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 2002
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 1-4534
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AIR PRODUCTS AND CHEMICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
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(State of Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
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 1 May 2002
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Common Stock, $1 par value 227,203,388
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
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Part I. Financial Information
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Consolidated Balance Sheets -
31 March 2002 and 30 September 2001 ........................................................... 3
Consolidated Income -
Three Months and Six Months Ended 31 March 2002 and 2001 ...................................... 4
Consolidated Statement of Comprehensive Income -
Three Months and Six Months Ended 31 March 2002 and 2001 ...................................... 5
Consolidated Cash Flows -
Six Months Ended 31 March 2002 and 2001 ....................................................... 6
Summary by Business Segments -
Three Months and Six Months Ended 31 March 2002 and 2001 ...................................... 7
Summary by Geographic Regions -
Three Months and Six Months Ended 31 March 2002 and 2001 ...................................... 9
Notes to Consolidated Financial Statements ...................................................... 10
Management's Discussion and Analysis ............................................................ 13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders .................................... 19
Item 6. Exhibits and Reports on Form 8-K ....................................................... 20
Signatures ...................................................................................... 21
REMARKS:
The consolidated financial statements of Air Products and Chemicals, Inc. and
its subsidiaries (the "company" or "registrant") included herein have been
prepared by the company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the company, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented not
misleading. Such adjustments are of a normal, recurring nature unless otherwise
disclosed in the notes to consolidated financial statements. However, the
interim results for the periods indicated herein do not 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 or six 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)
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31 March 2002 30 September 2001
ASSETS (Unaudited)
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CURRENT ASSETS
Cash and cash items $ 97.8 $ 66.2
Trade receivables, less allowances for doubtful accounts 867.2 913.4
Inventories 364.4 410.5
Contracts in progress, less progress billings 95.3 67.9
Other current assets 206.6 226.8
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TOTAL CURRENT ASSETS 1,631.3 1,684.8
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INVESTMENTS IN NET ASSETS OF AND ADVANCES TO 530.6 499.5
EQUITY AFFILIATES
PLANT AND EQUIPMENT, at cost 10,157.1 10,226.5
Less - Accumulated depreciation 5,160.2 5,108.0
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PLANT AND EQUIPMENT, net 4,996.9 5,118.5
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GOODWILL 343.1 384.7
OTHER NONCURRENT ASSETS 368.9 396.6
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TOTAL ASSETS $7,870.8 $8,084.1
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Payables, trade and other $ 460.3 $ 512.2
Accrued liabilities 323.0 341.6
Accrued income taxes 77.5 48.4
Short-term borrowings 46.6 255.7
Current portion of long-term debt 66.9 194.5
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TOTAL CURRENT LIABILITIES 974.3 1,352.4
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LONG-TERM DEBT 1,968.9 2,027.5
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 718.9 702.0
DEFERRED INCOME TAXES 791.1 778.4
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TOTAL LIABILITIES 4,453.2 4,860.3
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MINORITY INTEREST IN SUBSIDIARY COMPANIES 120.9 118.0
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SHAREHOLDERS' EQUITY
Common stock (par value $1 per share, issued 2002 and 2001-249,455,584 249.4 249.4
shares)
Capital in excess of par value 417.2 384.9
Retained earnings 4,118.9 3,965.9
Accumulated other comprehensive income (loss) (498.1) (452.5)
Treasury Stock, at cost (2002- 22,252,196 shares; 2001-22,269,244 shares) (768.3) (768.8)
Shares in trust (2002- 9,489,217 shares; 2001-11,723,720 shares) (222.4) (273.1)
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TOTAL SHAREHOLDERS' EQUITY 3,296.7 3,105.8
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,870.8 $8,084.1
======================================================================================================================
The accompanying notes are an integral part of these statements.
