UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended 31 March 2001
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
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(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 610-481-4911
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Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
--- --
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at 8 May 2001
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Common Stock, $1 par value 227,942,740
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
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Part I. Financial Information
Consolidated Balance Sheets -
31 March 2001 and 30 September 2000 ................................ 4
Consolidated Income -
Three Months and Six Months Ended 31 March 2001 and 2000 ........... 5
Consolidated Statement of Comprehensive Income -
Three Months and Six Months Ended 31 March 2001 and 2000 ........... 6
Consolidated Cash Flows -
Six Months Ended 31 March 2001 and 2000 ............................ 7
Summary by Business Segments -
Three Months and Six Months Ended 31 March 2001 and 2000 ........... 8
Summary by Geographic Regions -
Three Months and Six Months Ended 31 March 2001 and 2000 ........... 11
Notes to Consolidated Financial Statements .......................... 12
Management's Discussion and Analysis ................................ 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 6. Exhibits and Reports on Form 8-K ........................... 22
Signatures .......................................................... 23
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
interim results for the periods indicated herein do not
2
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 or six month period are not
necessarily indicative of the results of operations for a full year.
3
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
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31 March 2001 30 September 2000
ASSETS (Unaudited)
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CURRENT ASSETS
Cash and cash items $ 100.6 $ 94.1
Trade receivables, less allowances for 1,049.8 982.7
doubtful accounts
Inventories 405.7 388.8
Contracts in progress, less progress billings 108.5 93.4
Other current assets 240.3 246.0
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TOTAL CURRENT ASSETS 1,904.9 1,805.0
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INVESTMENTS IN NET ASSETS OF AND ADVANCES TO 493.8 466.6
EQUITY AFFILIATES
PLANT AND EQUIPMENT, at cost 10,451.6 10,310.9
Less - Accumulated depreciation 5,274.9 5,054.2
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PLANT AND EQUIPMENT, net 5,176.7 5,256.7
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GOODWILL AND OTHER NONCURRENT ASSETS 709.1 742.2
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TOTAL ASSETS $8,284.5 $8,270.5
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Payables, trade and other $ 577.0 $ 578.4
Accrued liabilities 336.6 357.2
Accrued income taxes 17.1 10.0
Short-term borrowings 209.1 249.7
Current portion of long-term debt 302.0 179.5
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TOTAL CURRENT LIABILITIES 1,441.8 1,374.8
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LONG-TERM DEBT 2,515.6 2,615.8
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 534.3 561.3
DEFERRED INCOME TAXES 785.6 781.8
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TOTAL LIABILITIES 5,277.3 5,333.7
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MINORITY INTEREST IN SUBSIDIARY COMPANIES 117.4 115.5
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SHAREHOLDERS' EQUITY
Common stock (par value $1 per share, issued fiscal 2001 249.4 249.4
and 2000-249,455,584 shares)
Capital in excess of par value 360.5 342.2
Retained earnings 3,816.7 3,667.9
Unrealized gain on investments 15.4 15.7
Minimum pension liability adjustments (2.7) (2.7)
Cumulative translation adjustments (498.1) (420.8)
Net gains on cash flow hedges 1.3 --
Treasury Stock, at cost (fiscal 2001-21,419,844 shares; (731.4) (681.6)
2000-20,150,393 shares)
Shares in trust (fiscal 2001-13,850,516 shares; (321.3) (348.8)
fiscal 2000-15,086,482 shares)
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TOTAL SHAREHOLDERS' EQUITY 2,889.8 2,821.3
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,284.5 $8,270.5
==============================================================================================================
The accompanying notes are an integral part of these statements.
