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 March 1999
----------------
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
------------------------------- ------------------------------------
(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 6 May 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 March 1999 and 30 September 1998 .............................. 3
Consolidated Income -
Three Months and Six Months Ended 31 March 1999 and 1998 ......... 4
Consolidated Statement of Comprehensive Income -
Three Months and Six Months Ended 31 March 1999 and 1998.......... 5
Consolidated Cash Flows -
Six Months Ended 31 March 1999 and 1998 .......................... 6
Summary by Business Segments -
Three Months and Six Months Ended 31 March 1999 and 1998.......... 7
Summary by Geographic Regions -
Three Months and Six Months Ended 31 March 1999 and 1998.......... 8
Notes to Consolidated Financial Statements .......................... 9
Management's Discussion and Analysis ................................ 11
Part II. Other Information
Item 1. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security-Holders......... 20
Item 6. Exhibits and Reports on Form 8-K ........................... 21
Signatures .......................................................... 22
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)
31 March
ASSETS 1999 30 September
------ (Unaudited) 1998
----------- ------------
CURRENT ASSETS
Cash and cash items $ 85.5 $ 61.5
Trade receivables, less allowances for doubtful accounts 889.2 881.1
Inventories 432.9 428.6
Contracts in progress, less progress billings 143.0 94.1
Other current assets 164.8 176.4
-------- --------
TOTAL CURRENT ASSETS 1,715.4 1,641.7
-------- --------
INVESTMENT IN NET ASSETS OF AND ADVANCES TO
UNCONSOLIDATED AFFILIATES 441.5 362.0
-------- --------
OTHER INVESTMENTS AND ADVANCES 24.7 18.4
-------- --------
PLANT AND EQUIPMENT, at cost 9,744.2 9,489.5
Less - Accumulated depreciation 4,833.1 4,703.4
-------- --------
PLANT AND EQUIPMENT, net 4,911.1 4,786.1
-------- --------
GOODWILL 343.0 324.9
-------- --------
OTHER NONCURRENT ASSETS 357.9 356.5
-------- --------
TOTAL ASSETS $7,793.6 $7,489.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Payables, trade and other $ 513.6 $ 478.7
Accrued liabilities 306.5 332.8
Accrued income taxes 30.7 30.9
Short-term borrowings 288.3 270.1
Current portion of long-term debt 201.7 153.1
-------- --------
TOTAL CURRENT LIABILITIES 1,340.8 1,265.6
-------- --------
LONG-TERM DEBT 2,231.7 2,274.3
-------- --------
DEFERRED INCOME AND OTHER NONCURRENT
LIABILITIES 590.6 570.9
-------- --------
DEFERRED INCOME TAXES 730.2 703.0
-------- --------
TOTAL LIABILITIES 4,893.3 4,813.8
-------- --------
MINORITY INTERESTS IN SUBSIDIARY COMPANIES 124.3 8.5
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share 249.5 249.4
Capital in excess of par value 335.2 329.2
Retained earnings 3,561.3 3,400.0
Accumulated other comprehensive income (283.7) (231.5)
Treasury stock, at cost (681.7) (657.0)
Shares in trust (404.6) (422.8)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 2,776.0 2,667.3
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,793.6 $7,489.6
======== ========
3
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
(Unaudited)
(Millions of dollars, except per share)
Three Months Ended Six Months Ended
31 March 31 March
----------------------- --------------------
1999 1998 1999 1998
SALES AND OTHER INCOME
Sales $1,253.3 $1,208.6 $2,527.9 $2,443.4
Other income, net 4.5 4.0(a) 9.4 (.9)(a)
-------- -------- -------- ------------
1,257.8 1,212.6 2,537.3 2,442.5
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales 877.5 816.1(b) 1,753.1 1,647.1(b)
Selling and administrative 168.3 163.1(b) 351.5 322.7(b)
Research and development 29.3 27.0 61.0 53.3
----- ------- ------ ------
OPERATING INCOME 182.7 206.4 371.7 419.4
Income from equity affiliates, net of
related expenses 14.1 7.9 23.9 13.6
Gain on American Ref-Fuel sale and
contract settlements -- -- -- 75.2
Net gain (loss) on formation of polymer
venture (.1) -- 31.1 --
Interest expense 40.4 39.0 80.8 79.2
----- ------- ------ ------
INCOME BEFORE TAXES AND MINORITY INTEREST 156.3 175.3 345.9 429.0
Income taxes 45.1 54.5 105.0 147.3
Minority interest (c) 4.3 .3(a) 7.6 .7(a)
----- ----- ------- --------
NET INCOME $106.9 $120.5 $ 233.3 $ 281.0
====== ====== ======= =======
BASIC EARNINGS PER COMMON SHARE $.51 $.56 $1.10 $1.29
------ ------ ------- -------
DILUTED EARNINGS PER COMMON SHARE $.50 $.55 $1.08 $1.27
------ ------ ------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (in millions) 211.6 215.9 211.5 217.1
------ ------ ------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES (in millions) 215.1 220.9 215.3 221.8
------ ------ ------- -------
DIVIDENDS DECLARED PER COMMON
SHARE - Cash $.17 $.15 $.34 $.30
------- ------- -------- -------
(a) The results for the three and six months ended 31 March 1998 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 and six months ended 31 March 1998 have been
restated to reflect the current year presentation of distribution expense
in cost of sales.