3
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
2002 2001 2002 2001
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SALES $1,312.7 $1,534.5 $2,629.2 $3,010.3
COSTS AND EXPENSES
Cost of sales 942.3 1,141.0 1,879.4 2,200.6
Selling and administrative 189.1 189.5 358.4 363.0
Research and development 28.1 30.8 58.5 59.3
Other (income) expense, net (1.6) 9.0 (6.1) (4.3)
---------------------------------------------------------------------------------------------------------
OPERATING INCOME 154.8 164.2 339.0 391.7
Income from equity affiliates, net of 20.3 16.9 38.7 37.8
related expenses
Gain on sale of packaged gas 55.7 -- 55.7 --
business
Interest expense 31.0 50.3 66.1 98.7
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INCOME BEFORE TAXES AND 199.8 130.8 367.3 330.8
MINORITY INTEREST
Income taxes 69.6 36.6 118.4 98.3
Minority interest (a) 4.1 (.4) 9.1 2.3
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NET INCOME $126.1 $94.6 $239.8 $230.2
=========================================================================================================
BASIC EARNINGS PER $.58 $.44 $1.11 $1.07
COMMON SHARE
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DILUTED EARNINGS PER $.57 $.43 $1.08 $1.05
COMMON SHARE
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WEIGHTED AVERAGE 216.6 214.5 216.2 214.4
NUMBER OF COMMON
SHARES (in millions)
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WEIGHTED AVERAGE 222.9 218.9 221.7 218.4
NUMBER OF COMMON AND
COMMON EQUIVALENT
SHARES (in millions) (b)
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DIVIDENDS DECLARED PER $.20 $.19 $.40 $.38
COMMON SHARE - Cash
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( 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.
4
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
2002 2001 2002 2001
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NET INCOME $126.1 $94.6 $239.8 $230.2
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OTHER COMPREHENSIVE INCOME
(LOSS), net of tax
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) (3.3) .5 (2.5) (.3)
arising during the period
Less: reclassification adjustment for (1.7) -- (1.7) --
gains included in net income
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Net unrealized holding gains (losses) on (5.0) .5 (4.2) (.3)
investments
Net gain (loss) on derivatives (1.2) (.1) .4 1.3
Translation adjustments (15.5) (59.7) (41.8) (77.3)
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TOTAL OTHER COMPREHENSIVE (21.7) (59.3) (45.6) (76.3)
INCOME (LOSS), net of tax
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COMPREHENSIVE INCOME $104.4 $35.3 $194.2 $153.9
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The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED CASH FLOWS
(Unaudited)
(Millions of dollars)
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Six Months Ended
31 March
2002 2001
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OPERATING ACTIVITIES
Net Income $239.8 $230.2
Adjustments to reconcile income to cash provided by operating activities:
Depreciation 275.7 291.7
Deferred income taxes 7.4 7.1
Undistributed earnings of unconsolidated affiliates (30.9) (19.9)
Gain on sale of assets and investments (58.6) (.6)
Other 66.1 (8.2)
Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures:
Trade receivables 10.1 (82.2)
Inventories and contracts in progress (5.8) (37.9)
Payables, trade and other (43.0) 1.6
Other 16.3 (1.9)
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CASH PROVIDED BY OPERATING ACTIVITIES 477.1 379.9
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INVESTING ACTIVITIES
Additions to plant and equipment (a) (321.3) (302.3)
Investment in and advances to unconsolidated affiliates (34.7) (26.5)
Acquisitions, less cash acquired (1.1) --
Proceeds from sale of assets and investments 267.8 32.2
Other 10.5 23.0
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CASH USED FOR INVESTING ACTIVITIES (78.8) (273.6)
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FINANCING ACTIVITIES
Long-term debt proceeds 20.8 54.4
Payments on long-term debt (164.8) (21.4)
Net decrease in commercial paper and other short-term borrowings (205.2) (25.7)
Purchase of treasury stock -- (50.0)
Dividends paid to shareholders (86.2) (81.5)
Issuance of stock for options and award plans 75.5 27.0
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CASH USED FOR FINANCING ACTIVITIES (359.9) (97.2)
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Effect of Exchange Rate Changes on Cash (6.8) (2.6)
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Increase in Cash and Cash Items 31.6 6.5
Cash and Cash Items - Beginning of Year 66.2 94.1
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Cash and Cash Items - End of Period $97.8 $100.6
======================================================================================================================
(a) Excludes capital lease additions of $1.8 and $.5 in 2002 and 2001,
respectively.
The accompanying notes are an integral part of these statements.
