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 30 June 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
--------------------
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 August 2002
- --------------------------- ------------------------------------
Common Stock, $1 par value 227,219,388
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets -
30 June 2002 and 30 September 2001 .................................. 3
Consolidated Income -
Three Months and Nine Months Ended 30 June 2002 and 2001 ............ 4
Consolidated Statement of Comprehensive Income -
Three Months and Nine Months Ended 30 June 2002 and 2001 ............ 5
Consolidated Cash Flows -
Nine Months Ended 30 June 2002 and 2001 ............................. 6
Summary by Business Segments -
Three Months and Nine Months Ended 30 June 2002 and 2001 ............ 7
Summary by Geographic Regions -
Three Months and Nine Months Ended 30 June 2002 and 2001 ............ 9
Notes to Consolidated Financial Statements ........................... 10
Management's Discussion and Analysis ................................. 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ............................ 20
Signatures ........................................................... 21
BASIS OF PRESENTATION:
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 nine 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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30 June 2002 30 September 2001
ASSETS (Unaudited)
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CURRENT ASSETS
Cash and cash items $185.8 $66.2
Trade receivables, less allowances for doubtful accounts 933.4 913.4
Inventories 366.4 410.5
Contracts in progress, less progress billings 84.7 67.9
Other current assets 210.7 226.8
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TOTAL CURRENT ASSETS 1,781.0 1,684.8
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INVESTMENTS IN NET ASSETS OF AND ADVANCES TO EQUITY AFFILIATES 568.5 499.5
PLANT AND EQUIPMENT, at cost 10,562.1 10,226.5
Less - Accumulated depreciation 5,413.8 5,108.0
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PLANT AND EQUIPMENT, net 5,148.3 5,118.5
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GOODWILL 381.9 384.7
OTHER NONCURRENT ASSETS 356.8 396.6
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TOTAL ASSETS $8,236.5 $8,084.1
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Payables, trade and other $486.7 $512.2
Accrued liabilities 352.5 341.6
Accrued income taxes 64.7 48.4
Short-term borrowings 33.4 255.7
Current portion of long-term debt 173.2 194.5
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TOTAL CURRENT LIABILITIES 1,110.5 1,352.4
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LONG-TERM DEBT 2,007.4 2,027.5
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 689.2 702.0
DEFERRED INCOME TAXES 779.2 778.4
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TOTAL LIABILITIES 4,586.3 4,860.3
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MINORITY INTEREST IN SUBSIDIARY COMPANIES 126.5 118.0
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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 429.1 384.9
Retained earnings 4,214.5 3,965.9
Accumulated other comprehensive income (loss) (392.0) (452.5)
Treasury Stock, at cost (2002 - 22,236,196 shares; 2001 - 22,269,244 (767.8) (768.8)
shares)
Shares in trust (2002 - 8,917,158 shares; 2001 - 11,723,720 shares) (209.5) (273.1)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,523.7 3,105.8
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,236.5 $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 Nine Months Ended
30 June 30 June
2002 2001 2002 2001
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SALES $1,374.0 $1,450.9 $4,003.2 $4,461.2
COSTS AND EXPENSES
Cost of sales 976.7 1,039.3 2,856.1 3,239.9
Selling and administrative 172.9 173.3 531.3 536.3
Research and development 31.9 31.0 90.4 90.3
Other (income) expense, net (22.6) (8.1) (28.7) (12.4)
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME 215.1 215.4 554.1 607.1
Income from equity affiliates, net of 17.7 21.8 56.4 59.6
related expenses
Gain on sale of packaged gas business -- -- 55.7 --
Interest expense 27.5 48.7 93.6 147.4
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INCOME BEFORE TAXES AND MINORITY INTEREST 205.3 188.5 572.6 519.3
Income taxes 60.6 53.8 179.0 152.1
Minority interest (a) 3.4 2.4 12.5 4.7
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NET INCOME $141.3 $132.3 $381.1 $362.5
=============================================================================================================
BASIC EARNINGS PER $.65 $.62 $1.76 $1.69
COMMON SHARE
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DILUTED EARNINGS PER $.63 $.60 $1.71 $1.65
COMMON SHARE
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WEIGHTED AVERAGE 218.0 214.9 216.8 214.7
NUMBER OF COMMON
SHARES (in millions)
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WEIGHTED AVERAGE 224.7 220.5 222.7 219.1
NUMBER OF COMMON AND
COMMON EQUIVALENT
SHARES (in millions)
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DIVIDENDS DECLARED PER $.21 $.20 $.61 $.58
COMMON SHARE - Cash
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(a) Minority interest primarily includes before-tax amounts.
