mix, similar to the experience in the United States, and some market
weakness in France and the United Kingdom.
The overall 15% growth in operating income, after a 3% negative currency impact,
was due to a combination of the substantial volume growth, asset management
initiatives and productivity gains. Combined, these effects resulted in
operating margin growth to 20.2% from 18.7% in the prior year second quarter.
Unfavorable economic conditions in Asia resulted in a decline in equity
affiliates' income from $8.5 million to $2.8 million for the quarter. This is
due to a combination of currency weakness, lower customer demand and higher
infrastructure costs.
Chemicals- Sales in the second quarter of fiscal 1998 of $378.4 million
increased $19.9 million, or 6%. Operating income grew 8%, or $4.2 million, to
$57.6 million. Both sales and operating income were impacted about 1% by
unfavorable currency effects. Overall volume grew 12%, led by strong growth in
polymers and chemical intermediates, up 10% and 25% respectively. Amines drove
the growth in chemical intermediates with both base business growth and
acquisition impacts. Overall performance chemicals volumes remained unchanged as
the weak Asian economy tempered volumes in epoxy additives and polyurethane
chemicals. Some margin pressures were experienced in polymers. The operating
margin increased to 15.2% from 14.9% in the prior year. Margin improvement is
attributed to higher plant utilization and the benefits of on-going productivity
programs.
Equipment and Services - Sales of $114.9 million declined $8.7 million from
$123.6 million in the prior year. Operating income however, grew 66% or $6.9
million to 17.4 million. While sales declined slightly, due to product mix,
overall broad-based project activity remained strong. A favorable product mix
combined with good project cost performance contributed to the record operating
income in this segment. Sales backlog is $355 million at 31 March 1998. This
backlog compares to $392 million at the same date in the prior year. The backlog
is up substantially from the $277 million level at the end of 31 December 1997.
The product mix in the backlog is more heavily weighted to air separation
equipment.
Equity affiliates' income of $3.9 million was up $.4 million or 11% over the
prior year. The improved results reflect the continued good performance at the
power generation facilities.
Corporate and Other - Operating expense of $13.6 million was up $8.2 million
from the prior year. The prior year results included a $7.3 million gain on the
sale of shares in a cost based investment. Excluding this gain, the operating
expense increase from the prior year was $.9 million.
Equity affiliates' income is essentially the same as in the prior year. However,
in the prior year there was a $4.8 million charge for a debt refinancing in the
American Ref-Fuel Company. Excluding the refinancing charge, equity affiliates'
income is down $5.4 million due to the divestiture of the business in December
1997.
INTEREST
Interest expense of $39.0 million is down 8% from $42.5 million in the prior
year, caused by a lower average debt balance and lower interest rates, partially
offset by lower capitalized interest.
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INCOME TAXES
The consolidated effective tax rate on income was 31.2%, down slightly from
31.6% in the prior fiscal year.
ACCOUNTING CHANGES
As of January 1, 1998, the Company no longer applied highly inflationary
accounting to operations in Brazil. For operations that used the United States
dollar for translation due to hyper-inflationary conditions, the functional
currency became the Brazilian Real. No material effects on the financial
statements resulted from this change.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post Retirement Benefits."
There are no measurement or recognition changes due to the new standard. This
statement standardizes disclosure requirements and requires additional
information to facilitate analysis of changes in benefit obligations and the
fair market value of plan assets. This standard will be applied to the financial
statements for the year ended 30 September 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP requires companies to
capitalize certain internally developed software costs based on criteria and
guidance in the Statement. The Company currently expenses the costs of
internally developed software. The Company will apply this Statement beginning
with fiscal year 1999. The impact is being evaluated, but is not expected to be
material to the consolidated financial statements.
YEAR 2000 SOFTWARE ISSUE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing the Year 2000 financial and
operating systems risk by establishing processes for evaluating and managing the
risks associated with this problem. In 1996, the Company's computing portfolio
was assessed and specific plans were initiated to ensure Year 2000 compliance on
mission-critical systems by 1999. The Company's most recent estimates of the
costs to achieve such Year 2000 compliance plans continue to remain viable at
approximately $18 million over the cost of normal software upgrades and
replacements.