6
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
2002 2001 2002 2001
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Revenues from external customers
Gases $ 886.8 $1,079.4 $1,790.9 $2,106.1
Chemicals 358.1 390.3 707.1 783.6
Equipment 67.8 64.8 131.2 120.6
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Segment Totals 1,312.7 1,534.5 2,629.2 3,010.3
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Consolidated Totals $1,312.7 $1,534.5 $2,629.2 $3,010.3
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Operating income
Gases $122.5 $156.8 $274.5 $348.2
Chemicals 42.0 18.5 82.5 55.5
Equipment 5.1 3.5 6.0 4.6
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Segment Totals 169.6 178.8 363.0 408.3
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Corporate research and development and (14.8) (14.6) (24.0) (16.6)
other income/(expense)
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Consolidated Totals $154.8 $164.2 $339.0 $391.7
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Operating income (excluding special items)
Gases $148.7(a) $183.1(c) $300.7(a) $374.5(c)
Chemicals 46.6(b) 23.1(d) 87.1(b) 60.1(d)
Equipment 5.1 3.5 6.0 4.6
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Segment Totals 200.4 209.7 393.8 439.2
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Corporate research and development and (14.8) (8.6)(e) (24.0) (10.6)(e)
other income/(expense)
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Consolidated Totals $185.6 $201.1 $369.8 $428.6
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Equity affiliates' income
Gases $16.3 $16.6 $32.1 $35.3
Chemicals 2.8 -- 5.1 1.5
Equipment 1.2 .2 1.5 .9
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Segment Totals 20.3 16.8 38.7 37.7
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Other -- .1 -- .1
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Consolidated Totals $20.3 $16.9 $38.7 $37.8
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7
(Millions of dollars)
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31 March
2002 2001
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Identifiable assets (f)
Gases $5,503.2 $5,930.7
Chemicals 1,384.4 1,457.9
Equipment 214.1 229.9
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Segment Totals 7,101.7 7,618.5
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Corporate assets 238.5 172.2
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Consolidated Totals $7,340.2 $7,790.7
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Twelve Months Ended
31 March
2002 2001
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ORONA (f)
Gases 11.2% 12.9%
Chemicals 12.0% 9.6%
Equipment 6.5% 6.3%
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Segment Totals 11.2% 12.0%
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Consolidated Totals 10.6% 11.3%
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(a) The results for the three and six months ended 31 March 2002 excluded a
cost reduction charge of $26.2.
(b) The results for the three and six months ended 31 March 2002 excluded a
cost reduction charge of $4.6.
(c) The results for the three and six months ended 31 March 2001 excluded a
cost reduction charge of $26.3.
(d) The results for the three and six months ended 31 March 2001 excluded a
cost reduction charge of $4.6.
(e) The results for the three and six months ended 31 March 2001 excluded a
litigation settlement charge of $6.0.
(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 (identifiable
assets). The ORONA calculation excluded all special items impacting
operating income.
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
(Millions of dollars)
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Three Months Ended Six Months Ended
31 March 31 March
2002 2001 2002 2001
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Revenues from external
customers
United States $819.9 $1,030.9 $1,657.8 $2,012.1
Canada 27.1 29.8 52.1 59.3
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Total North America 847.0 1,060.7 1,709.9 2,071.4
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United Kingdom 108.0 125.7 218.9 238.1
Spain 80.5 82.8 161.7 157.1
Other Europe 180.5 159.9 332.4 307.5
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Total Europe 369.0 368.4 713.0 702.7
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Asia 69.1 77.1 152.0 169.7
Latin America 27.6 28.3 54.2 66.4
All Other -- -- .1 .1
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Total $1,312.7 $1,534.5 $2,629.2 $3,010.3
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Note: Geographic information is based on country of origin. The other Europe
segment operates principally in France, Germany, Netherlands, and Belgium.
9
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share)
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
1 October 2001. As required by SFAS 142, the company performed an impairment
test on goodwill as of 1 October 2001, which indicated no impairment of
goodwill. As of 1 October 2001, the company is no longer amortizing goodwill,
including goodwill associated with investments in equity affiliates. Goodwill
amortization in 2001 was $14.8 on an after-tax basis, or $.07 per share.
Goodwill amortization for the three and six months ended 31 March 2001 was $3.6
and $7.4, on an after-tax basis, or $.02 and $.04 per share, respectively.
Changes to the carrying amount of consolidated goodwill by segment for the six
months ended 31 March 2002, are as follows:
Gases Chemicals Equipment Total
---------------------------------------------
Balance as of 30 September 2001 $289.2 $87.1 $8.4 $384.7
Acquisitions and adjustments 4.5 (.1) -- 4.4
Currency translation and other (8.2) (1.5) -- (9.7)
Goodwill related to the sale of (36.3) -- -- (36.3)
U.S. packaged gas business
---------------------------------------------
Balance as of 31 March 2002 $249.2 $85.5 $8.4 $343.1
----------------------------------------------
There were no significant acquisitions during the six months ended 31 March
2002. Goodwill associated with the divested U.S. packaged gas business was
included in the carrying amount of the business in determining the gain on
disposal. The amount of goodwill included in the carrying amount of the divested
business was based on the relative fair value of the divested business to the
total reporting unit. The fair values were determined using the expected present
value of future cash flows.
