UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
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 December 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.
------------------------------------------------------
(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
--------------
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 at 4 February 1999
-------------------------- ---------------------------------
Common Stock, $1 par value 229,304,812
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets -
31 December 1998 and 30 September 1998 ................... 3
Consolidated Income -
Three Months Ended 31 December 1998 and 1997 ............. 4
Consolidated Statement of Comprehensive Income
Three Months Ended 31 December 1998 and 1997 ............. 5
Consolidated Cash Flows -
Three Months Ended 31 December 1998 and 1997 ............. 6
Summary by Business Segments -
Three Months Ended 31 December 1998 and 1997.............. 7
Summary by Geographic Regions -
Three Months Ended 31 December 1998 and 1997.............. 8
Notes to Consolidated Financial Statements .................. 9
Management's Discussion and Analysis ........................ 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................... 20
Signatures .................................................. 21
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
(UNAUDITED)
(Millions of dollars, except per share)
31 December 30 September
ASSETS 1998 1998
------ ---------------- -----------------
CURRENT ASSETS
Cash and cash items $ 57.8 $ 61.5
Trade receivables, less allowances for doubtful accounts 886.1 881.1
Inventories 452.1 428.6
Contracts in progress, less progress billings 136.6 94.1
Other current assets 129.2 176.4
TOTAL CURRENT ASSETS 1,661.8 1,641.7
---------- ---------
INVESTMENT IN NET ASSETS OF AND ADVANCES TO
UNCONSOLIDATED AFFILIATES 440.8 362.0
---------- ---------
OTHER INVESTMENTS AND ADVANCES 24.5 18.4
---------- ---------
PLANT AND EQUIPMENT, at cost 9,687.2 9,489.5
Less - Accumulated depreciation 4,793.5 4,703.4
---------- ---------
4,893.7 4,786.1
PLANT AND EQUIPMENT, net ---------- ---------
346.4 324.9
GOODWILL ---------- ---------
351.7 356.5
OTHER NONCURRENT ASSETS ---------- ---------
TOTAL ASSETS $7,718.9 $7,489.6
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Payables, trade and other $ 480.4 $ 478.7
Accrued liabilities 269.6 332.8
Accrued income taxes 54.3 30.9
Short-term borrowings 252.7 270.1
Current portion of long-term debt 310.1 153.1
-------- --------
TOTAL CURRENT LIABILITIES 1,367.1 1,265.6
-------- --------
LONG-TERM DEBT 2,123.2 2,274.3
-------- --------
DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES 605.2 570.9
-------- --------
DEFERRED INCOME TAXES 733.9 703.0
-------- --------
TOTAL LIABILITIES 4,829.4 4,813.8
-------- --------
MINORITY INTERESTS IN SUBSIDIARY COMPANIES 117.0 8.5
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share 249.4 249.4
Capital in excess of par value 331.1 329.2
Retained earnings 3,490.5 3,400.0
Accumulated other comprehensive income (203.3) (231.5)
Treasury stock, at cost (681.6) (657.0)
Shares in trust (413.6) (422.8)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 2,772.5 2,667.3
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,718.9 $7,489.6
======== ========
3
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
(UNAUDITED)
(Millions of dollars, except per share)
Three Months Ended
31 December
------------------------------
1998 1997
---- ----
SALES AND OTHER INCOME
Sales $1,274.6 $1,234.8
Other income (expense), net 4.9 (4.9)(a)
-------- --------
1,279.5 1,229.9
-------- --------
COSTS AND EXPENSES
Cost of sales 875.6 831.0 (b)
Selling and administrative 183.2 159.6 (b)
Research and development 31.7 26.3
-------- -------
OPERATING INCOME 189.0 213.0
Income from equity affiliates, net of related expenses 9.8 5.7
Gain on Ref-Fuel Sale and Contract Settlement -- 75.2
Net gain on formation of polymer venture 31.2 --
Interest expense 40.4 40.2
-------- -------
INCOME BEFORE TAXES AND MINORITY INTEREST 189.6 253.7
Income taxes 59.9 92.8
Minority interest 3.3 .4 (a)
-------- -------
NET INCOME $ 126.4 $ 160.5
======== =========
BASIC EARNINGS PER COMMON SHARE $.60 $.74
-------- -------
DILUTED EARNINGS PER COMMON SHARE $.59 $.72
-------- -------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (in millions) 211.4 218.1
-------- -------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
(in millions) 215.4 222.6
-------- -------
DIVIDENDS DECLARED PER COMMON SHARE - Cash $.17 $ .15
-------- -------
(a) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of minority interest in a separate
line item between income taxes and net income.