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME
(Unaudited)
(Millions of dollars, except per share)
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Three Months Ended Six Months Ended
31 March 31 March
2001 2000 2001 2000
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SALES AND OTHER INCOME
Sales $1,498.3 $1,347.2 $2,939.6 $2,611.6
Other income (expense), net (9.0) 7.1 4.3 13.9
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1,489.3 1,354.3 2,943.9 2,625.5
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COSTS AND EXPENSES
Cost of sales 1,104.8 925.6 2,129.9 1,802.7
Selling and administrative 189.5 179.9 363.0 347.7
Research and development 30.8 29.9 59.3 60.0
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OPERATING INCOME 164.2 218.9 391.7 415.1
Income from equity affiliates, net of 16.9 21.3 37.8 41.6
related expenses
Loss on currency hedges related to -- 134.7 -- 247.9
BOC transaction and expenses
Interest expense 50.3 46.8 98.7 88.1
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INCOME BEFORE TAXES AND 130.8 58.7 330.8 120.7
MINORITY INTEREST
Income taxes 36.6 8.3 98.3 17.4
Minority interest (a) (.4) 2.8 2.3 5.1
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NET INCOME $94.6 $47.6 $230.2 $98.2
==========================================================================================================
BASIC EARNINGS PER COMMON $.44 $.22 $1.07 $.46
SHARE
- ----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER $.43 $.22 $1.05 $.46
COMMON SHARE
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WEIGHTED AVERAGE NUMBER 214.5 213.3 214.4 213.2
OF COMMON SHARES (in
millions)
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WEIGHTED AVERAGE NUMBER 218.9 215.4 218.4 215.5
OF COMMON AND COMMON
EQUIVALENT SHARES (in
millions) (b)
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DIVIDENDS DECLARED PER $.19 $.18 $.38 $.36
COMMON SHARE - Cash
- ----------------------------------------------------------------------------------------------------------
(a) Minority interest primarily includes before-tax amounts.
(b) The dilution of earnings per common share is due mainly to the impact of
unexercised stock options.
The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(Millions of dollars)
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Three Months Ended Six Months Ended
31 March 31 March
2001 2000 2001 2000
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NET INCOME $94.6 $47.6 $230.2 $98.2
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OTHER COMPREHENSIVE INCOME
(LOSS), net of tax
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Unrealized holding gains/(losses) on .5 1.3 (.3) (2.7)
investments arising during the
period
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Foreign currency translation
adjustments:
Consolidated subsidiaries and (93.9) (34.9) (68.5) (104.0)
joint ventures
Cumulative effect of a change in -- -- (1.7) --
accounting for hedges of net
investments in foreign entities
Transaction gains (losses) resulting 34.2 16.4 (7.1) 40.7
from hedges of net investments in
foreign entities
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Total foreign currency translation (59.7) (18.5) (77.3) (63.3)
adjustments
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Cash flow hedges:
Cumulative effect of a change in -- -- (.8) --
accounting for cash flow hedges
Net gains arising during the period 5.6 -- 8.1 --
Reclassification adjustment for (5.7) -- (6.0) --
(losses) reclassified into income
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Net gains on cash flow hedges (.1) -- 1.3 --
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TOTAL OTHER COMPREHENSIVE (LOSS) (59.3) (17.2) (76.3) (66.0)
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COMPREHENSIVE INCOME $35.3 $30.4 $153.9 $32.2
=========================================================================================================================
The accompanying notes are an integral part of these statements.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED CASH FLOWS
(Unaudited)
(Millions of dollars)
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Six Months Ended
31 March
2001 2000
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OPERATING ACTIVITIES
Net Income $230.2 $98.2
Adjustments to reconcile income to cash provided
by operating activities:
Depreciation 291.7 276.3
Impairment of long-lived assets 6.4 --
Deferred income taxes 7.1 12.9
Loss on BOC transaction -- 201.3
Undistributed (earnings) of unconsolidated affiliates (19.9) (25.5)
(Gain) on sale of assets and investments (.6) (10.9)
Other (14.6) 35.9
Working capital changes that provided (used) cash, net of
effects of acquisitions:
Trade receivables (82.2) (41.5)
Inventories and contracts in progress (37.9) 6.8
Payables, trade and other 1.6 30.7
Other (1.9) (82.6)
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CASH PROVIDED BY OPERATING ACTIVITIES 379.9 501.6
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INVESTING ACTIVITIES
Additions to plant and equipment (a) (302.3) (378.6)
Acquisitions, less cash acquired (b) -- (168.7)
Investment in and advances to equity affiliates (26.5) (16.5)
Proceeds from sale of assets and investments 32.2 30.0
Other 23.0 (15.3)
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CASH USED FOR INVESTING ACTIVITIES (273.6) (549.1)
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FINANCING ACTIVITIES
Long-term debt proceeds 54.4 507.5
Payments on long-term debt (21.4) (369.6)
Net (decrease) increase in commercial paper and other (25.7) 10.5
short-term borrowings
Purchase of treasury stock (50.0) --
Dividends paid to shareholders (81.5) (76.8)
Other 27.0 1.8
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CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (97.2) 73.4
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Effect of Exchange Rate Changes on Cash (2.6) 5.2
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Increase in Cash and Cash Items 6.5 31.1
Cash and Cash Items - Beginning of Year 94.1 61.6
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Cash and Cash Items - End of Period $100.6 $92.7
====================================================================================================================
(a) Excludes capital lease additions of $.5 million and $16.0 million in fiscal
2001 and 2000, respectively.