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 Nine Months Ended
30 June 30 June
2002 2001 2002 2001
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NET INCOME $141.3 $132.3 $381.1 $362.5
- -----------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(LOSS), net of tax
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising 3.3 9.7 .8 9.4
during the period
Less: reclassification adjustment for gains (2.9) -- (4.6) --
included in net income
- -----------------------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) on .4 9.7 (3.8) 9.4
investments
Net gain (loss) on derivatives (.2) 3.8 .2 5.1
Translation adjustments 105.9 (10.2) 64.1 (87.5)
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TOTAL OTHER COMPREHENSIVE INCOME (LOSS), net of 106.1 3.3 60.5 (73.0)
tax
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COMPREHENSIVE INCOME $247.4 $135.6 $441.6 $289.5
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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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Nine Months Ended
30 June
2002 2001
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OPERATING ACTIVITIES
Net Income $381.1 $362.5
Adjustments to reconcile income to cash provided by operating
activities:
Depreciation 423.9 433.6
Deferred income taxes 30.8 26.5
Undistributed earnings of unconsolidated affiliates (33.2) (45.2)
(Gain) loss on sale of assets and investments (66.6) 1.2
Other 12.1 (19.0)
Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures:
Trade receivables (16.8) 8.5
Inventories and contracts in progress 15.9 (33.2)
Payables, trade and other (39.2) (38.1)
Other 16.7 (8.4)
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CASH PROVIDED BY OPERATING ACTIVITIES 724.7 688.4
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INVESTING ACTIVITIES
Additions to plant and equipment (a) (459.8) (510.1)
Investment in and advances to unconsolidated affiliates (35.2) (27.8)
Acquisitions, less cash acquired (10.3) --
Proceeds from sale of assets and investments 283.7 42.4
Other 6.3 30.1
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CASH USED FOR INVESTING ACTIVITIES (215.3) (465.4)
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FINANCING ACTIVITIES
Long-term debt proceeds 43.6 120.5
Payments on long-term debt (174.1) (42.1)
Net decrease in commercial paper and other short-term borrowings (229.6) (157.4)
Purchase of treasury stock -- (75.0)
Dividends paid to shareholders (129.8) (122.2)
Issuance of stock for options and award plans 96.4 77.6
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CASH USED FOR FINANCING ACTIVITIES (393.5) (198.6)
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Effect of Exchange Rate Changes on Cash 3.7 (2.4)
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Increase in Cash and Cash Items 119.6 22.0
Cash and Cash Items - Beginning of Year 66.2 94.1
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Cash and Cash Items - End of Period $185.8 $116.1
========================================================================================================================
(a) Excludes capital lease additions of $2.7 and $.6 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 Nine Months Ended
30 June 30 June
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Revenues from external customers
Gases $915.7 $1,018.9 $2,706.6 $3,125.0
Chemicals 385.4 374.7 1,092.5 1,158.3
Equipment 72.9 57.3 204.1 177.9
- ----------------------------------------------------------------- --------------------------------------------------
Segment Totals 1,374.0 1,450.9 4,003.2 4,461.2
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Consolidated Totals $1,374.0 $1,450.9 $4,003.2 $4,461.2
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Operating income
Gases $166.7 $175.2 $441.2 $523.4
Chemicals 47.9 39.7 130.4 95.2
Equipment 5.7 2.7 11.7 7.3
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Segment Totals 220.3 217.6 583.3 625.9
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Corporate research and development and (5.2) (2.2) (29.2) (18.8)
other income (expense)
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Consolidated Totals $215.1 $215.4 $554.1 $607.1
- ---------------------------------------------------------------------------------------------------------------------
Operating income (excluding special items)
Gases $166.7 $175.2 $467.4(a) $549.7(c)
Chemicals 47.9 39.7 135.0(b) 99.8(d)
Equipment 5.7 2.7 11.7 7.3
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Segment Totals 220.3 217.6 614.1 656.8