(c) Minority interest primarily includes before-tax amounts.
4
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(Millions of dollars)
Three Months Ended Six Months Ended
31 March 31 March
------------------ ----------------
1999 1998 1999 1998
----- ------ ------ -----
NET INCOME $106.9 $120.5 $233.3 $281.0
------ ------ ------ ------
OTHER COMPREHENSIVE INCOME,
net of tax
Foreign currency translation adjustments (80.6) (47.9) (56.3) (80.7)
Unrealized gains on investments:
Unrealized holding gains arising during the period .2 4.1 4.1 1.7
Less: reclassification adjustment for
gains included in net income -- -- -- --
------ ------ ------ ------
Net unrealized gains on investments .2 4.1 4.1 1.7
------ ------ ------ ------
TOTAL OTHER COMPREHENSIVE INCOME (80.4) (43.8) (52.2) (79.0)
------ ------ ------ ------
COMPREHENSIVE INCOME $26.5 $76.7 $181.1 $202.0
====== ====== ====== ======
5
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS
(Unaudited)
(Millions of dollars)
Six Months Ended
31 March
--------------------------
1999 1998
------ -------
OPERATING ACTIVITIES
Net Income $233.3 $281.0
Adjustments to reconcile income to cash provided by
operating activities:
Depreciation 261.3 238.2
Deferred income taxes 31.9 37.6
Ref-Fuel divestiture deferred income taxes -- (80.3)
Gain on formation of polymer venture (31.1) --
Undistributed (earnings) of unconsolidated affiliates (4.6) 15.9
Loss (gain) on sale of assets and investments 1.6 (83.7)
Other 68.0 65.1
Working capital changes that provided (used) cash, net
of effects of acquisitions:
Trade receivables (18.7) 9.7
Other receivables 43.2 34.0
Inventories and contracts in progress (40.2) 18.6
Payables, trade and other 45.7 (66.9)
Accrued liabilities (31.2) (48.8)
Accrued income taxes (2.4) 89.0
Other (5.1) (10.9)
Cash (used for) discontinued operations (2.0) (3.4)
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 549.7 495.1
----- -----
INVESTING ACTIVITIES
Additions to plant and equipment (450.9) (332.7)
Acquisitions, less cash acquired (22.4) (125.0)
Investment in and advances to unconsolidated affiliates (66.0) (10.0)
Proceeds from sale of assets and investments 31.3 285.9
Other 19.8 (13.8)
------ ------
CASH (USED FOR) INVESTING ACTIVITIES (488.2) (195.6)
------ ------
FINANCING ACTIVITIES
Long-term debt proceeds 51.5 52.2
Payments on long-term debt (31.7) (54.0)
Net increase in commercial paper 11.4 10.2
Net increase (decrease) in other short-term borrowings 9.2 (15.1)
Dividends paid to shareholders (71.9) (65.4)
Purchase of Treasury Stock (24.6) (200.0)
Other 19.6 7.1
------ ------
CASH (USED FOR) FINANCING ACTIVITIES (36.5) (265.0)
------ ------
Effect of Exchange Rate Changes on Cash (1.0) (2.0)
Increase in Cash and Cash Items 24.0 32.5
Cash and Cash Items - Beginning of Year 61.5 52.5
------ ------
Cash and Cash Items - End of Period $85.5 $85.0
===== =====
6
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
(Millions of dollars)
Three Months Ended Six Months Ended
31 March 31 March
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales:
Industrial Gases $727.0 $715.3 $1,467.8 $1,442.3
Chemicals 416.9 378.4 818.7 759.3
Equipment/Services 109.4 114.9 241.4 241.8
Corporate/Other -- -- -- --
- ---------------------- -------- -------- -------- --------
CONSOLIDATED $1,253.3 $1,208.6 $2,527.9 $2,443.4
- ---------------------- -------- -------- -------- --------