(b) Excludes $24.2 million of long-term debt assumed in acquisitions in fiscal
2000.
The accompanying notes are an integral part of these statements.
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
Business segment information is shown below:
(Millions of dollars)
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Three Months Ended Six Months Ended
31 March 31 March
2001 2000 2001 2000
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Revenues from external
customers
Gases $1,043.2 $842.1 $2,035.4 $1,622.7
Equipment 64.8 53.8 120.6 104.4
Chemicals 390.3 451.3 783.6 884.5
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Segment Totals 1,498.3 1,347.2 2,939.6 2,611.6
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Consolidated Totals $1,498.3 $1,347.2 $2,939.6 $2,611.6
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Operating income
Gases $156.8 $171.0 $348.2 $324.3
Equipment 3.5 5.6 4.6 6.8
Chemicals 18.5 50.0 55.5 101.6
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Segment Totals 178.8 226.6 408.3 432.7
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Corporate research and (14.6) (7.7) (16.6) (17.6)
development and other
(expense)
Consolidated Totals $164.2 $218.9 $391.7 $415.1
- --------------------------------------------------------------------------------------------------------------
Operating income (excluding
special items)
Gases $183.1(a) $164.7(c) $374.5(a) $318.0(c)
Equipment 3.5 5.6 4.6 6.8
Chemicals 23.1(b) 58.7(d) 60.1(b) 110.3(d)
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Segment Totals 209.7 229.0 439.2 435.1
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Corporate research and (8.6)(e) (7.7) (10.6)(e) (17.6)
development and other
(expense)
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Consolidated Totals $201.1 $221.3 $428.6 $417.5
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Equity affiliates' income
Gases $16.6 $17.8 $35.3 $34.2
Equipment .2 .5 .9 .8
Chemicals -- 3.1 1.5 6.7
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Segment Totals 16.8 21.4 37.7 41.7
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Other .1 (.1) .1 (.1)
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Consolidated Totals $16.9 $21.3 $37.8 $41.6
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8
(Millions of dollars)
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31 March
2001 2000
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Total assets
Gases $6,368.7 $6,243.1
Equipment 232.8 217.2
Chemicals 1,510.8 1,712.7
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Segment Totals 8,112.3 8,173.0
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Corporate assets 172.2 397.3
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Consolidated Totals $8,284.5 $8,570.3
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Twelve Months Ended
31 March
2001 2000
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Operating Return On Net Assets (ORONA)(f)
Gases 12.9% 10.8%
Equipment 6.3% 4.7%
Chemicals 9.6% 12.8%
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Segment Totals 12.0% 11.0%
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Consolidated Totals 11.3% 10.1%
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(a) The results for the three and six months ended 31 March 2001 exclude a cost
reduction charge of $26.3 million.
(b) The results for the three and six months ended 31 March 2001 exclude a cost
reduction charge of $4.6 million.
(c) The results for three and six months ended 31 March 2000 exclude a gain on
the sale of packaged gas facilities of $6.3 million.
(d) The results for three and six months ended 31 March 2000 exclude a cost
reduction charge of $8.7 million.
(e) The results for the three and six months ended 31 March 2001 exclude a
litigation settlement charge of $6.0 million.
(f) 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 all special items impacting operating income.
9
A reconciliation of total segment operating income to consolidated income before
income taxes and minority interest is as follows:
(Millions of dollars)
- --------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
31 March 31 March
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Total segment operating
income $178.8 $226.6 $408.3 $432.7
Corporate research and (14.6) (7.7) (16.6) (17.6)
development and other
(expense)
- --------------------------------------------------------------------------------------------
Consolidated operating income 164.2 218.9 391.7 415.1
- --------------------------------------------------------------------------------------------
Equity affiliates' income 16.9 21.3 37.8 41.6
Loss on currency hedges related -- 134.7 -- 247.9
to BOC transaction and
expenses
Interest expense 50.3 46.8 98.7 88.1
- --------------------------------------------------------------------------------------------
Consolidated income before $130.8 $58.7 $330.8 $120.7
taxes and minority interest
============================================================================================
10
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
(Millions of dollars)
- -------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
31 March 31 March
2001 2000 2001 2000
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Revenues from external
customers
United States $1,018.8 $879.3 $1,988.6 $1,718.5
- -------------------------------------------------------------------------------------------
United Kingdom 116.1 124.4 218.9 245.5
Spain 78.0 78.9 147.8 155.7
Other Europe 152.8 149.1 294.0 289.9
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Total Europe 346.9 352.4 660.7 691.1
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Canada/Latin America 56.4 55.0 122.3 113.4
Asia 76.2 60.4 167.9 88.4
All Other -- .1 .1 .2
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Total $1,498.3 $1,347.2 $2,939.6 $2,611.6
- -------------------------------------------------------------------------------------------
Note: Geographic information is based on country of origin. The other Europe
segment operates principally in France, Germany, Netherlands, and
Belgium.