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Corporate research and development and (5.2) (2.2) (29.2) (12.8)(e)
other income (expense)
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Consolidated Totals $215.1 $215.4 $584.9 $644.0
- ---------------------------------------------------------------------------------------------------------------------
Equity affiliates' income
Gases $14.4 $17.8 $46.5 $53.1
Chemicals 3.4 3.7 8.5 5.2
Equipment (.1) .4 1.4 1.3
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Segment Totals 17.7 21.9 56.4 59.6
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Other -- (.1) -- --
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Consolidated Totals $17.7 $21.8 $56.4 $59.6
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7
(Millions of dollars)
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30 June
2002 2001
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Identifiable assets (f)
Gases $5,771.1 $5,926.0
Chemicals 1,399.3 1,404.5
Equipment 202.4 206.8
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Segment Totals 7,372.8 7,537.3
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Corporate assets 295.2 169.6
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Consolidated Totals $7,668.0 $7,706.9
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- --------------------------------------------------------------------------------------------------------------
Twelve Months Ended
30 June
2002 2001
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ORONA (f)
Gases 11.1% 12.6%
Chemicals 12.7% 9.1%
Equipment 8.1% 6.2%
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Segment Totals 11.3% 11.7%
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Consolidated Totals 10.6% 11.1%
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(a) The results for the nine months ended 30 June 2002 excluded a cost
reduction charge of $26.2.
(b) The results for the nine months ended 30 June 2002 excluded a cost
reduction charge of $4.6.
(c) The results for the nine months ended 30 June 2001 excluded a cost
reduction charge of $26.3.
(d) The results for the nine months ended 30 June 2001 excluded a cost
reduction charge of $4.6.
(e) The results for the nine months ended 30 June 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 Nine Months Ended
30 June 30 June
2002 2001 2002 2001
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Revenues from external customers
United States $845.8 $958.0 $2,503.6 $2,970.1
Canada 28.5 31.2 80.6 90.5
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Total North America 874.3 989.2 2,584.2 3,060.6
- ---------------------------------------------------------------------------------------------------------
United Kingdom 122.4 115.7 341.3 353.8
Spain 89.2 79.5 250.9 236.6
Other Europe 173.8 151.0 506.2 458.5
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Total Europe 385.4 346.2 1,098.4 1,048.9
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Asia 88.1 84.0 240.1 253.7
Latin America 26.1 31.4 80.3 97.8
All Other .1 .1 .2 .2
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Total $1,374.0 $1,450.9 $4,003.2 $4,461.2
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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)
Goodwill
- --------
The company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," on 1 October 2001. As required by SFAS
No. 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 nine
months ended 30 June 2001 was $3.6 and $11.0, on an after-tax basis, or $.02 and
$.05 per share, respectively.
Changes to the carrying amount of consolidated goodwill by segment for the nine
months ended 30 June 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 13.1 -- -- 13.1
Currency translation and other 17.2 2.3 .9 20.4
Goodwill related to the sale of (36.3) -- -- (36.3)
U.S. packaged gas business
-----------------------------------------------------------
Balance as of 30 June 2002 $283.2 $89.4 $9.3 $381.9
-----------------------------------------------------------
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.
Acquisition
- -----------
In July 2002, the company increased its ownership in San Fu Chemical Company,
Ltd. (San Fu) from 48% to 70%. Since 1987, the company has had a joint venture
arrangement with San Fu, the largest industrial gas company in Taiwan. San Fu is
a full service industrial gas and chemical company with a broad product
portfolio supplying specialty gases, electronic piping and equipment, liquid/
bulk gases, pipeline/on-site gases and chemicals to the Taiwan marketplace.