On 28 February 2002, the company completed the sale of the majority of its U.S.
packaged gas business, excluding the electronic gases and magnetic resonance
imaging related helium operations, to Airgas, Inc. (Airgas). This sale included
approximately 100 facilities in 30 states associated with the filling and
distribution of cylinders, liquid dewars, tube trailers, and other containers of
industrial gases and non-electronic specialty gases, and the retail selling of
welding hardgoods, including customer service centers, warehouses, and other
related assets. The company also sold its packaged gas operations in the
Carolinas and in Southern Virginia to National Welders Supply Company, Inc., a
joint venture between Airgas and the Turner family of Charlotte, N.C. The assets
sold generated approximately $240 in revenues in 2001 with a modest contribution
to operating income. For the five months ended 28 February 2002, the revenues
were approximately $100 also with a modest contribution to operating income.
These facilities employed 1,200 people. The proceeds from these transactions
were $254.5. The results for the three and six months ended 31 March 2002
included a gain of $55.7 ($25.7 after-tax, or $.12 per share).
10
The following table sets forth the computation of basic and diluted earnings per
share:
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Three Months Ended Six Months Ended
31 March 31 March
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income $126.1 $94.6 $239.8 $230.2
Denominator for basic EPS
-weighted average shares 216.6 214.5 216.2 214.4
Effect of diluted securities:
Employee stock options 5.5 3.4 4.9 3.1
Other award plans .8 1.0 .6 .9
- ------------------------------------------------------------------------------------------------
6.3 4.4 5.5 4.0
- ------------------------------------------------------------------------------------------------
Denominator for diluted EPS
-weighted average shares and
assumed conversions 222.9 218.9 221.7 218.4
- ------------------------------------------------------------------------------------------------
Basic EPS $.58 $.44 $1.11 $1.07
- ------------------------------------------------------------------------------------------------
Diluted EPS $.57 $.43 $1.08 $1.05
- ------------------------------------------------------------------------------------------------
Options of 5.6 million shares of common stock were not included in computing
diluted EPS for the second quarter of 2001 because their effects were
antidilutive.
Income from equity affiliates contributed $.09 and $.07 to diluted earnings per
share for the three months ended 31 March 2002 and 2001, respectively. Income
from equity affiliates contributed $.16 to diluted earnings per share for both
the six months ended 31 March 2002 and 2001.
The results for the three and six months ended 31 March 2002 included a charge
of $30.8 ($18.9 after-tax, or $.09 per share) for a global cost reduction plan
(2002 Plan) including packaged gas divestiture related reductions. This charge
included $27.1 for severance and pension related benefits and $3.7 for asset
impairments related to the planned sale or closure of two small chemical
facilities. The company will eliminate 333 positions in areas of manufacturing,
engineering, distribution, and overheads. The restructuring charges included in
cost of sales, selling and administrative, research and development, and other
expense were $13.4, $14.1, $.4, and $2.9, respectively.
The results for the three and six months ended 31 March 2001 included a charge
of $30.9 ($20.0 after-tax, or $.09 per share) for a global cost reduction plan.
The plan included 311 position eliminations, resulting in a charge of $22.4 for
severance and termination benefits. A charge of $8.5 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, $9.4, and $7.1, respectively. The results for the three and six months
ended 31 March 2001 also included a charge of $6.0 ($3.7 after-tax, or $.02 per
share) related to a litigation settlement.
11
ACCRUAL FOR COST REDUCTION PLANS
Severance Pension Other (1) Total
--------------------------------------------------
Balance at 30 September 2001 $49.1 $ -- $1.5 $50.6
Provision 16.4 10.7 3.7 30.8
Noncash charges -- (10.7) (3.7) (14.4)
Cash expenditures (18.6) -- -- (18.6)
Adjustments 2001 Plan (2.4) -- (.6) (3.0)
- --------------------------------------------------------------------------------
Balance at 31 March 2002 $44.5 $ -- $.9 $45.4
- --------------------------------------------------------------------------------
(1) Asset impairments and related expenses are included in the other category.
12
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
SECOND QUARTER 2002 VS. SECOND QUARTER 2001
- -------------------------------------------------------------------------------
(Millions of dollars, except per share)
RESULTS OF OPERATIONS
Consolidated - Sales in the second quarter of 2002 of $1,312.7 declined 14%, or
$221.8, compared with the same quarter in the prior year. Operating income was
$154.8, down $9.4, or 6%. Income from equity affiliates was up $3.4 to $20.3.