(b) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of distribution expense in cost of
sales.
4
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(Millions of dollars)
Three Months Ended
31 December
----------------------------
1998 1997
---------- -----------
NET INCOME $126.4 $160.5
OTHER COMPREHENSIVE INCOME, net of tax
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 24.3 (32.8)
UNREALIZED GAINS ON INVESTMENTS:
Unrealized holding gains (losses) arising during the period 3.9 (2.4)
Less: reclassification adjustment for gains included in net income -- --
------ ------
NET UNREALIZED GAINS (LOSSES) ON INVESTMENTS 3.9 (2.4)
------ ------
TOTAL OTHER COMPREHENSIVE INCOME 28.2 (35.2)
------ ------
COMPREHENSIVE INCOME $154.6 $125.3
====== ======
5
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS
(UNAUDITED)
(Millions of dollars) Three Months Ended
31 December
----------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net Income $ 126.4 $ 160.5
Adjustments to reconcile income to cash provided by operating activities:
Depreciation 127.8 117.6
Deferred income taxes 21.4 17.5
Ref-Fuel divestiture deferred income taxes -- (80.3)
Gain on formation of polymer venture (31.2) --
Undistributed (earnings) of unconsolidated affiliates 6.7 34.0
(Gain) loss on sale of assets and investments .5 (82.9)
Other 58.5 30.2
Working capital changes that provided (used) cash, net of effects of
acquisitions:
Trade receivables 6.7 53.6
Other receivables 45.5 (17.4)
Inventories and contracts in progress (47.5) 6.0
Payables, trade and other 2.1 (4.4)
Accrued liabilities (73.5) (86.2)
Accrued income taxes 23.7 151.8
Other 6.0 (20.6)
Cash provided by (used for) discontinued operations -- (3.2)
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 273.1 276.2
----- -----
INVESTING ACTIVITIES
Additions to plant and equipment (189.5) (154.9)
Acquisitions, less cash acquired (4.6) (16.6)
Investment in and advances to unconsolidated affiliates (50.4) (4.5)
Proceeds from sale of assets and investments 17.3 248.3
Other 14.7 (.9)
----- -----
CASH PROVIDED BY (USED FOR)INVESTING ACTIVITIES (212.5) 71.4
----- -----
FINANCING ACTIVITIES
Long-term debt proceeds .8 2.0
Payments on long-term debt 4.2 (43.5)
Net increase (decrease) in commercial paper (16.1) (65.5)
Net increase (decrease) in other short-term borrowings (1.2) (24.6)
Dividends paid to shareholders (36.0) (33.0)
Purchase of Treasury Stock (24.6) (150.0)
Other 7.6 1.4
----- -----
CASH (USED FOR) FINANCING ACTIVITIES (65.3) (313.2)
----- -----
Effect of Exchange Rate Changes on Cash 1.0 (1.0)
----- -----
Increase (decrease) in Cash and Cash Items (3.7) 33.4
Cash and Cash Items - Beginning of Year 61.5 52.5
----- -----
Cash and Cash Items - End of Period $57.8 $ 85.9
----- -----
6
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SUMMARY BY BUSINESS SEGMENTS
(UNAUDITED)
(Millions of dollars)
Three Months Ended
31 December
----------------------------
1998 1997
---- ----
Sales:
Industrial Gases $740.8 $727.0
Chemicals 401.8 380.9
Equipment/Services 132.0 126.9
Corporate/Other -- --
- -------------------------------- -------- --------
CONSOLIDATED $1,274.6 $1,234.8
- -------------------------------- -------- --------
Operating
Income:
Industrial Gases $122.2 (a) $147.2
Chemicals 52.6 (a) 68.4
Equipment/Services 28.8 (a) 12.6
Corporate/Other (14.6)(a) (15.2) (b)
- -------------------------------- -------- --------
CONSOLIDATED $189.0 $213.0
- -------------------------------- -------- --------
Equity Affiliates' Income:
Industrial Gases $6.1 $.4
Chemicals 2.1 --
Equipment/Services 1.1 4.4
Corporate/Other .5 .9
- -------------------------------- -------- --------
CONSOLIDATED $9.8 $5.7
- -------------------------------- -------- --------
Operating Return on Net Assets:
Industrial Gases 11.3 % 11.4 %
Chemicals 16.2 18.1
Equipment/Services 32.7 11.3
Corporate/Other N/A N/A
- -------------------------------- -------- --------
CONSOLIDATED 12.0 % 11.5 %
- -------------------------------- -------- --------
(a) The results for the three months ended 31 December 1998 include the cost
reduction charge in Industrial Gases ($16.3 million), Chemicals ($1.6
million), Equipment/Services ($1.9 million), and Corporate/Other ($.5
million).