For the nine months ended 30 June 2002, San Fu had revenues of approximately
$153. This investment is consistent with the company's strategy of investing in
growth markets (Asia) and industries (electronics) and will provide a stronger
foundation for growth in both Taiwan and China.
As of 30 June 2002, the company accounted for its investment in San Fu using the
equity method. In July 2002, the company obtained control through the
acquisition of an additional 22% of the outstanding shares. As part of this
transaction, put options have been issued which give other shareholders the
right to sell San Fu stock to the company at market price when exercised. The
options are effective from January 2005 thru January 2015 and allow for the sale
of all stock owned by other shareholders to the company.
10
Divestiture
- -----------
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 cash proceeds from these
transactions were $254.5. The results for the nine months ended 30 June 2002
included a gain of $55.7 ($25.7 after-tax, or $.12 per share).
Earnings Per Share
- ------------------
The following table sets forth the computation of basic and diluted earnings per
share:
- --------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
30 June 30 June
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income $141.3 $132.3 $381.1 $362.5
Denominator for basic EPS
-weighted average shares (in 218.0 214.9 216.8 214.7
millions)
Effect of diluted securities
Employee stock options (in millions) 5.9 4.7 5.2 3.5
Other award plans (in millions) .8 .9 .7 .9
- --------------------------------------------------------------------------------------------------
6.7 5.6 5.9 4.4
- --------------------------------------------------------------------------------------------------
Denominator for diluted EPS
-weighted average shares and
assumed conversions (in 224.7 220.5 222.7 219.1
millions)
- --------------------------------------------------------------------------------------------------
Basic EPS $.65 $.62 $1.76 $1.69
- --------------------------------------------------------------------------------------------------
Diluted EPS $.63 $.60 $1.71 $1.65
- --------------------------------------------------------------------------------------------------
11
Equity Affiliates' Income
- -------------------------
Income from equity affiliates contributed $.08 and $.09 to diluted earnings per
share for the three months ended 30 June 2002 and 2001, respectively. Income
from equity affiliates contributed $.24 and $.25 to diluted earnings per share
for the nine months ended 30 June 2002 and 2001, respectively.
Cost Reduction Programs
- -----------------------
The results for the nine months ended 30 June 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 nine months ended 30 June 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 nine months ended 30 June 2001 also
included a charge of $6.0 ($3.7 after-tax, or $.02 per share) related to a
litigation settlement.
The following table summarizes changes to the carrying amount of the accrual for
cost reduction plans for the nine months ended 30 June 2002:
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 (29.1) -- -- (29.1)
Adjustments 2001 Plan (2.4) -- (.6) (3.0)
- ------------------------------------------------------------------------------
Balance at 30 June 2002 $34.0 $ -- $.9 $34.9
- ------------------------------------------------------------------------------
(1) Asset impairments and related expenses are included in the other category.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." The Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated asset retirement costs.
The Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred. The
asset retirement obligations will be capitalized as part of the carrying amount
of the long-lived asset. The Statement applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and normal operation of long-lived assets. The
company will adopt the Statement effective 1 October 2002 and is currently
evaluating its impact.
12
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The Statement also supersedes Accounting Principles Board
Opinion (APB) No. 30 provisions related to the accounting and reporting for the
disposal of a segment of a business. This Statement establishes a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale. The Statement retains most of the
requirements in SFAS No. 121 related to the recognition of impairment of
long-lived assets to be held and used. Additionally, SFAS No. 144 broadens the
definition of businesses that qualify for reporting as discontinued operations
and changes the timing of recognizing losses on such operations. The company
will adopt the Statement effective 1 October 2002. The company does not believe
this Statement will have a material effect on the company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." The Statement requires gains and losses from
debt extinguishments that are used as part of the company's risk management
strategy to be classified as income from operations rather than as extraordinary
items, net of tax. The company adopted this Statement as of 1 July 2002. The
impact on the company will be to reclassify the extraordinary item recorded in
the fourth quarter of the prior year to other (income) expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses the accounting for
costs associated with disposal activities covered by SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," and with exit
(restructuring) activities previously covered by Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." This Statement nullifies EITF