Net income was $126.1, or $.57 diluted earnings per share, compared to net
income of $94.6, or $.43 diluted earnings per share. The results for the quarter
ended 31 March 2002 were impacted by two special items: an after-tax gain of
$25.7, or $.12 per share, on the sale of the U.S. packaged gas business; and an
after-tax charge of $18.9, or $.09 per share, for a global cost reduction plan.
The results for the quarter ended 31 March 2001 were impacted by an after-tax
charge of $20.0, or $.09 per share, for a global cost reduction plan as well as
an after-tax charge of $3.7, or $.02 per share, for costs related to a
litigation settlement. Excluding special items, net income for the quarters
ended 31 March 2002 and 2001 were $119.3 and $118.3, respectively. Excluding
special items, diluted earnings per share for both quarters ended 31 March 2002
and 2001 was $.54.
Operating income benefited from global cost reduction plans initiated in 2002
and prior years. See Note 3 to the consolidated financial statements in the 2001
annual report on Form 10-K for details of the 2001, 2000, and 1999 plans.
Benefits generated from the plans of $58 for fiscal year 2001 resulted primarily
from reduced personnel costs. Benefits of $87 are expected for fiscal year 2002
and $110 for fiscal year 2003.
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. All comparisons in the discussion are to the corresponding
period in the prior year unless otherwise stated.
Gases - Sales declined $192.6, or 18%, to $886.8 in the second quarter of 2002.
Excluding natural gas cost pass-through, acquisitions and divestitures, and
currency effects, sales declined 4%. This decline of 4% was principally due to
lower shipments, especially to the electronics industry. Volume growth in
chemicals and processing industries (CPI) and higher merchant prices partially
offset this decline in sales.
Operating income of $148.7 declined $34.4, or 19%. This decline was principally
due to the depressed conditions in the global electronics market as current low
levels are being compared to record high levels of prior year. North American
operating results included a write-off of $7.3 million in receivables associated
with three bankrupt steel customers. Higher merchant gases pricing and lower
operating costs partially offset the operating income decline. Currency and
exchange related effects had a minimal impact on the operating income
comparison. Operating margin of 16.8% was down .2% compared to 17.0%.
While experiencing modest sequential improvement, results for electronics
continued to be affected by a sharp reduction in customers' global silicon wafer
processing due to soft demand. Total worldwide CPI tonnage volume increased
overall 7% with hydrogen and carbon monoxide (HYCO) experiencing double-digit
growth. While remaining stable sequentially, liquid bulk volume declined 8% in
North America, reflecting continued softening demand across a number of end
markets. Improved pricing, lower operating costs, and lower overheads in liquid
bulk were able to more than offset the continued general slowdown in volumes.
Average liquid oxygen and nitrogen (LOX/LIN) prices increased 5% as a direct
result of pricing and surcharge initiatives.
13
A 4% increase in the European LOX/LIN price index and lower operating costs were
more than offset by a 5% decline in European liquid bulk volumes. The Asian
liquid bulk volume decreased 5% primarily due to lower demand by northern
Chinese steel makers.
Gases equity affiliates' income was $16.3 down $.3 from $16.6. The absence of
income from two cogeneration facilities that were divested in the fourth quarter
of 2001 and lower results from electronics affiliates more than offset a $5.0
gain recognized from a one-time tax benefit related to an asset revaluation of
an Italian affiliate.
Chemicals - Sales in the second quarter of 2002 of $358.1 declined $32.2, or 8%.
Excluding the effects of natural gas cost pass-through and currency impacts,
sales were down 4%. This decline was principally due to unfavorable price/mix
variance. The overall volume index for chemicals was up 1%. In the performance
chemicals division, overall volumes were up 4%. Worldwide emulsion volumes
increased nearly 7%, while epoxy additives and surfactants volumes were down.
Chemical intermediates volumes declined 4% as higher shipments of methylamines
and polyurethane intermediates were more than offset by weaker demand for
specialty and higher amines.
Operating income of $46.6 increased $23.5, or 102%, due to margin improvement in
most product lines resulting from lower natural gas and feedstock costs, lower
costs due to continuous improvement efforts, and the increase in volume
performance. The operating margin of 13.0% was significantly improved.
Equity affiliates' income was up $2.8 due to the improved profitability of the
global Polymers joint venture.