(b) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of minority interest in a separate
line item between income taxes and net income.
7
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SUMMARY BY GEOGRAPHIC REGIONS
(REVISED)
(UNAUDITED)
(Millions of dollars)
Three Months Ended
31 December
----------------------------
1998 1997
---- ----
Sales:
United States $807.9 $876.0
Europe 399.3 299.4
Canada/Latin America 58.0 51.3
Other 9.4 8.1
- -------------------------------- -------- --------
CONSOLIDATED $1,274.6 $1,234.8
- -------------------------------- -------- --------
Operating
Income:
United States $136.0 (a) $169.2 (b)
Europe 48.3 (a) 41.2 (b)
Canada/Latin America 5.4 3.5
Other (.7) (.9) (b)
- -------------------------------- -------- --------
CONSOLIDATED $189.0 $213.0
- -------------------------------- -------- --------
Equity Affiliates' Income:
United States $1.9 $5.5
Europe 2.9 2.7
Canada/Latin America 4.5 2.9
Other .5 (5.4)
- -------------------------------- -------- --------
CONSOLIDATED $9.8 $5.7
- -------------------------------- -------- --------
(a) The results for the three months ended 31 December 1998 include the cost
reduction charge in the United States ($10.5 million) and Europe ($9.8
million).
(b) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of minority interest in a separate
line item between income taxes and net income.
8
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 31 December 1998 1997
- ------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income ..................... $ 126.4 $160.5
Denominator for basic EPS
- -weighted average shares ....................... 211.4 218.1
Effect of diluted securities:
Employee stock options ....................... 3.0 3.6
Other award plans ............................ 1.0 .9
-------- --------
4.0 4.5
Denominator for diluted EPS
- -weighted average shares and
assumed conversions ............................ 215.4 222.6
======== ========
Basic EPS ...................................... $ .60 $ .74
======== ========
Diluted EPS .................................... $ .59 $ .72
======== ========
Options on 8.1 million and 2.6 million shares of common stock were not included
in computing diluted EPS for the first quarter of fiscal 1999 and 1998,
respectively because their effects were antidilutive. The potential dilutive
effect of these options can not be estimated based on current information.
The results for the three months ended 31 December 1998 include a net gain of
$31.2 million ($21.4 million after-tax or $.10 per share) related to the
formation of Air Products Polymers (a 65% majority owned venture with
Wacker-Chemie GmbH). The gain was partially offset by costs related to an
emulsions facility shutdown not included in the joint venture and for costs
related to indemnities provided by Air Products to the venture.
On 21 December 1998, the Company committed to a global cost reduction plan. The
plan results in a staffing reduction of 206 employees in the areas of
manufacturing, distribution, and overhead. The plan will be completed by
31 December 1999.
9
$20.3 million ($12.9 million after-tax or $.06 per share) related to employee
termination benefits was charged to expense in the fiscal quarter of which
$4.8 million has been incurred and the balance is included in accrued
liabilities. The charges to cost of sales, selling and administrative and
research and development were $9.9 million, $9.3 million and $1.1 million,
respectively.