11
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)
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Three Months Ended Six Months Ended
31 March 31 March
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income $94.6 $47.6 $230.2 $98.2
Denominator for basic EPS
-weighted average shares 214.5 213.3 214.4 213.2
Effect of diluted securities:
Employee stock options 3.4 1.3 3.1 1.5
Other award plans 1.0 .8 .8 .8
- --------------------------------------------------------------------------------------------------------
4.4 2.1 3.9 2.3
Denominator for diluted EPS
-weighted average shares and
assumed conversions 218.9 215.4 218.4 215.5
========================================================================================================
Basic EPS $.44 $.22 $1.07 $.46
========================================================================================================
Diluted EPS $.43 $.22 $1.05 $.46
========================================================================================================
Options on 5.6 million and 10.2 million shares of common stock were not included
in computing diluted EPS for the second quarter of fiscal 2001 and 2000,
respectively because their effects were antidilutive.
The results for the three and six months ended 31 March 2001 include a charge of
$30.9 million ($20.0 million after-tax, or $.09 per share) for a global cost
reduction plan. The plan includes 311 position eliminations, resulting in a
charge of $22.4 million for severance and termination benefits. A charge of $8.5
million was recognized for asset impairments and other related restructuring
costs. The restructuring charges included in cost of sales, selling and
administrative, and other expense were $14.4 million, $9.4 million, and $7.1
million, respectively. The results for the three and six months ended 31 March
2001, also, include a charge of $6.0 million ($3.7 million after-tax, or $.02
per share) related to a litigation settlement.
Income from equity affiliates, net of related expenses and taxes, contributed
$.07 and $.09 per share to diluted earnings per share for the three months ended
31 March 2001 and 31 March 2000, respectively. Income from equity affiliates,
net of related expenses and taxes, contributed $.16 and $.18 per share to
diluted earnings per share for the six months ended 31 March 2001 and 31 March
2000, respectively.
The company, The BOC Group plc (BOC) and L'Air Liquide S.A. (Air Liquide) of
France announced in July 1999 that they had agreed to the terms of a recommended
offer for the share capital of BOC. In May 2000, the company and Air Liquide
announced that the
12
Federal Trade Commission had indicated it would not approve the offer by 12 May
2000, the date on which the period for satisfying the preconditions to the offer
would expire, and the offer was not extended beyond 12 May 2000. As a result,
certain costs and financing fees that had been deferred were expensed in the
third quarter of fiscal 2000.
The results for the three and six months ended 31 March 2000 include a charge of
$134.7 million ($84.1 million after-tax, or $.39 per share) and $247.9 million
($154.7 million after-tax, or $.72 per share), respectively, for costs related
to the BOC transaction. These costs consist primarily of charges recorded on
purchased option and forward exchange contracts entered into to hedge the
currency exposure of the BOC transaction.
The results for the three and six months ended 31 March 2000 include a charge of
$8.7 million ($5.5 million after-tax, or $.03 per share) for the global cost
reduction plan and a gain of $6.3 million ($4.0 million after-tax, or $.02 per
share) related to the sale of packaged gas facilities. The restructuring charges
included in cost of sales, selling and administrative, and research and
development were $3.3 million, $4.4 million, and $1.0 million, respectively.