Operating Income:
Industrial Gases $142.6 $144.7 $264.8(b) $291.9
Chemicals 44.2(a) 57.6 96.8(a)(b) 126.0
Equipment/Services 8.2 17.4 37.0(b) 30.0
Corporate/Other (12.3) (13.3)(c) (26.9)(b) (28.5)(c)
- ---------------------- -------- -------- -------- --------
CONSOLIDATED $182.7 $206.4 $371.7 $419.4
- ---------------------- -------- -------- -------- --------
Equity Affiliates' Income:
Industrial Gases $7.2 $2.8 $13.3 $3.2
Chemicals 3.4 .4 5.5 .4
Equipment/Services 3.6 3.9 4.7 8.3
Corporate/Other (.1) .8 .4 1.7
- ---------------------- -------- -------- -------- --------
CONSOLIDATED $14.1 $7.9 $23.9 $13.6
- ---------------------- -------- -------- -------- --------
Operating Return on Net Assets:(d)
Industrial Gases 11.1% 11.8%
Chemicals 15.2 17.9
Equipment/Services 30.8 13.9
Corporate/Other N/A N/A
- ---------------------- -------- -------
CONSOLIDATED 11.6% 11.8%
- ---------------------- -------- -------
(a) The results for the three and six months ended 31 March 1999 include a
charge of $10.3 million primarily related to Chemicals facility closure
costs.
(b) The results for the six months ended 31 March 1999 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).
(c) The results for the three and six months ended 31 March 1998 have been
restated to reflect the current year presentation of minority interest in
a separate line item between income taxes and net income.
(d) Operating return on net assets (ORONA) is calculated as the rolling four
quarter sum of operating income divided by the rolling five quarter
average of total assets less investments in equity affiliates. The ORONA
calculation excludes $20.3 million in charges related to a global cost
reduction plan and $10.3 million in charges primarily related to Chemicals
facility closure costs.
7
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SUMMARY BY GEOGRAPHIC REGION
(Unaudited)
(Millions of dollars)
Three Months Ended Six Months Ended
31 March 31 March
------------------- ----------------------
1999 1998 1999 1998
------- ------- ------ -------
Sales:
United States $801.8 $836.7 $1,609.7 $1,712.7
Europe 388.6 315.7 787.9 615.1
Canada/Latin America 45.2 52.4 103.2 103.7
Other 17.7 3.8 27.1 11.9
- ----------------------- -------- -------- -------- --------
CONSOLIDATED $1,253.3 $1,208.6 $2,527.9 $2,443.4
- ----------------------- -------- -------- -------- --------
Operating Income:
United States $126.7(a) $158.8 (c) $ 262.7(a)(b) $328.0 (c)
Europe 51.4 45.7 (c) 99.7(b) 86.9 (c)
Canada/Latin America 5.3 3.3 (c) 10.7 6.8 (c)
Other (.7) (1.4)(c) (1.4) (2.3)(c)
- ----------------------- -------- ------- ------- -------
CONSOLIDATED $182.7 $206.4 $371.7 $ 419.4
- ----------------------- -------- ------- ------- -------
Equity Affiliates' Income:
United States $5.0 $4.2 $6.9 $9.7
Europe 3.5 2.3 6.4 5.0
Canada/Latin America 4.4 2.7 8.9 5.6
Other 1.2 (1.3) 1.7 (6.7)
- ----------------------- -------- ------- ------- --------
CONSOLIDATED $14.1 $7.9 $23.9 $13.6
- ----------------------- -------- ------- ------- --------
(a) The results for the three and six months ended 31 March 1999 include a
charge of $10.3 million primarily related to Chemicals facility closure
costs.
(b) The results for the six months ended 31 March 1999 include the cost
reduction charge in the United States ($10.5 million) and Europe
($9.8 million).