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.(BFI), to a limited liability company (LCC) formed by Duke
Energy Power Services and United American Energy Corporation. This transaction
provides for the sale of Air Products' interest in American Ref-Fuel's five
waste-to-energy facilities for $237 million, and the assumption of various
parental support agreements by Duke Energy Capital Corporation, the parent
company of Duke Energy Power Services. The income statement for the three months
ended 31 December 1997 includes a gain of $62.6 million from this sale,
($35.1 million after-tax or $.16 per share).
The results for the three months ended 31 December 1997 also include a gain of
$12.6 million from a cogeneration project contract settlement ($7.6 million
after-tax or $.03 per share).
10
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST QUARTER FISCAL 1999 VS. FIRST QUARTER FISCAL 1998
------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the first quarter of fiscal 1999 were $1,274.6 million, 3% higher than
in the same quarter of the prior year while operating income, was down $24.0
million, or 11%, to $189.0 million. Profits of equity affiliates increased $4.1
million to $9.8 million for the three months ended 31 December 1998. Net income
was $126.4 million, or $.59 diluted earnings per share, compared to net income
of $160.5 million, or $.72 diluted earnings per share, in the year-ago quarter.
The current year included two special items: an after-tax gain of $21.4 million,
or $.10 per share related to the formation of Air Products Polymers and an
after-tax charge of $12.9 million, or $.06 per share related to a global cost
reduction plan. Excluding the impact of these special items, net income was
$117.9 million, and diluted earnings per share was $.55. The prior year also
included two special items: an after-tax gain of $35.1 million, or $.16 per
share from the sale of the Company's 50% interest in American Ref-Fuel Company
and an after-tax gain of $7.6 million, or $.03 per share from a cogeneration
project contract settlement. Excluding these special items, net income was $118
million, and diluted earnings per share was $.53 for the quarter of fiscal 1998.
Excluding these special items, net income for the first quarter of fiscal 1999
of $117.9 million is essentially unchanged from prior year, while diluted
earnings per share of $.55 is up 4%. The remaining discussion and analysis of
the consolidated results of operations excludes the impact of special items.
Consolidated sales were up 3% driven by growth in all three segments, primarily
outside North America. Higher sales in Europe and Asia were offset by decreased
North American sales across several end markets in the industrial gases segment.
Volume gains in the chemicals businesses were due to the new emulsions venture
and prior year acquisitions. The equipment segment sales were slightly higher
than last year.
Operating income was slightly below last year primarily due to slower
electronics, chemical processing and steel market segments. Volume growth
declined from high levels last year in the methylamine, higher amine, and PVOH
businesses of our chemicals segment. The equipment segment generated record
operating income due to improved cost performance and a favorable product mix.
Equity affiliates' income increased principally due to foreign exchange losses
recorded in the prior year. Foreign exchange had a minimal impact on equity
affiliates' income in the current quarter.
11
Industrial Gases - Sales increased 2% to $740.8 million in the first quarter of
fiscal 1999 while operating income decreased 17% to $122.2 million. Excluding
the cost reduction charge included in the current year results, operating income
was $138.5 million, a decline of 6%. Merchant gases volumes grew 2% in the
United States, with LOX/LIN up 3% including non-cryo. Soft business conditions
in the metals and electronics areas partially offset growth in several other end
use markets. LOX/LIN pricing was down 3% due to continuing competitive pressure.
Tonnage gases volumes in the United States declined 3% due to lower spot HYCO
sales and cutbacks at several large steel accounts. European merchant volumes
were up 4% with LOX/LIN including non-cryo up 8%. Carburos Metalicos continues
to provide strong growth. Continuing competitive pressure in northern Europe
resulted in a 2% decline in LOX/LIN prices. A planned customer outage in
Rotterdam resulted in a tonnage gases decline. Total gases margin of 18.7% was
down 1.5% from the prior year. Almost half of the decline is due to business and
geographic mix and the balance is due to lower volumes in the HYCO and steel
accounts as well as a weak electronics market.
Equity affiliates' income for the first quarter of fiscal 1999 increased to $6.1
million compared to $.4 million in the prior year. This increase was due
primarily to the unfavorable foreign exchange effects recorded in the prior
year. The impact of foreign exchange in the current year was minimal.