13
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
SECOND QUARTER FISCAL 2001 VS. SECOND QUARTER FISCAL 2000
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the second quarter of fiscal 2001 of $1,498.3 million were up 11%, or
$151.1 million compared with the same quarter in the prior year. Operating
income of $164.2 million declined $54.7 million or 25%. Income from equity
affiliates was $16.9 million compared with $21.3 million in the prior year. Net
income was $94.6 million, or $.43 diluted earnings per share, compared to net
income of $47.6 million, or $.22 diluted earnings per share, in the year-ago
quarter. The results for the three months ended 31 March 2001 included an
after-tax charge of $20.0 million, or $.09 per share, for a cost reduction
program and an after-tax charge of $3.7 million, or $.02 per share, related to a
litigation settlement. The quarter ended 31 March 2000 included an after-tax
charge of $84.1 million, or $.39 per share, for costs related to the "The BOC
Group plc" (BOC) transaction. The prior year quarter also included an after-tax
charge of $5.5 million, or $.03 per share, for a cost reduction program and an
after-tax gain of $4.0 million, or $.02 per share, related to the sale of
packaged gas facilities. Excluding these special items, current year net income
of $118.3 million compares to $133.2 million in the prior year, a decrease of
11%. Diluted earnings per share excluding special items of $.54 declined 13%
from the prior year. The remaining discussion and analysis of the results of
operations excludes the impact of special items. See Summary of Business
Segments for details of special items by segment.
Gases -Sales increased 24% to $1,043.2 million in the second quarter of fiscal
2001. Natural gas cost pass-through added 13% to sales growth, while unfavorable
currency impacts reduced sales growth about 3%. The balance of the sales
increase was principally due to higher shipments to the electronics market.
Electronics volume growth continued with strong global demand for specialty
gases, particularly nitrogen trifluoride (NF3), tungsten hexafluoride (WF6), the
Solkatronic Brand products, and the Schumacher specialty chemicals. Chemical and
processing industries (CPI) tonnage volume declined 4% globally from the prior
year, primarily as the result of lower gaseous oxygen/nitrogen (GOX/GAN) volume.
GOX/GAN volume was impacted by customer outages and the rapid rise in natural
gas cost.
Liquid bulk volume declined 2% in North America as demand softened, particularly
in steel and metal processing. Same store cylinder volume declined 1% on
weakness in the automotive market. The average price for liquid oxygen/nitrogen
(LOX/LIN) increased 8% with about half the increase resulting from price
increase and surcharge initiatives.
In spite of the strong U.S. dollar, overall European gases operations improved
over the prior year quarter. The liquid bulk volume index was flat as weakness
in the United Kingdom offset gains on the continent. The European LOX/LIN price
index was up 1% from the prior year, reflecting the price increase and the
Service Plus program initiatives. Cylinder volume declined 1% primarily due to
weak industrial activity in the United Kingdom. Specialty gas and helium
cylinder sales increased year-on-year.
14
Liquid bulk volume increased 18% in Asia with strong growth in China and Korea.
Higher volume in electronics and improved operating performance in CPI drove the
11% increase in operating income to $183.1 million. Excluding unfavorable
currency and exchange related effects, operating income improved 14%. The
operating margin was 17.6%, down 2.0% from the prior year. Excluding the
unfavorable margin impact of higher natural gas cost pass-through revenues, the
operating margin was essentially unchanged from the prior year.
Equipment- Sales were $64.8 million, up $11.0 million from the prior year.
Operating income of $3.5 million declined $2.1 million from the prior year due
to an unfavorable project mix. The sales backlog at 31 March 2001 was $104
million compared to $121 million at 31 March 2000.
Chemicals- Sales in the second quarter of fiscal 2001 were $390.3 million
compared to $451.3 million in the prior year, down 14%. Excluding the impact of
the divested polyvinyl alcohol (PVOH) business, sales declined 3%. Sales growth
was reduced 1% due to unfavorable currency impacts. The overall volume decline
was 9%, excluding the impact of PVOH. The volume decline resulted from the
slowing economy, lost market share due to price increases, and customer outages.
Performance chemicals experienced an overall 9% volume decline. Emulsions
declined globally due to market share loss in response to price increases as
well as a general economic slowdown. Epoxy additives volume grew modestly, while
specialty additives and polyurethane additives declined on market weakness.
Chemical intermediates volume declined 8% as shipments of polyurethane
intermediates were reduced due to customer outages. The amines volume was
impacted by market share loss in response to price increases and a customer
outage.
Operating income of $23.1 million declined 61%, or $35.6 million from the prior
year. About two thirds of the decline resulted from lower volumes and one third
resulted from higher natural gas costs. Aggressive price increases have been
partially successful in recovering the rapid rise in costs. The operating margin
of 5.9% declined from 13.0% in the prior year.
Equity affiliates' income declined $3.1 million as the emulsions business
experienced global volume and margin pressure.
INTEREST
Interest expense of $50.3 million increased $3.5 million, or 7% over the prior
year. The increase primarily resulted from lower capitalized interest.