(c) The results for the three and six months ended 31 March 1998 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
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
--------------------- --------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income $106.9 $120.5 $233.3 $281.0
Denominator for basic EPS
- -weighted average shares 211.6 215.9 211.5 217.1
Effect of diluted securities:
Employee stock options 2.6 3.9 2.8 3.7
Other award plans 0.9 1.1 1.0 1.0
--------------------------------------------------
3.5 5.0 3.8 4.7
Denominator for diluted EPS
- -weighted average shares and
assumed conversions 215.1 220.9 215.3 221.8
==================================================
Basic EPS $.51 $.56 $1.10 $1.29
==================================================
Diluted EPS $.50 $.55 $1.08 $1.27
==================================================
Options on 8.4 million and 2.5 million shares of common stock were not included
in computing diluted EPS for the second 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 and six months ended 31 March 1999 include a charge of
$10.3 million ($6.4 million after-tax, or $.03 per share) primarily related to
Chemicals facility closure costs.
The results for the six months ended 31 March 1999 include a net gain of
$31.1 million ($21.3 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. $20.3 million ($12.9 million after-tax, or $.06 per share)
related to employee termination benefits was charged to expense in the first
fiscal quarter. As of this filing, $10.3 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.
9
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 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 $.03 per share).
10
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
SECOND QUARTER FISCAL 1999 VS. SECOND QUARTER FISCAL 1998
----------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the second quarter of fiscal 1999 were $1,253.3 million, 4% higher
than in the same quarter of the prior year while operating income, was down
$23.7 million, or 11%, to $182.7 million. Profits of equity affiliates
increased $6.2 million to $14.1 million for the three months ended
31 March 1999. Net income was $106.9 million, or $.50 diluted earnings per
share, compared to net income of $120.5 million, or $.55 diluted earnings per
share, in the year-ago quarter. The current year included an after-tax charge
of $6.4 million, or $ .03 per share primarily related to Chemicals facility
closure costs. Excluding the impact of this special item, net income for the
second quarter of fiscal 1999 of $113.3 million declined $7.2 million from the
prior year, and diluted earnings per share of $.53 is down 4%. The remaining
discussion and analysis of the consolidated results of operations excludes the
impact of the special item.
Consolidated sales were up 4% driven by growth in Chemicals and Industrial
Gases, primarily outside North America. Higher sales were achieved in Europe
and Asia while North American sales across several end markets in the Industrial
Gases segment were flat. Volume gains in the chemicals businesses were largely
due to the new emulsions venture and prior year acquisitions.
Operating income declined primarily due to slowing activity in the Equipment/
Services segment, where profits were approximately half of those of the prior
year. Also, unfavorably impacting results were higher fixed costs for new
capacity and softer end-market conditions in some key Industrial Gases and
Chemicals businesses. Favorable cost performance, particularly in distribution
and overheads, was achieved.
Equity affiliates' income increased principally due to better performance at
several affiliates, favorable foreign currency impacts in the current quarter,
and the addition of the redispersible powders venture formed with Wacker-Chemie
GmbH.
Industrial Gases - Sales increased 2% to $727.0 million in the second quarter
of fiscal 1999 while operating income declined slightly to $142.6 million.
Merchant gases volumes grew 2% in the United States, with LOX/LIN down 1%
including non-cryo. Soft business conditions in the metals and electronics
areas offset growth in several other end use markets. LOX/LIN pricing was flat
compared to the prior year. Tonnage gases volumes in the United States
declined 1% due to production cutbacks at several large steel accounts. HYCO
volumes were essentially the same as the prior year. European merchant volumes
were up 2% with LOX/LIN including non-cryo up 8%. Carburos Metalicos continues
to provide strong growth. Consistent with North America, European LOX/LIN
prices were unchanged from the prior year. Tonnage volumes increased 6% due to
loading in Rotterdam more than offsetting weaker steel
11
demand. Total gases margin of 19.6% was down slightly from the prior year.
A portion of the decline is due to geographic mix and the balance is due to
lower volumes to steel customers and continued pressure in several electronics
product areas. The results of asset management initiatives and cost reduction
efforts had a favorable impact in the current quarter.
Equity affiliates' income for the second quarter of fiscal 1999 increased to
$7.2 million compared to $2.8 million in the prior year. This increase was due
primarily to improved performance at several affiliates as well as favorable
foreign currency effects in the current quarter.