In addition, assessment and remediation of the Company's manufacturing control
systems, transfill and distribution facilities and other embedded-chip devices
for compliance with the Year 2000 issue are now under way. The Company is also
identifying and contacting customers, suppliers and other critical business
partners to determine if entities with which the Company transacts business have
effective Year 2000 plans in place and to assess the potential impact of the
Year 2000 issue on the Company's operations. The supply of critical energy
requirements to Company facilities will be included in such assessment.
Contingency plans will be developed as needed. Although the process of
identifying, assessing and remediating continues, the Company does not
anticipate that the Year 2000 issues within its control will have a material
effect on the Company's business, operations or financial condition.
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SUBSEQUENT EVENTS
The Company and Wacker-Chemie GmbH (Munich, Germany) have substantially
concluded negotiations to combine their emulsions and redispersible powder
businesses within two joint venture entities they expect to establish and start
up on 1 October 1998. The combined sales revenues of the two joint venture
entities, each with its own management team, will exceed US$700 million. The two
companies have been in discussions regarding the formation of the joint ventures
since late last year.
The Company and Wacker are now in the process of completing the legal and
administrative documentation and other arrangements necessary to create and
operate the joint ventures. Approval will be obtained from the relevant merger
control authorities prior to start-up.
Subsequent to the balance sheet date (6 May 1998), the Board of Directors
approved a two-for-one stock split. The additional shares will be issued on 15
June 1998, to shareholders of record on 15 May 1998.
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SIX MONTHS FISCAL 1998 VS. SIX MONTHS FISCAL 1997
RESULTS OF OPERATIONS
Consolidated
Sales in the first six months of fiscal 1998 of $2,443.4 million were 7% higher
than the $2,274.0 million reported in the prior fiscal year. Operating income
was up $65.3 million, or 18%, to $418.7 million. Profits of equity affiliates
decreased $18.6 million to $13.6 million for the six months ended 31 March
1998. Net income was $281.0 million, or $2.53 diluted earnings per share,
compared to net income of $205.9 million, or $1.83 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, or $.32 per share from the sale of
the Company's 50% interest in American Ref-Fuel Company, and a gain of $7.6
million, or $.07 per share from a cogeneration project contract settlement.
Excluding these special items, net income for this year is $238.3 million, or
$2.14 diluted earnings per share, up 17% over the $1.83 reported in fiscal
1997.
The very favorable results were achieved in spite of unfavorable foreign
currency impacts. For the six months of fiscal 1998, foreign exchange and
currency losses have the combined impact of reducing the earnings per share
growth by approximately $.22. A stronger U.S. dollar versus most of the world's
currencies resulted in a reduced diluted earnings growth of $.10. The Company's
Asian equity affiliates were impacted by unfavorable economic conditions and
were primarily the cause of the $.12 exchange impact.
Consolidated sales grew 7%, in spite of a 2% unfavorable currency related
impact. Merchant and tonnage gases in both Europe and North America have
experienced strong growth in new business and broad based end use growth. Due to
a product mix change, Equipment and Services sales are down even as project
activity remains high.
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 year's first
quarter.
Industrial Gases - Sales of $1,442.3 million in the first six months of fiscal
1998 increased 12%, or $156.8 million over the $1,285.5 million reported in
fiscal 1997. Strong volume gains in both merchant and tonnage gases were
achieved in both the North American and European regions. Unfavorable currency
effects, primarily European, decreased year-to-year sales growth by
approximately 3%. Merchant gases volumes are up 12% and 7% in North America and
Europe respectively, consistent with broad end-use market growth and new
business signings. Pricing in the LOX/LIN component of merchant gases is down
about 2% in both Europe and North America, with average pricing impacted
primarily by the lower priced high volume customer demand. Tonnage gases volumes
grew 21% and 8% in Europe and North America, driven by loading on recent
investments, particularly in the HYCO franchise systems. Operating income of
$291.9 million increased 20%, or $48.1 million. Operating margin for the six
months was 20.2% up more than a full percent from 19.0% in the prior year. The
operating margin improvement reflects the volume growth leveraged by initiatives
in asset management and productivity.
Equity affiliates' income decreased $17.3 million to $3.2 million. This decline
is primarily the result of the unfavorable economic environment in Asia.