A long-term supplier of sulfuric acid, which is used in the production of
dinitrotoluene (DNT), has been operating under Chapter 11 bankruptcy protection
since 8 May 2001. The company's DNT operation and supply to its customers have
not been materially impacted. The company expects this supplier to be successful
in their reorganization. In the unlikely event of unsuccessful reorganization,
the profitability of the chemicals segment could be materially impacted on an
annual basis. The company extended an $8.0 line of credit to this supplier, of
which $4.5 was drawn at 31 March 2002. The company also entered into a product
pre-payment agreement with this supplier. At 31 March 2002 the unamortized
balance was $5.8. The company expects to fully recover these advances.
Equipment - Sales of $67.8 were up $3.0, or 5%, due to increased activity across
several product lines. Operating income increased $1.6, to $5.1, primarily due
to higher shipments of helium containers and membrane units. The sales backlog
for the equipment segment at 31 March 2002 was $193.8 compared to $103.9 at
31 March 2001 and $227.2 at 30 September 2001.
INTEREST
Interest expense of $31.0 decreased $19.3, or 38%. This decline resulted from a
lower average debt outstanding coupled with lower interest rates.
INCOME TAXES
The effective tax rate for the second quarter of 2002 was 35.6%, after minority
interest of $4.1. The effective rate excluding the impact of special items was
30.0%. The comparable rate in the prior year was 29.6%. The .4% increase was due
principally to lower tax credits in the current year.
14
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
SIX MONTHS FISCAL 2002 VS. SIX MONTHS FISCAL 2001
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated - Sales for the six months ended 31 March 2002 of $2,629.2 were 13%
lower than the $3,010.3 reported in the prior year. Operating income of $339.0
declined $52.7, or 14%. Income from equity affiliates was $38.7 compared with
$37.8. Net income was $239.8, or $1.08 diluted earnings per share, compared to
net income of $230.2, or $1.05 diluted earnings per share. The results for the
six months ended 31 March 2002 were impacted by two special items: an after-tax
gain of $25.7, or $.12 per share, on the sale of the U.S. packaged gas business;
and an after-tax charge of $18.9, or $.09 per share, for a global cost reduction
plan. 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. Excluding these special items, net income for the six months ended
31 March 2002 of $233.0 declined $20.9, or 8% from the prior year. Excluding
special items, diluted earnings per share of $1.05 declined 9% from 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. All comparisons in the discussion are to the corresponding
period in the prior year unless otherwise stated.
Gases - Sales in the first six months of 2002 were $1,790.9 compared to
$2,106.1, down $315.2 or 15%. Excluding natural gas cost pass-through,
acquisitions and divestitures, and currency effects, sales declined 5%. The
balance of the sales decline was due principally to lower shipments to the
electronics industry. The decline in sales was partially offset by higher prices
for merchant gases and volume growth in CPI.
Operating income of $300.7 declined $73.8, or 20%, due principally to the
depressed conditions in the global electronics market. North American operating
results included a write-off of $7.3 million in receivables associated with
three bankrupt steel customers. Higher merchant gases pricing and lower
operating costs partially offset the operating income decline. Unfavorable
currency and exchange related effects reduced operating income by 1%. Operating
margin of 16.8% was down 1.0% compared to 17.8%.
Electronics volume decline resulted from continued depressed conditions in the
global electronics market as current low levels are being compared to record
high levels of prior year. While experiencing modest sequential improvement,
electronics continued to be affected by a sharp reduction in customers' global
silicon wafer processing due to soft demand. Overall CPI tonnage volume grew 4%
as increased HYCO demand was largely offset by weakness in gaseous oxygen and
nitrogen (GOX/GAN).
While remaining stable sequentially, liquid bulk volume declined 8% in North
America, reflecting continued softening demand across a number of end markets.
Improved pricing, lower operating costs, and lower overheads in liquid bulk were
able to more than offset the continued general slowdown in volumes. Average
LOX/LIN prices increased 5% as a direct result of pricing and surcharge
initiatives.
A 4% increase in the European LOX/LIN price was tempered by a 5% decline in
European liquid bulk volumes. The Asian liquid bulk volume decreased 2% due to
lower demand by northern Chinese steel makers partially offset by growth in
Southern China and Thailand.
15
Gases equity affiliates' income was down $3.2 or 9%, mainly due to the absence
of income from two cogeneration facilities that were divested in the fourth
quarter of 2001 which more than offset a $5.0 gain recognized from a one-time
tax benefit related to an asset revaluation in an Italian affiliate.