INCOME TAXES
The effective tax rate for the second quarter of fiscal 2001 was 27.8%, after
minority interest. The effective rate excluding the impact of special items was
29.6%. The comparable rate in the prior year was 31.0%. The 1.4% decrease was
due to increased tax credits and adjustments.
15
GLOBAL COST REDUCTION
The results for the quarter ended 31 March 2001 include a charge of $30.9
million, or $20.0 million after-tax, for a global cost reduction plan. The plan
includes 311 staff position reductions resulting in a charge of $22.4 million
for severance and termination benefits. A charge of $8.5 million was recognized
primarily for asset impairments and restructuring expenses related to the
rationalization of several facilities. The charges to cost of sales, selling and
administrative, and other expense were $14.4 million, $9.4 million, and $7.1
million, respectively. Asset impairments and other restructuring expenses
totaling $7.8 million were incurred in the fiscal quarter and $23.1 million
reflected in accrued liabilities at 31 March 2001. Benefits from the plan are
expected to be approximately $9 million in fiscal years 2002 and 2003,
respectively.
Staff reductions related to the charge recognized in the current fiscal quarter
will be completed by 31 March 2002. Of the 311 position eliminations in the
plan, 120 are related to restructuring of customer service centers and regional
management centers at Carburos Metalicos SA. (Carburos) in Spain. The total
Carburos initiative requires information system investments prior to completing
the restructuring. Therefore, the company anticipates an additional charge for
restructuring and related expenses for the Carburos initiative of about $11
million in the fourth quarter of fiscal 2001.
The company announced a global cost reduction plan in the fiscal quarter ended
31 March 2000, providing for a reduction of 103 staff positions. The plan which
resulted in a charge of $8.7 million, or $5.5 million after-tax, was completed
essentially as expected in the quarter ended 31 March 2001.
16
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
SIX MONTHS FISCAL 2001 VS. SIX MONTHS FISCAL 2000
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales for the six months ended 31 March 2001 of $2,939.6 million were 13% higher
than the $2,611.6 million reported in the prior year. Operating income of
$391.7 million declined $23.4 million, or 6% versus prior year. Income from
equity affiliates was $37.8 million compared with $41.6 million in the prior
year. Net income was $230.2 million, or $1.05 diluted earnings per share,
compared to net income of $98.2 million, or $.46 diluted earnings per share, in
the first six months of the prior year. The results for the six months ended 31
March 2001 included an after-tax charge of $20.0 million, or $.09 per share, for
a cost reduction program and an after-tax charge of $3.7 million, or $.02 per
share, related to a litigation settlement. The six months ended 31 March 2000
included an after-tax charge of $154.7 million, or $.72 per share, for costs
related to the BOC transaction. These costs consisted principally of charges
recorded on purchased option and forward exchange contracts entered into to
hedge the currency exposure of the transaction. The results of the first six
months of the prior year also included an after-tax charge of $5.5 million, or
$.03 per share, for a cost reduction program and an after-tax gain of $4.0
million, or $.02 per share, related to the sale of packaged gas facilities.
Excluding these special items, current year net income of $253.9 million was
essentially equal to that of the prior year. Diluted earnings per share
excluding special items of $1.16 declined 2% from the prior year. The remaining
discussion and analysis of the results of operations excludes the impact of
special items. See Summary of Business Segments for details of special items by
segment.
Gases- Sales of $2,035.4 million increased 25%, or $412.7 million, over the
first six months of fiscal 2000. Natural gas cost pass-through added 10% to
sales growth. Unfavorable currency impacts reduced sales growth by 4%, while the
consolidation of Korea Industrial Gases (KIG) contributed 2% to sales growth.
The balance of the sales increase was principally due to higher shipments to the
electronics market.
Electronics volume growth resulted from strong global demand for specialty gases
and chemicals. Recently completed and announced additions to NF3 and WF6
specialty gases production capacity are critical to sustained growth. Overall
CPI tonnage volume grew 1% as increased hydrogen and carbon monoxide (HYCO)
demand was largely offset by weakness in GOX/GAN.
The liquid bulk volume index in North America was essentially unchanged
year-on-year. Cylinder volume declined 2%. Weakness in the steel, metals
processing, and automotive end markets impacted both liquid bulk and cylinder
volumes. Average LOX/LIN prices increased 8% as a result of pricing and
surcharge initiatives. The surcharge recovery somewhat lags the increased fuel
and energy cost increases.