Chemicals- Sales in the second quarter of fiscal 1999 of $416.9 million
increased 10%, or $38.5 million. Operating income decreased $13.4 million to
$44.2 million. Excluding the charge primarily related to facility closure costs
included in the current year results, operating income was $54.5 million, a
decline of 5%. Overall volumes increased 12%. Excluding the impact of the
emulsions venture and prior year acquisitions, the current quarter volumes
increased 2%. The current year operating margin of 13.1% declined approximately
2% from the prior year as a result of several factors including costs related to
the emulsions venture, new facilities brought on-stream, and secondary Asian
market impacts.
Equity affiliates' income for the second quarter of fiscal 1999 was
$3.4 million. This amount mainly reflects the Company's 20% interest in the
redispersible powders venture formed with Wacker-Chemie GmbH.
Equipment and Services - Sales decreased 5% from $114.9 million in the prior
year to $109.4 million. Operating income decreased from $17.4 million to
$8.2 million. The significant decline in operating income was a result of less
project activity in all areas. Sales backlog for the equipment product line
declined to $134 million at 31 March 1999. This backlog compares to $302 million
at 30 September 1998 and $355 million at 31 March 1998.
Equity affiliates' income for the second quarter of fiscal 1999 decreased
slightly from $3.9 million in the prior year to $3.6 million.
Corporate and Other - Operating loss declined $1.0 million to $12.3 million.
The operating loss decline is mainly due to a litigation settlement in the
current fiscal quarter.
Equity affiliates' income for the second quarter of fiscal 1999 decreased
$.9 million mainly due to a favorable power contract settlement in the prior
year.
INTEREST
Interest expense of $40.4 million is slightly higher than the level of the prior
fiscal year second 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 29.7%. Excluding the tax rate
impact related to Chemicals facility closure costs, the effective tax rate is
30.2%.
12
This rate is 1% lower than the prior year rate mainly due to tax strategies and
initiatives. The effective tax rate calculation includes before-tax minority
interest.
ACCOUNTING CHANGES
As of April 1999, the Company will apply highly inflationary accounting to
operations in Indonesia. The financial statements of the Company's operations in
Indonesia will be remeasured as if the functional currency were the US dollar.
No material effects on the financial statements are expected to result from this
change.
As of 1 January 1999, the Company ceased 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 three and six months
ended 31 March 1998 were restated for comparability.
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 two thirds of the plan has been
implemented. 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.
Expenses of $10.3 million have been incurred and charged to the accrual with the
balance remaining 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 began to occur in the second quarter of the 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 March 1999, 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 Company continues to believe that the
previously disclosed $40 million cost estimate remains sufficient to cover the
cost of the Company's Year 2000 program. Year 2000 contingency planning is in
progress and is expected to be ready to address Year 2000 issues as they arise.
13
Information Technology
Over 99% 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 May 1999. 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. An organization has been created and is in place to support
Information Technology contingency planning. Normal operating plans have been
reviewed against potential Year 2000 risks. Year 2000 contingency plans are
currently being developed to address these risks. The Company has implemented
controls to limit changes to Information Technology Systems over Year 2000
critical date changeovers.
Process Control and Embedded Chip Systems
Over 99% 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 88% of the mission critical systems
certified as Year 2000 ready. The Company expects that approximately 98% of the
mission critical systems will be certified as Year 2000 ready by the end of June
1999. Individual plant site contingency plans are currently being reviewed
against potential Year 2000 risks. These reviews and any required Year 2000
changes to these contingency plans are expected to be complete by September
1999.
Third Parties
Assessment of the Company's key suppliers for Year 2000 readiness with respect
to the Company's needs is continuing as planned. Over 95% of the Company's key
suppliers have been contacted and assessed. Approximately 60% have met the
Company's Year 2000 readiness expectations and no further follow-up activities
are planned. The Company is conducting more thorough evaluations of the
remaining key suppliers based on the assessment results. By September 1999,
contingency plans will be developed as appropriate to address perceived Year
2000 readiness shortfalls with respect to individual key suppliers.
Business Contingency Planning
A cross-functional management team has been created and is in place to
coordinate the Company's various Year 2000 contingency planning efforts, to
guide the Company's Year 2000 business contingency planning, and to specifically
address customers' Year 2000 issues and concerns. The Company expects to develop
its business contingency plans by September 1999.
EURO IMPACT
The Euro became legal currency as of 1 January 1999. The Company has
administrative operations in 9 of the 11 countries which have adopted the Euro
and is well positioned to comply with the legislation applicable to its
introduction.