Chemicals- Sales in the first quarter of fiscal 1999 of $401.8 million increased
5%, or $20.9 million. Operating income decreased $15.8 million to $52.6 million.
Excluding the cost reduction plan charge included in the current year results,
operating income was $54.2 million, a decline of 21%. Overall volumes increased
8%. Excluding the impact of the emulsions venture and prior year acquisitions,
the current quarter volumes decreased 3%. Methylamine, higher amine, and PVOH
volumes were down from the strong levels in the prior year. The current year
operating margin of 13.5% declined as a result of several factors including
costs related to new facilities brought on-stream, customer outages, and a less
favorable product mix.
Equity affiliates' income for the first quarter of fiscal 1999 was $2.1 million.
This amount mainly reflects the Company's 20% interest in the redispersible
powders venture formed with Wacker-Chemie GmbH.
Equipment and Services - Sales increased slightly from $126.9 million in the
prior year to $132.0 million. Operating income increased from $12.6 million to
$28.8 million. Excluding the cost reduction plan charge included in the current
year results, operating income increased $18.1 million. The record operating
income was achieved as a result of improved cost performance, a favorable
project mix, and early completion of several key projects. Sales backlog for the
equipment product line declined to $212 million at 31 December 1998. This
backlog compares to $302 million at 30 September 1998 and $277 million at 31
December 1997.
Equity affiliates' income for the first quarter of fiscal 1999 decreased $3.3
million to $1.1 million. This decline is mainly a result of lower energy pricing
in the power generation business.
12
Corporate and Other - Operating loss declined $.6 million to $14.6 million.
Excluding the cost reduction plan charge included in the current year results,
the operating loss decreased $1.1 million. The prior year results included
unfavorable foreign exchange impacts. The current year foreign exchange impacts
were minimal.
Equity affiliates' income for the first quarter of fiscal 1999 decreased $.4
million mainly due to the American Ref-Fuel Company being included as an equity
affiliate for the first two months of the prior year.
INTEREST
Interest expense of $40.4 million is approximately at the level of the prior
fiscal year first quarter. Increased interest incurred on a higher average debt
balance was offset by lower rates and higher capitalized interest.
INCOME TAXES
The consolidated effective tax rate on income was 31.6%. Excluding the tax rate
impact related to the gain from the formation of the emulsions venture and the
cost reduction program, the effective tax rate is 32.2%. This rate is 1.7% lower
than the prior year rate mainly due to higher after-tax equity affiliates'
income.
ACCOUNTING CHANGES
Effective 1 October 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The standard establishes additional disclosure for the
elements of comprehensive income and a computation of total comprehensive
income. The Company's implementation resulted in a new financial statement,
"Consolidated Statement of Comprehensive Income."
As of 1 January 1999, the Company will cease applying highly inflationary
accounting to operations in Mexico. For operations that used the US dollar for
translation, due to hyperinflationary conditions, the functional currency will
now be the Mexican Peso. No material effects on the financial statements are
expected to result from this change.
Beginning with the fiscal quarter ended 31 December 1998, the Company changed
the income statement presentation of distribution expense. Distribution expense
is now included as part of "Cost of sales" and was previously reported as part
of "Selling, distribution and administrative." This change reflects a more
common industry classification of expenses. Results of the period ended 31
December 1997 were restated for comparability. A disclosure of the impacts of
this change on prior periods, 1988 to 1998, is enclosed with this filing.
13
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first three months of fiscal 1999 totaled $245.4
million compared to $186.9 million in the corresponding period of the prior
year. Additions to plant and equipment increased from $154.9 million during the
first three months of fiscal 1998 to $189.5 million during the current period.
Investments in unconsolidated affiliates were $50.4 million during the first
three months of fiscal 1999 versus $4.5 million last year. The current year
results include a cash contribution of $33.5 million related to the formation of
the redispersible powders venture with Wacker-Chemie GmbH. Capital expenditures
are expected to be approximately $1.0 billion in fiscal 1999. It is 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 three months of fiscal
1999 ($273.1 million) combined with proceeds from the sale of assets and
investments ($17.3 million) were used largely for capital expenditures ($245.4
million), purchase of common stock for treasury ($24.6 million), debt repayments
($12.3 million) and cash dividends ($36.0 million). Cash and cash items
decreased $3.7 million from $61.5 million at the beginning of the fiscal year to
$57.8 million at 31 December 1998. The net decrease in commercial paper was
$16.1 million.