In spite of the strong U.S. dollar, overall European gases operations improved
in the current year. The liquid bulk volume index increased slightly as weakness
in the United Kingdom offset gains on the continent. The LOX/LIN price also
increased slightly from the prior year.
17
Liquid bulk volume in Asia grew about 20%. About half of this favorable variance
was due to consolidation of KIG.
Higher volume in electronics and improved operating performance in CPI drove the
18% increase in operating income. Unfavorable currency and exchange related
effects reduced operating income growth by 4%. The operating margin in the first
six months of fiscal 2001 was 18.4% compared to 19.6% in the prior year.
Excluding the unfavorable margin impact of the natural gas cost pass-through on
revenues, the operating margin in the current year was 20.0%, up 0.4% over the
prior year.
Equipment- Sales of $120.6 million rose $16.2 million from the prior year.
Operating income of $4.6 million declined $2.2 million from the prior year due
to an unfavorable project mix. The $104 million sales backlog at 31 March 2001
compared to $131 million at 31 December 2000 and $149 million at 30 September
2000. A significant increase in the sales backlog in the second six months of
fiscal 2001 is anticipated in the LNG business area.
Chemicals- Sales in the first six months of fiscal 2001 were $783.6 million
compared to $884.5 million in the prior year, down 11%. Excluding the impact of
the divested PVOH business, sales declined 1% from prior year. Sales growth was
reduced 1% due to unfavorable currency impacts. The overall volume decline was
6%, excluding the impact of PVOH. The volume decline resulted from the slowing
economy, lost market share due to price increases, and customer outages.
Performance chemicals experienced an overall 8% volume decline. Emulsions
declined globally due to market share loss in response to price increases as
well as a general economic slowdown. Epoxy additives volume grew modestly, while
specialty additives and polyurethane additives declined on market weakness.
Chemical intermediates volume declined 4%. Polyurethane intermediates were down
slightly year-on-year. The amines volume was impacted by market share loss in
response to price increases and a customer outage.
Operating income of $60.1 million declined 46%, or $50.2 million from the prior
year. Lower volumes and higher raw material and energy costs drove the
significant decline in operating income. Aggressive price increases have been
partially successful in recovering the rapid rise in costs. Unfavorable currency
and exchange related effects reduced operating income about 6%. The operating
margin of 7.7% declined from 12.5% in the prior year.
Equity affiliates' income declined $5.2 million as the emulsions business
experienced global volume and margin pressure.
INTEREST
Interest expense of $98.7 million increased $10.6 million, or 12% over the prior
year. The increase primarily resulted from lower capitalized interest.
INCOME TAXES
The effective tax rate for the first six months of fiscal 2001 was 29.9%, after
minority interest of $2.3 million. The effective rate excluding the impact of
special items was 30.5%, equal to the comparable rate in the prior year.
18
GLOBAL COST REDUCTION
The results for the six months ended 31 March 2001 include a before-tax charge
of $30.9 million for a global cost reduction program initiated in the quarter
ended 31 March 2001.
The cost reduction program in fiscal 2000 included staff reductions of 450
employees and resulted in a before-tax charge of $47.9 million. This charge was
recognized in the second and third quarters of fiscal 2000. The plan phase
initiated in the second quarter of fiscal 2000 was completed essentially as
expected as of 31 March 2001. As of 31 March 2001, there have been 366 positions
eliminated with completion of the full fiscal 2000 plan expected by 30 June
2001. Expenses of $42.3 million have been incurred with $5.6 million remaining
in accrued liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first six months of fiscal 2001 totaled $329.3
million compared to $604.0 million in the corresponding period of the prior
year. Additions to plant and equipment decreased from $378.6 million during the
first six months of fiscal 2000 to $302.3 million during the current period.
Investments in unconsolidated affiliates were $26.5 million during the first six
months of fiscal 2001 versus $16.5 million last year. There were no expenditures
for acquisitions during the current period compared to expenditures of $168.7
million during the first six months of fiscal 2000. The prior year amount
included the acquisition of the remaining 51.1 percent of the shares in KIG, the
largest industrial gas company in Korea. Capital expenditures are expected to be
approximately $800 million in fiscal 2001. It is anticipated these expenditures
will be funded with cash from operations.
Total debt at 31 March 2001 and 30 September 2000, expressed as a percentage of
the sum of total debt, shareholders' equity, and minority interest, was 50% and
51%, respectively. Total debt decreased from $3,045.0 million at 30 September
2000 to $3,026.7 million at 31 March 2001.