14
SIX MONTHS FISCAL 1999 VS. SIX MONTHS FISCAL 1998
---------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the first six months of fiscal 1999 of $2,527.9 million were 3% higher
than the $2,443.4 million reported in the prior fiscal year. Operating income
declined $47.7 million, or 11%, to $371.7 million. Profits of equity affiliates
increased $10.3 million to $23.9 million for the six months ended 31 March 1999.
Net income was $233.3 million, or $1.08 diluted earnings per share, compared to
net income of $281.0 million, or $1.27 diluted earnings per share in the prior
year. In the first six months of 1999 there were three special items; an
after-tax gain of $21.3 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, and an after-tax charge of
$6.4 million, or $.03 per share primarily related to Chemicals facility closure
costs. Excluding these special items, net income for this year is
$231.3 million, or $1.07 diluted earnings per share. Additionally, in the first
fiscal quarter of 1998 there were 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 a gain of $7.6 million, or $.03 per share from a
cogeneration project contract settlement. Excluding these special items, net
income for the six months ended 31 March 1998 was $238.3 million, or $1.08
diluted earnings per share. Excluding the impact of all special items, net
income for the first six months of fiscal 1999 of $231.3 million declined
$7.0 million from the prior year, and diluted earnings per share of $1.07 is
down $.01. The remaining discussion and analysis of the consolidated results of
operations excludes the impact of special items.
Consolidated sales grew 3% primarily as a result of growth in Chemicals and
Industrial Gases outside North America. Sales growth in Europe and Asia was
offset by decreased North American sales across several end markets in the
Industrial Gases segment. Chemicals businesses experienced volume gains as a
result of the new emulsions venture with Wacker-Chemie GmbH and prior year
acquisitions. The Equipment/Services segment sales were essentially flat
compared to the prior year.
Operating income excluding special items decreased $17.1 million, or 4% from
the prior year. This decline is primarily due to slower Industrial Gases sales
in the electronics and metals markets. Also, the margin impacts on some
Chemicals product lines resulting from the secondary effects of the Asian market
contributed to the decline in operating income.
Equity affiliates' income increased due to unfavorable foreign exchange impacts
in the prior year, favorable foreign currency effects in the current year,
improved performance at several affiliates, and the addition of the
redispersible powders venture formed with Wacker-Chemie GmbH.
Industrial Gases - Sales of $1,467.8 million in the first six months of fiscal
1999 increased 2%, or $25.5 million over the $1,442.3 million reported in fiscal
1998. Merchant gases volumes are up approximately 3% in both North America and
15
Europe. Soft conditions in the metals and electronics markets offset growth in
several other end use markets. Pricing in the LOX/LIN component of merchant
gases is down approximately 2% in North America and 1% in Europe, with
average pricing impacted primarily by continuing competitive pressure. Tonnage
gases volumes declined 2% in North America while Europe remained flat driven by
weaker steel demand and a planned customer outage in Rotterdam.
Operating income decreased $27.1 million to $264.8 million from the prior year.
The current year results include a cost reduction charge of $16.3 million.
Excluding this charge, operating income declined 4%. Operating margin for the
six months excluding special items was 19.2% down 1% from 20.2% in the prior
year. The operating margin decline is mainly due to geographic mix, lower
volumes to steel customers and a weak electronics market.
Equity affiliates' income increased $10.1 million to $13.3 million. This
increase is due to unfavorable foreign exchange effects in the prior year,
favorable foreign currency effects in the current year, and improved
performance at several affiliates in the current year.
Chemicals - Sales in the first six months of fiscal 1999 of $818.7 million
increased $59.4 million, or 8%. Operating income declined $29.2 million to
$96.8 million. The current year results include a charge of $10.3 million
primarily due to facility closure costs, and a cost reduction charge of
$1.6 million. Excluding these special items, fiscal 1999 operating income
declined 14%. The overall volume for the segment grew about 10% for the first
half of the fiscal year primarily due to the emulsions venture and prior year
acquisitions. Methylamine, higher amine and PVOH volumes were down from the
strong levels in the prior year. The operating income decline was due to
increased fixed costs of new capacity additions, integration costs of the
emulsions venture, customer outages, and the impacts of the Asian economy.