Total debt at 31 December 1998 and 30 September 1998, expressed as a percentage
of the sum of total debt and shareholders' equity, was 49% and 50%,
respectively. Total debt decreased slightly from $2,697.5 million at 30
September 1998 to $2,686.0 million at 31 December 1998.
There was $304.6 million of commercial paper outstanding at 31 December 1998.
The Company's revolving credit commitments amounted to $600.0 million at 31
December 1998 with funding available in 13 currencies. No borrowings were
outstanding under these commitments. Additional commitments totaling $100.6
million are maintained by the Company's foreign subsidiaries, of which $13.1
million was utilized at 31 December 1998.
At 31 December 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 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.
14
The notional principal and fair value of interest rate swap agreements at 31
December 1998 and 30 September 1998 were as follows:
(Millions of dollars)
31 December 1998 30 September 1998
-------------------------------- ---------------------------------
Notional Fair Value Notional Fair Value
Amount Gain (Loss) Amount Gain (Loss)
------------ ----------------- -------------- ---------------
Fixed to Variable $361.0 $ 25.0 $461.0 $37.6
Variable to Variable 60.0 110.8 60.0 86.4
------------- ----------------- -------------- ---------------
Total $421.0 $135.8 $521.0 $124.0
============= ================= ============== ===============
During the first three months of fiscal 1999 two fixed to variable interest rate
swap agreements with a total notional amount of $100 million were terminated,
resulting in a deferred gain of $7.5 million. Additionally, subsequent to 31
December 1998, one fixed to variable interest rate swap agreement with a
notional amount of $50 million was terminated, resulting in a deferred gain of
$3.0 million.
A $55.6 million asset has been recognized in the financial statements related to
the above variable to variable interest rate swap agreements. Additionally, a
$55.6 million liability has been recognized in the financial statements related
to the corresponding debt agreements.
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
December 1998 was $389.3 million. The fair value of the agreements was a loss of
$2.3 million, of which a $28.0 million gain related to the currency component
was recognized in the financial statements. The remaining $30.3 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 1998 interest rate and currency swap agreements
were outstanding with a notional principal amount and fair value of $419.3
million and a gain of $1.8 million, respectively.
The estimated fair value of the Company's long-term debt, including current
portion, as of 31 December 1998 is $2,813.2 million compared to a book value of
$2,433.3 million.
During the first quarter of fiscal 1998, .6 million shares of the Company's
outstanding common stock were repurchased at a cost of $24.6 million.
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.
15
POLYMER VENTURE FORMATION AND GAIN
On 1 October 1998, the Company and Wacker-Chemie GmbH (Munich, Germany) formed
two joint ventures to combine their emulsions and redispersible powder
businesses.
The polymer emulsions joint venture, Air Products Polymers, L.P. (APP), is
headquartered in the United States and has facilities in Germany, Mexico, Korea,
and the United States. Air Products has a 65% interest in the venture and
Wacker-Chemie has a 35% interest. Air Products fully consolidated the results of
the venture and the Wacker-Chemie interest has been accounted for as a minority
interest.
The results for the three months ended 31 December 1998 include a net gain of
$31.2 million ($21.4 million after-tax or $.10 per share) related to the
formation of APP. Deferred taxes of $10.2 million were provided as a result
of the gain. The gain was partially offset by costs related to an emulsions
facility shutdown not included in the venture and for costs related to
indemnities provided by Air Products to the venture. The APP purchase price
allocation period remains open.
The assets contributed by the Company to APP were recorded by the venture at
carryover value. The venture applied purchase accounting to the assets provided
by Wacker-Chemie GmbH and recorded them at fair market value. The Company's
contribution was treated as a partial sale of assets thus resulting in a gain.
The Company elected the option of recording the gain to the statement of
consolidated income. The option must be consistently applied to all future gains
and losses due to similar transactions and is adopted as a Company accounting
policy. This form of transaction is not expected to be a common occurrence.