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Chemicals - Sales in the first six months of fiscal 1998 of $759.3 million
increased $54.6 million or 8%. Operating income grew $28.1 million to $126.0
million. The results of the prior year were reduced by $9.3 million due to an
asset impairment loss in the polyurethane release agents business. Excluding
this prior year loss, fiscal 1998 operating income grew 18%. This substantive
growth was driven by broad based volume growth combined with the impacts of
productivity initiatives. The overall volume for the segment grew about 13% for
the first half of the fiscal year, led by the chemicals intermediates and
polymers businesses. Chemicals intermediates growth is driven by the amines
business that is experiencing good base growth and contributions from
acquisitions. Polymers volume growth is primarily the result of increased demand
in both the emulsions and PVOH businesses. The Asian economic environment
remains an uncertainty as to the effect on exports and margins.
Equipment and Services - Sales decreased to $241.8 million from $282.6 million
in the prior year due to a change in product mix. Overall, project activity
remains strong. Operating income is $30.0 million or 86% higher than in the
prior year. The increase is due to the change in product mix and good project
execution. Sales backlog is $355 million at 31 March 1998. This backlog compares
to $392 million at the same date in the prior year. The backlog is up
substantially from the $277 million level at 31 December 1997. The product mix
in the backlog is more heavily weighted to air separation equipment.
Equity affiliates' income for the first half of fiscal 1998 increased $1.3
million to $8.3 million, or 19% over the prior year. The increase is due to good
performance at the power generation facilities.
Corporate and Other - Operating expense is up $24.8 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 $8.0
million due primarily to unfavorable foreign exchange impacts.
Equity affiliates' income declined $2.8 million. 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 $7.6 million, due to the sale of
the American Ref-Fuel Company in December 1997.
INTEREST
Interest expense of $79.2 million declined $3.2 million or 4% below the prior
year. Lower average debt and lower interest rates were partially offset by lower
capitalized interest.
INCOME TAXES
The consolidated effective tax rate on income was 34.4%. Excluding the tax rate
impact on the sale of the American Ref-Fuel Company and the gain on the
cogeneration power contract settlement, the effective tax rate is 32.5%. This
rate is up slightly from 32.1% in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first six months of fiscal 1998 totaled $479.8
million compared to $808.4 million in the corresponding period of the prior
year. Additions to plant and equipment decreased from $488.9 million during the
first six months of fiscal 1997 to $332.7 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 $10.0 million during the first six months of
fiscal 1998 versus $24.3 million last year. Capital expenditures are expected to
be approximately $1.1 billion in fiscal 1998. It is
13
14
anticipated that these expenditures will be funded with cash from operations
supplemented with proceeds from financing activities.
Cash provided by operating activities during the first six months of fiscal 1998
($495.1 million) combined with proceeds from the sale of assets and investments
($285.9 million) and cash provided by debt financing ($62.4 million) were used
largely for capital expenditures ($479.8 million), purchase of common stock for
treasury ($200.0 million), debt repayments ($69.1 million) and cash dividends
($65.4 million). Cash and cash items increased $32.5 million from $52.5 million
at the beginning of the fiscal year to $85.0 million at 31 March 1998. The net
increase in commercial paper was $10.2 million.
Total debt at 31 March 1998 and 30 September 1997, expressed as a percentage of
the sum of total debt and shareholders' equity, was 49% and 48%, respectively.
Total debt decreased from $2,468.1 million at 30 September 1997 to $2,467.0
million at 31 March 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%.
There was $145.2 million of commercial paper outstanding at 31 March 1998. The
Company's revolving credit commitments amounted to $600.0 million at 31 March
1998 with funding available in 13 currencies. No borrowings were outstanding
under these commitments. Additional commitments totaling $82.8 million are
maintained by the Company's foreign subsidiaries, of which $3.3 million was
utilized at 31 March 1998.
At 31 March 1998, the Company had unutilized shelf registrations for $375.0
million of debt securities.
The Company enters into interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio in order 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 31
March 1998 and 30 September 1997 were as follows:
(Millions of dollars)
31 March 1998 30 September 1997
----------------------------- ----------------------------
Notional Fair Value Notional Fair Value
Amount Gain (Loss) Amount Gain (Loss)
----------------------------- ----------------------------
Fixed to Variable $511.0 $ 17.7 $461.0 $9.6
Variable to Variable 60.0 89.5 60.0 68.9
----------------------------- ----------------------------
Total $571.0 $107.2 $521.0 $78.5
============================= ============================
A $41.9 million asset has been recognized in the financial statements related to
the above variable to variable interest rate swap agreements. Additionally, a
$41.9 million liability has been recognized in the financial statements related
to the corresponding debt agreements.