Equipment and Services - Sales decreased slightly to $241.4 million from
$241.8 million in the prior year. Operating income increased $7.0 million to
$37.0 million over the prior year. Excluding the cost reduction charge included
in the current year results, operating income was $38.9 million, an increase of
30%. The significant increase in operating income was the result of improved
cost performance and a favorable project mix in the first quarter of fiscal
year 1999. The second quarter results reflect a slowing of project activity as
reflected in the backlog. Sales backlog for the equipment product line declined
to $134 million at 31 March 1999. This backlog compares to $302 million at
30 September 1998 and $355 million at 31 March 1998.
Equity affiliates' income for the first half of fiscal 1999 decreased
$3.6 million to $4.7 million from the prior year. The decrease is mainly due
to lower energy pricing in the power generation business.
Corporate and Other - Operating expense declined to $26.9 million from
$28.5 million in the prior year. The current year results include a cost
reduction charge of $.5 million. Excluding this charge, operating expense
declined $2.1 million due primarily to unfavorable foreign exchange impacts in
the prior year and a litigation settlement received in the current year.
16
Equity affiliates' income declined $1.3 million to $.4 million in the current
year. This decline is mainly due a favorable power contract settlement in the
prior year.
INTEREST
Interest expense of $80.8 million increased $1.6 million or 2% over the prior
year. Higher average debt was partially offset by lower interest rates and
higher capitalized interest.
INCOME TAXES
The consolidated effective tax rate on income was 31.0%. Excluding the tax rate
impact on the Chemicals facility closure costs, the gain on formation of the
emulsions venture, and the cost reduction plan charge, the effective tax rate is
31.5%. This rate is down from 32.5% excluding special items in the prior year
primarily due to tax strategies and initiatives. The effective tax rate
calculation includes before-tax minority interest.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first six months of fiscal 1999 totaled
$541.3 million compared to $479.8 million in the corresponding period of the
prior year. Additions to plant and equipment increased from $332.7 million
during the first six months of fiscal 1998 to $450.9 million during the current
period. The current year additions include a new 500 million pound-per-year
dinitrotoluene (DNT) production facility in Geismar, Louisiana. Investments in
unconsolidated affiliates were $66.0 million during the first six months of
fiscal 1999 versus $10.0 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 $1.1 billion in fiscal 1999. This is up from the
first quarter estimate due to a number of acquisition opportunities the Company
has completed or plans to complete in this fiscal year. 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 six months of fiscal 1999
($549.7 million) combined with proceeds from the sale of assets and investments
($31.3 million) and cash provided by debt financing ($62.9 million) were used
largely for capital expenditures ($541.3 million), purchase of common stock for
treasury ($24.6 million), debt repayments ($22.5 million) and cash dividends
($71.9 million). Cash and cash items increased $24.0 million from $61.5 million
at the beginning of the fiscal year to $85.5 million at 31 March 1999. The net
increase in commercial paper was $11.4 million.
Total debt expressed as a percentage of the sum of total debt and shareholders'
equity, was 50% at 31 March 1999 and 30 September 1998. Total debt increased
from $2,697.5 million at 30 September 1998 to $2,721.7 million at 31 March 1999.
There was $332.1 million of commercial paper outstanding at 31 March 1999. The
Company's revolving credit commitments amounted to $600.0 million at 31 March
1999 with funding available in 13 currencies. No borrowings were outstanding
under these commitments. Additional commitments totaling $91.5 million are
maintained by the Company's foreign subsidiaries, of which $9.9 million was
utilized at 31 March 1999.
17
At 31 March 1999, 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.
The notional principal and fair value of interest rate swap agreements at 31
March 1999 and 30 September 1998 were as follows:
(Millions of dollars)
31 March 1999 30 September 1998
------------------------------------ -------------------------------------
Notional Fair Value Notional Fair Value
Amount Gain (Loss) Amount Gain (Loss)
--------------- --------------- -------------- ------------------
Fixed to Variable $311.0 $16.5 $461.0 $37.6
Variable to Variable 60.0 118.1 60.0 86.4
--------------- --------------- -------------- ------------------
Total $371.0 $134.6 $521.0 $124.0
=============== =============== ============== ==================
During the first six months of fiscal 1999 three fixed to variable interest
rate swap agreements with a total notional amount of $150.0 million were
terminated, resulting in a deferred gain of $10.5 million.
A $60.8 million asset has been recognized in the financial statements related to
the above variable to variable interest rate swap agreements. Additionally, a
$60.8 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 March
1999 was $270.8 million. The fair value of the agreements was a gain of
$1.1 million, of which a $24.5 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 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. In the quarter ended
31 March 1999, three interest rate and currency
18
swap agreements with a total notional amount of $118.5 million were terminated,
resulting in a deferred loss of $2.2 million.