The redispersible powders venture, Wacker Polymer Systems (WPS), is
headquartered in Germany with manufacturing facilities in Germany and the United
States. Air Products has a 20% interest in this venture and reported the results
by the equity accounting method.
COST REDUCTION PLAN
On 21 December 1998, the Company committed to a global cost reduction plan. The
plan results in a staffing reduction of 206 employees in the areas of
manufacturing, distribution and overhead. The plan has been communicated to all
employees and as of the filing, approximately 75% of the employees impacted have
been notified. The plan will be completed by 31 December 1999. $20.3 million
($12.9 million after-tax or $.06 per share) related to employee termination
benefits was charged to expense in the fiscal quarter ended 31 December 1998, of
which $4.8 million was incurred and the balance was included in accrued
liabilities. The charges to cost of sales, selling and administrative, and to
research and development were $9.9 million, $9.3 million and $1.1 million,
respectively. The charges to segments were to Industrial Gases ($16.3 million),
Chemicals ($1.6 million), Equipment/Services ($1.9 million) and Corporate/Other
($.5 million). Benefits of the cost reduction plan will begin to occur in the
second quarter of the
16
current fiscal year and will reach an annualized savings of approximately
$15 million in early fiscal year 2000.
YEAR 2000 READINESS DISCLOSURE
Year 2000 Preparation
During the fiscal quarter ended 31 December 1998, the Company continued to
achieve the critical milestones in the Year 2000 readiness program. Progress and
exposure are essentially as planned and disclosed in the fiscal year 1998 Annual
Report issued in December 1998. The $40 million cost estimate as previously
disclosed remains currently viable. The next phase, Year 2000 contingency
planning, is in progress and is expected to be ready to address Year 2000 issues
as they arise.
Information Technology
Over 96% of the mission-critical infrastructure and applications portfolio have
been tested and certified as Year 2000 ready. This activity is expected to be
complete by the end of the second fiscal quarter. The Company continues to
believe that the combination of readiness certification and contingency plans
will result in no material adverse impact on the Company's operations or
financial condition due to Information Technology Systems.
Process Control and Embedded Chip Systems
Over 98% of the Company-owned or operated Non-Information Technology Systems
have been inventoried and risk assessment is complete. Year 2000 certification
efforts continue as planned with over 50% of the mission critical systems
certified as Year 2000 ready.
Third Parties
Assessment of the Company's key suppliers is continuing as planned.
EURO IMPACT
The Euro has become operational as of January 1999. The Company does not
anticipate materially adverse operational or competitive impacts from this
event.
17
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
RESTATEMENT OF COST OF SALES AND SELLING AND ADMINISTRATIVE
Beginning with the fiscal quarter ending 31 December 1998, the Company is
reporting distribution expense as part of "Cost of sales." Distribution expense
was previously reported as part of "Selling, distribution, and administrative."
The following tables disclose the impact of this change for the fiscal quarters
of 1998 and 1997 and fiscal years 1996 through 1988.