14
15
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 31 March
1998 was $419.3 million. The fair value of the agreements was a gain of $17.4
million, of which a $42.5 million gain related to the currency component was
recognized in the financial statements. The remaining $25.1 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 31 March 1998 is $2,620.7 million compared to a book value of
$2,378.5 million.
During the second quarter of fiscal 1998, .6 million shares of the Company's
outstanding common stock were repurchased at a cost of $50.0 million. Under the
current program, the Company has repurchased 6.2 million shares at a cost of
$435.3 million to date. The remainder of the program will be dependent upon
ongoing capital investment requirements.
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, and other factors
resulting from fluctuations in interest rates and foreign currencies, the impact
of competitive products and pricing, continued success of productivity programs,
and the impact of tax and other legislation and other regulations in the
jurisdictions in which the Company and its affiliates operate.
15
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
(a) The Annual Meeting of Shareholders of the Registrant was held on 22
January 1998.
(c) The following matters were voted on at the Annual Meeting:
(1) Election of Directors
- --------------------------------------------------------------------------------
NAME OF DIRECTOR NUMBER OF VOTES CAST
-----------------------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
-----------------------------------------------------------
T. H. BARRETT 105,809,141 1,699,180 0 0
- --------------------------------------------------------------------------------
J. F. HARDYMON 105,722,176 1,786,145 0 0
- --------------------------------------------------------------------------------
T. SHIINA 104,650,102 2,858,219 0 0
- --------------------------------------------------------------------------------
L. D. THOMAS 105,819,147 1,689,174 0 0
- --------------------------------------------------------------------------------
(2) Ratification of the appointment of Arthur Andersen LLP of
Philadelphia, Pennsylvania, as independent certified public
accountants for the Registrant for the fiscal year ending 30
September 1998.
- --------------------------------------------------------------------------------
NUMBER OF VOTES CAST
- --------------------------------------------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
- --------------------------------------------------------------------------------
106,370,343 343,446 794,532 0
- --------------------------------------------------------------------------------
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17
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) A Current Report on Form 8-K dated 22 January 1998 was filed
by the Registrant during the quarter ended 31 March 1997 in
which Item 5 of such form was reported.
17
18
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: May 14, 1998 By: /s/ P. E. Huck
-------------------------
P. E. Huck
Vice President &
Corporate Controller
(Chief Accounting Officer)
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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.
1
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
Six
Months
Ended
Year Ended 30 September 31 March
--------------------------------------------------- -------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------
Earnings: (Millions of dollars)
Income before extraordinary item
and the cumulative effect of
accounting changes: $200.9 $233.5 $368.2 $416.4 $429.3 $281.0
Add (deduct):
Provision for income taxes 103.0 95.2 186.2 195.5 203.4 149.0
Fixed charges, excluding
capitalized interest 127.3 127.1 148.8 184.0 233.0 104.0
Capitalized interest amortized
during the period 7.7 8.0 9.1 9.4 8.3 3.5
Undistributed earnings of
less-than-fifty-percent-owned
affiliates (8.1) (2.8) (25.4) (40.6) (31.1) (9.6)
------- ------- ------- ------- ------- -------
Earnings, as adjusted $430.8 $461.0 $686.9 $764.7 $842.9 $527.9
======= ======= ======= ======= ======= =======
Fixed Charges:
Interest on indebtedness,
including capital lease
obligations $118.6 $118.2 $139.4 $171.7 $217.8 $96.3
Capitalized interest 6.3 9.7 18.5 20.0 20.9 7.9
Amortization of debt discount
premium and expense .7 .8 .2 1.5 1.8 0.9
Portion of rents under operating
leases representative of the
interest factor 8.0 8.1 9.2 10.8 13.4 6.8
------- ------- ------- ------- ------- -------
Fixed charges $133.6 $136.8 $167.3 $204.0 $253.9 $111.9
======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed
Charges: 3.2 3.4 4.1 3.7 3.3 4.7
======= ======= ======= ======= ======= =======
5
1,000,000
6-MOS
SEP-30-1998
OCT-01-1997
MAR-31-1998
85
0
887
22
407
1,610
8,996
4,461
4,535
1,120
2,254
0
0
125
2,476
7,160
2,443
2,443
1,423
1,423
53
3
79
428
147
281
0
0
0
281
2.59
2.53