Chemicals - Sales in the first six months of 2002 were $707.1 compared to
$783.6, down 10%. Excluding the effects of natural gas cost pass-through and
some prior year polyvinyl alcohol (PVOH) post-sale export revenues, sales
declined 5%. Unfavorable currency impacts had minimal effect on revenues. The
overall volume index decline was 6%, excluding the impact of PVOH. The volume
decline resulted from soft demand related to the weak economy.
Performance chemicals experienced generally flat volumes year on year. Chemical
intermediates volume declined 7%, resulting from market softness for
polyurethane intermediates as well as weaker demand in specialty and higher
amines.
Operating income of $87.1 increased 45%, or $27.0. Improved margins resulting
from lower natural gas and feedstock costs, and reduced overhead costs drove the
significant increase in operating income. Unfavorable currency and exchange
related effects reduced operating income about 1%. The operating margin of 12.3%
was significantly improved.
Equity affiliates' income increased $3.6 primarily due to the improved
profitability of the global Polymers joint venture.
Equipment - Sales of $131.2 grew $10.6 while operating income of $6.0 was up
$1.4. The improved results reflected increased activity across several product
lines.
INTEREST
Interest expense of $66.1 decreased $32.6, or 33%. The decrease primarily
resulted from a combination of lower average debt outstanding and lower interest
rates.
INCOME TAXES
The effective tax rate for the first six months of 2002 was 33.1%, after
minority interest of $9.1. The effective rate excluding the impact of special
items was 30.0%. The comparable rate in the prior year was 30.5%. The .5%
decrease was due principally to higher tax credits in the current year.
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
Capital expenditures during the first six months of 2002 totaled $358.9 compared
to $329.3. Additions to plant and equipment were $321.3 during the first six
months of 2002 compared to $302.3. Investments in and advances to unconsolidated
affiliates were $34.7 during the current period versus $26.5. Capital
expenditures for new plant and equipment are expected to be approximately $700
in 2002. In addition, the company intends to continue to pursue acquisition
opportunities and investments in affiliated entities. It is anticipated these
expenditures will be funded with cash from operations and proceeds from asset
sales.
Total debt at 31 March 2002 and 30 September 2001, expressed as a percentage of
the sum of total debt, shareholders' equity, and minority interest, was 38% and
43%, respectively. Total debt decreased from $2,477.7 at 30 September 2001 to
$2,082.4 at 31 March 2002.
There was no commercial paper outstanding at 31 March 2002. The company's total
revolving credit commitments amounted to $600.0 at 31 March 2002. No borrowings
were outstanding under these commitments.
16
Additional commitments totaling $71.7 are maintained by the company's foreign
subsidiaries, of which $22.2 was utilized at 31 March 2002.
The estimated fair value of the company's long-term debt, including current
portion, as of 31 March 2002 is $2,061.2 compared to a book value of $2,035.8.
There have been no material changes to the company's commitments for future
payments of long-term debt, leases, and unconditional purchase obligations.
The company's off-balance sheet arrangements include the sale and leaseback of
cryogenic vessel equipment with a third party and the debt of its equity
affiliates. In September 2001, the company sold and leased back certain
cryogenic vessel equipment for $301.9. This operating lease has a five-year term
with purchase and renewal options. This lease includes a residual value
guarantee by the company not to exceed $256. The probability of incurring a
material loss under this guarantee is remote. Summarized financial information
of equity affiliates was provided in Note 7 to the consolidated financial
statements in the company's 2001 annual report on Form 10-K.
The company has not entered into any off-balance sheet arrangements with a
limited or special purpose entity. Liquidity and availability of capital
resources are not dependent on the use of off-balance sheet arrangements. The
company has no material obligations to provide funding for lines of credit,
take-or-pay contracts, throughput agreements, or similar types of arrangements.
As discussed in Note 16 to the consolidated financial statements in the
company's 2001 annual report on Form 10-K, the company has guaranteed repayment
of borrowings of certain foreign affiliates and has equity support agreements
related to the financing by equity affiliates for cogeneration projects. The
company does not expect that any sum it may have to pay in connection with these
matters will have a materially adverse effect on its consolidated financial
position or results of operations.
The company's principal related parties are equity affiliates operating in
industrial gas and chemicals businesses. During 2001 and the six months ended
31 March 2002, the company did not engage in any material transactions
involving related parties that included terms or other aspects that differ from
those which would be negotiated with clearly independent parties.