Fiscal Years 1998 and 1997 by Quarter
(In millions)
Fiscal Year 1998 Fiscal Year 1997
Reported Restated Reported Restated
- -------------------------------------------------------------------------------------------------------------------
Cost of sales:
Quarter 1 $ 720.7 $ 831.0 $ 692.7 $ 791.4
Quarter 2 701.9 816.1 686.3 793.8
Quarter 3 708.7 824.1 663.4 771.1
Quarter 4 725.2 845.6 729.2 839.1
- --------------------------------------------------------------------------------------------------------
Total $2,856.5 $3,316.8 $2,771.6 $3,195.4
- --------------------------------------------------------------------------------------------------------
Selling and administrative:
Quarter 1 $ 269.9 $ 159.6 $ 241.5 $ 142.8
Quarter 2 277.3 163.1 264.7 157.2
Quarter 3 287.4 172.0 266.8 159.1
Quarter 4 285.7 165.3 278.3 168.4
- -------------------------------------------------------------------------------------------------------
Total $1,120.3 $ 660.0 $1,051.3 $ 627.5
- --------------------------------------------------------------- -----------------------------------------------
Fiscal Years 1996 through 1988
Selling and
Cost of sales administrative
Reported Restated Reported Restated
- -------------------------------------------------------------------------------
Fiscal Year 1996 $ 2,408 $ 2,780 $ 920 $ 548
Fiscal Year 1995 $ 2,317 $ 2,678 $ 869 $ 508
Fiscal Year 1994 $ 2,112 $ 2,455 $ 789 $ 446
Fiscal Year 1993 $ 2,030 $ 2,340 $ 744 $ 434
Fiscal Year 1992 $ 1,937 $ 2,233 $ 724 $ 428
Fiscal Year 1991 $ 1,755 $ 2,030 $ 686 $ 411
Fiscal Year 1990 $ 1,775 $ 2,042 $ 659 $ 392
Fiscal Year 1989 $ 1,601 $ 1,843 $ 610 $ 368
Fiscal Year 1988 $ 1,452 $ 1,666 $ 545 $ 331
18
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. In addition to important risk factors and
uncertainties referred to in the Management's Discussion and Analysis such as
those relating to the Year 2000, other 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, customer demand and other
factors resulting from fluctuations in interest rates and foreign currencies,
the impact of competitive products and pricing, success of work process programs
to control costs, and the impact of tax and other legislation and other
regulations in the jurisdictions in which the Company and its affiliates
operate.
19
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 for the three months ended
31 December 1998, which is submitted electronically
to the Securities and Exchange Commission for information
only, and not filed.
(b) Current Reports on Form 8-K dated 1 October 1998,
22 October 1998 and 28 October 1998 were filed by the
registrant during the quarter ended 31 December 1998
in which Item 5 of such form was reported.
20
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: February 8, 1999 By: /s/ Leo J. Daley
-----------------------------
Leo J. Daley
Vice President - Finance
(Chief Financial Officer)
21
===============================================================================
UNITED STATES
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 31 December 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 for the three months ended
31 December 1998, which is submitted electronically
to the Securities and Exchange Commission for information
only, and not filed.
(b) Current Reports on Form 8-K dated 1 October 1998,
22 October 1998 and 28 October 1998 were filed by the
registrant during the quarter ended 31 December 1998
in which Item 5 of such form was reported.
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
Three
Months
Ended
Year Ended 30 September 31 Dec
--------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998
Earnings: (Millions of dollars)
Income before extraordinary item and
the cumulative effect of accounting
changes: $233.5 $368.2 $416.4 $429.3 $546.8 $126.4
Add (deduct):
Provision for income taxes 95.2 186.2 195.5 203.4 280.9 60.8
Fixed charges, excluding capitalized interest 127.1 148.8 184.0 233.0 202.8 48.5
Capitalized interest amortized during the period 8.0 9.1 9.4 8.3 7.4 1.5
Undistributed earnings of
less-than-fifty-percent-owned affiliates (2.8) (25.4) (40.6) (31.1) (25.3) (8.9)
---- ----- ----- ----- ----- ------
Earnings, as adjusted $461.0 $686.9 $764.7 $842.9 $1,012.6 $228.3
====== ====== ====== ====== ======== ======
Fixed Charges:
Interest on indebtedness, including capital lease
obligations $118.2 $139.4 $171.7 $217.8 $186.7 $ 44.3
Capitalized interest 9.7 18.5 20.0 20.9 18.4 6.8
Amortization of debt discount premium and expense .8 .2 1.5 1.8 1.9 .5
Portion of rents under operating leases
representative of the interest factor 8.1 9.2 10.8 13.4 14.2 3.7
------ ------ ------ ------ ------ -----
Fixed charges $136.8 $167.3 $204.0 $253.9 $221.2 $ 55.3
====== ====== ====== ====== ====== =======
Ratio of Earnings to Fixed Charges: 3.4 4.1 3.7 3.3 4.6 4.1
====== ====== ====== ====== ====== =======
5
1,000,000
US Dollars
3-MOS
SEP-30-1999
OCT-01-1998
DEC-31-1998
1
58
0
898
12
452
1662
9687
4793
7719
1367
2123
0
0
249
2523
7719
1275
1275
876
876
32
1
40
190
60
126
0
0
0
156
0.6
0.59