The estimated fair value of the Company's long-term debt, including current
portion, as of 31 March 1999 is $2,731.5 million compared to a book value of
$2,433.4 million.
During the first six months of fiscal 1999, .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.
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 1. LEGAL PROCEEDINGS
During April of 1999, the Kentucky Department of Environmental Protection
("KDEP") forwarded a Notice of Violation alleging the Company's Calvert City,
Kentucky chemical manufacturing facility had exceeded the significant net
emission rate for ozone (measured as volatile organic compounds ("VOCs")) of
Kentucky's Prevention of Significant Air Quality regulation with respect to
calendar years 1993, 1995, 1997 and related construction permits. KDEP has also
cited the facility for delayed installation of a device to control VOCs.
The Company does not expect that any sums it may have to pay in connection
with these matters would have a materially adverse effect on its consolidated
financial position nor is there any material additional exposure expected in any
one year in excess of the amounts the Company currently has accrued.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
a. The Annual Meeting of Shareholders of the Registrant was held on
28 January 1999.
c. The following matters were voted on at the Annual Meeting:
1. Election of Directors
NUMBER OF VOTES CAST
--------------------------------------------
NAME OF DIRECTOR AGAINST BROKER
OR NON-
FOR WITHHELD ABSTENTIONS VOTES
--------------- ------------ ------------- -----------
R. CIZIK 203,758,595 2,878,765 0 0
----------------- ---------------- ------------ ------------- -----------
U.F. FAIRBAIRN 203,810,516 2,826,844 0 0
----------------- ---------------- ------------ ------------- -----------
J.P. JONES III 203,759,232 2,878,128 0 0
----------------- ---------------- ------------ ------------- -----------
J.J. KAMINSKI 202,311,915 4,325,445 0 0
----------------- ---------------- ------------ ------------- -----------
R.F.M. LUBBERS 203,852,286 2,785,074 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 1999.
NUMBER OF VOTES CAST
--------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
----------- ------- ----------- ----------
205,079,080 702,981 855,299 0
----------- ------- ----------- ----------
20
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 Reports on Form 8-K dated 22 January 1999 and
26 January 1999 were filed by the Registrant during the
quarter ended 31 March 1999 in which Item 5 of such forms
was reported.
21
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 12, 1999 By: /s/ L. J. Daley
--------------------------------
L. J. Daley
Vice President - Finance
(Chief Financial Officer)
22
===============================================================================
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 March 1999
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) 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 Mar
---------------------------------------------------- ---------
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ---------
(Millions of dollars)
Earnings:
Income before extraordinary item and
the cumulative effect of accounting
changes: $233.5 $368.2 $416.4 $429.3 $546.8 $233.3
Add (deduct):
Provision for income taxes 95.2 186.2 195.5 203.4 280.9 107.7
Fixed charges, excluding capitalized
interest 127.1 148.8 184.0 233.0 202.8 98.0
Capitalized interest amortized during
the period 8.0 9.1 9.4 8.3 7.4 3.0
Undistributed earnings of
less-than-fifty-percent-owned affiliates (2.8) (25.4) (40.6) (31.1) (25.3) (17.3)
------ ------ ------ ------ ------- ------
Earnings, as adjusted $461.0 $686.9 $764.7 $842.9 1,012.6 $424.7
====== ====== ====== ====== ======= ======
Fixed Charges:
Interest on indebtedness, including
capital leaseobligations $118.2 $139.4 $171.7 $217.8 $186.7 $89.6
Capitalized interest 9.7 18.5 20.0 20.9 18.4 11.4
Amortization of debt discount premium
and expense .8 .2 1.5 1.8 1.9 .9
Portion of rents under operating leases
representative of the interest factor 8.1 9.2 10.8 13.4 14.2 7.5
------ ------ ------ ------ ------ -----
Fixed charges $136.8 $167.3 $204.0 $253.9 $221.2 $109.4
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges: 3.4 4.1 3.7 3.3 4.6 3.9
====== ====== ====== ====== ====== ======
5
1,000,000
U S Dollar
6-MOS
SEP-30-1999
OCT-01-1998
MAR-31-1999
1
86
0
901
12
433
1715
9744
4833
7794
1341
2232
0
0
249
2527
7794
2528
2528
1753
1753
61
3
81
346
105
233
0
0
0
233
1.10
1.08