FINANCIAL INSTRUMENTS
The net financial instrument position of the company was reduced from $2,300.5
at 30 September 2001 to $2,021.6 at 31 March 2002 primarily due to scheduled
repayments of outstanding long-term debt. All financial instruments are entered
into for other than trading purposes and there was no material change to market
risk sensitivity since 30 September 2001.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The significant accounting policies of the company are described in the notes to
the consolidated financial statements included in the annual report on
Form 10-K. Judgments and estimates of uncertainties are required in applying the
company's accounting policies in many areas. Following are some of the areas
requiring significant judgments and estimates: useful lives of plant and
equipment; cash flow and valuation assumptions in performing asset impairment
tests of long-lived assets and goodwill; assessment of the fair value of
investments
17
in equity affiliates; and estimated costs to be incurred for environmental
matters, contract disputes and settlement of litigation.
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. Factors that might cause forward-looking
statements to differ materially from actual results include those specifically
referenced as future events or outcomes that the company "expects" (or a
similar forward-looking qualifier), as well as, among other things, overall
economic and business conditions, in particular the success of the world
economy, including the electronics industry, strengthening in the second half
of the fiscal year and resulting in meaningful increases in the demand for Air
Products' goods and services during that time; competitive factors in the
industries in which it competes; the ability to recover increased energy and raw
material costs from customers; spikes in the pricing of natural gas; changes in
government regulations; consequences of acts of terrorism impacting the United
States' and other markets; the success of implementing cost reduction programs;
the timing, impact and other uncertainties of future acquisitions or
divestitures; significant fluctuations in interest rates and foreign currencies;
the impact of tax and other legislation and regulations in jurisdictions in
which Air Products and its affiliates operate; and the timing and rate at which
tax credits can be utilized.
18
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
24 January 2002.
b. The following directors were elected at the meeting: Michael J.
Donahue, Ursula F. Fairbairn and John P. Jones III.
Directors whose term of office continued after the meeting include:
Mario L. Baeza, L. Paul Bremer III, Edward E. Hagenlocker, Terry R.
Lautenbach, James F. Hardymon, Charles H. Noski, Paul G. Rosput
and Lawrason D. Thomas.
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
----------------------------------------------------------------------------
Michael J. Donahue 204,562,003 2,493,716 0 0
----------------------------------------------------------------------------
Ursula F. Fairbairn 204,462,495 2,593,224 0 0
----------------------------------------------------------------------------
John P. Jones III 203,841,169 3,214,542 0 0
----------------------------------------------------------------------------
19
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 2002.
--------------------------------------------------------------------------
NUMBER OF VOTES CAST
--------------------------------------------------------------------------
AGAINST
OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
--------------------------------------------------------------------------
198,430,332 7,251,232 1,374,155 0
--------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a)(10.1) Amended and Restated Long Term Incentive Plan of the Company,
effective 1 October 2001
(a)(10.2) Amended and Restated Annual Incentive Plan of the Company,
effective 1 October 2001
(a)(10.3) Resolutions approving an Amendment to the Compensation
Program for Directors of the Company, effective
1 January 2002
(a)(10.4) Amended and Restated Deferred Compensation Plan for
Directors of the Company, effective 20 September 2001
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(b) Current Reports on Form 8-K dated 23 January 2002 and
23 April 2002, in which Item 5 of such Forms was reported,
and 22 January 2002 and 23 April 2002, in which Item 5 and
Item 9 of such Forms were reported, were filed by the
Registrant during the quarter ended 31 March 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Air Products and Chemicals, Inc.
--------------------------------
(Registrant)
Date: 3 May 2002 By: /s/L. J. Daley
----------------------------------------
L. J. Daley
Vice President - Finance
(Chief Financial Officer)
21
+==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
EXHIBITS
To
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended 31 March 2002
Commission File No. 1-4534
-------------------
AIR PRODUCTS AND CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
===============================================================================
INDEX TO EXHIBITS
(a)(10.1) Amended and Restated Long Term Incentive Plan of the Company,
effective 1 October 2001
(a)(10.2) Amended and Restated Annual Incentive Plan of the Company,
effective 1 October 2001
(a)(10.3) Resolutions approving an Amendment to the Compensation Program
for Directors of the Company, effective 1 January 2002
(a)(10.4) Amended and Restated Deferred Compensation Plan for Directors
of the Company, effective 20 September 2001
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(b) Current Reports on Form 8-K dated 23 January 2002 and
23 April 2002, in which Item 5 of such Forms was reported,
and 22 January 2002 and 23 April 2002, in which Item 5
and Item 9 of such Forms were reported, were filed by the
Registrant during the quarter ended 31 March 2002.