There was $77.0 million of commercial paper outstanding at 31 March 2001. The
company's total revolving credit commitments amounted to $600.0 million at 31
March 2001. During fiscal 2000, the company had an additional $500.0 million
revolving credit commitment which matured in October 2000. No borrowings were
outstanding under these commitments. Additional commitments totaling $71.2
million are maintained by the company's foreign subsidiaries, of which $21.4
million was utilized at 31 March 2001.
The estimated fair value of the company's long-term debt, including current
portion, as of 31 March 2001 is $3,019.4 million compared to a book value of
$2,817.6 million.
On 25 January 2001, the company announced its intention to reactivate its share
repurchase program. Through the first six months of fiscal 2001, the company has
repurchased $50 million of its shares. Based on its current outlook, the company
expects to purchase approximately $100 million of the company's shares during
fiscal 2001.
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.
19
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this release are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. Factors that might cause forward-looking
statements to differ materially from actual results include, among other things,
overall economic and business conditions; demand and timing of the placing of
orders for the goods and services of Air Products; competitive factors in the
industries in which it competes; whether prices of natural gas and other raw
materials fall in the second half of fiscal 2001; the ability to recover
increased energy and raw material costs from customers; the availability of
utilities, particularly in California, to provide electrical power; changes in
government regulations; success of implementing cost reduction programs; the
timing, impact and other uncertainties of future acquisitions or divestitures;
fluctuations in interest rates and foreign currencies; the impact of tax and
other legislation and regulations in the jurisdictions in which Air Products and
its affiliates operate; and the timing and rate at which tax credits can be
utilized.
20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
a. The Annual Meeting of Shareholders of the Registrant was
held on 25 January 2001.
b. The following directors were elected at the meeting:
James F. Hardymon, Charles H. Noski, Paula G. Rosput, and
Lawrason D. Thomas. Directors whose term of office continued
after the meeting include: Robert Cizik, Ursula F. Fairbairn,
John P. Jones III, Mario L. Baeza, L. Paul Bremer III,
Edward E. Hagenlocker, and Terry R. Lautenbach.
c. The following matters were voted on at the Annual Meeting:
1. Election of Directors
--------------------------------------------------------------------------
NAME OF DIRECTOR NUMBER OF VOTES CAST
--------------------------------------------------------------------------
AGAINST BROKER
OR NON-
FOR WITHHELD ABSTENTIONS VOTES
--------------------------------------------------------------------------
J. F. Hardymon 206,273,279 2,302,838 0 0
--------------------------------------------------------------------------
C. H. Noski 206,234,821 2,341,296 0 0
--------------------------------------------------------------------------
P. G. Rosput 206,184,521 2,391,596 0 0
--------------------------------------------------------------------------
L. D. Thomas 206,244,213 2,331,904 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 2001.
--------------------------------------------------------------------------
NUMBER OF VOTES CAST
--------------------------------------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--------------------------------------------------------------------------
207,079,466 626,457 870,194 0
--------------------------------------------------------------------------
21
3. Approval of 2002 Amendments to the Long-Term Incentive
Plan.
--------------------------------------------------------------------------
NUMBER OF VOTES CAST
--------------------------------------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--------------------------------------------------------------------------
195,483,375 11,201,934 1,8 0
--------------------------------------------------------------------------
4. Approval of the Internal Revenue Code 162(M) Annual
Incentive Plan Terms
--------------------------------------------------------------------------
NUMBER OF VOTES CAST
--------------------------------------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--------------------------------------------------------------------------
--------------------------------------------------------------------------
201,291,342 5,244,145 2,040,630 0
-------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a)(10.1) Form of Severance Agreement which the Company
has with one European Executive Officer dated
16 September 1999.
(a)(10.2) Amendment to form of Severance Agreement with
one European Executive Officer dated
26 February 2001.
(a)(10.3) Letter dated 19 April 2000, covering pension for a
European Executive Officer.
(a)(12) Computation of Ratios of Earnings to Fixed
Charges.
(b) Current Reports on Form 8-K dated 22 January
2001 and 25 January 2001, in which Item 5 of
such forms was reported, and 19 March 2001, in
which Item 5 and Item 9 of such forms was
reported, were filed by the Registrant during
the quarter ended 31 March 2001.
22
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 11, 2001 By: /s/L. J. Daley
----------------------------------------
L. J. Daley
Vice President - Finance and Controller
(Chief Financial Officer)
23