94-3 in its entirety and requires that a liability for all costs be recognized
when the liability is incurred. This Statement also establishes a fair value
objective for initial measurement of the liability. The Statement will be
applied prospectively to exit or disposal activities initiated after 31 December
2002. The company is currently evaluating the impact of adopting this Statement.
Reclassification
- ----------------
As of 1 October 2001, the company changed its reporting of the demurrage/
cylinder income to include it in revenues. Previously, it was included
as an offset to cost of sales. The consolidated income statements of the
prior periods have been adjusted to reflect this reclassification.
13
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER FISCAL 2002 VS. THIRD QUARTER FISCAL 2001
- -------------------------------------------------------------------------------
(Millions of dollars, except per share)
RESULTS OF OPERATIONS
Consolidated - Sales in the third quarter of 2002 of $1,374.0 declined 5%, or
$76.9, mainly due to the lower contractual natural gas cost pass-through
compared with the same quarter in the prior year. Operating income of $215.1
remained relatively flat compared with $215.4. Income from equity affiliates was
down $4.1 to $17.7. Net income was $141.3, or $.63 diluted earnings per share,
compared to net income of $132.3, or $.60 diluted earnings per share.
There were no special items impacting the quarter's results of operations. All
comparisons in the discussion are to the corresponding period in the prior year
unless otherwise stated.
Gases - Sales declined $103.2, or 10%, to $915.7 in the third quarter of 2002.
Excluding natural gas cost pass-through, acquisitions, divestitures, and
currency effects, sales declined 1%. This decline of 1% was principally due to
the recessionary impact on merchant gases demand.
Operating income of $166.7 declined $8.5, or 5%. This decline was principally
due to higher maintenance spending in Chemicals and Process Industries (CPI) and
the first full quarter effect of the U.S. packaged gas divestiture. Favorable
currency and exchange, modest improvements in electronics demand, and continued
margin improvement in the worldwide liquid bulk business partially offset the
operating income decline. Operating margin of 18.2% was up 1% compared to 17.2%.
This operating margin improvement resulted from lower natural gas cost
pass-through.
The electronics business showed improvement with sales increasing 2%. Worldwide
CPI tonnage volume increased 9% overall with hydrogen and carbon monoxide (HYCO)
experiencing 5% growth. CPI posted record HYCO volumes and experienced a
recovery in gaseous oxygen and nitrogen (GOX/GAN) volumes due to higher
petrochemical demand. Liquid bulk volume declined 4% in North America,
reflecting continued softness in demand across a number of end markets. Average
liquid oxygen and nitrogen (LOX/LIN) prices decreased 2% as a direct result of
the removal of national surcharges. Excluding the negative surcharge removal
effect of 5%, the underlying average LOX/LIN price increased 3%.
In the European liquid bulk business, a 2% increase in the European LOX/LIN
price index and lower operating costs were offset by a 2% decline in European
liquid bulk volumes due to weakness in United Kingdom and Southern Europe
manufacturing. The Asian liquid bulk volume increased 11% primarily due to rapid
volume growth in Southern and Eastern China.
Gases equity affiliates' income was $14.4 down $3.4 from $17.8. This decline
resulted from the absence of income from two cogeneration facilities that were
divested in the fourth quarter of 2001 and lower results of electronics equity
affiliates.
14
Chemicals - Sales in the third quarter of 2002 of $385.4 increased $10.7, or 3%.
Excluding the effects of natural gas cost pass-through and currency impacts,
sales were up 4%. This increase was a result of an 8% volume increase offset by
an unfavorable price/mix variance of 4%. In the performance chemicals division,
volumes were up 11% led by emulsions with its improved U.S. demand in the
adhesives, non-wovens, and coatings end markets. Chemical intermediates volumes
increased 4%. Higher polyurethane intermediate shipments were partially offset
by lower shipments of amines primarily due to continued weakness in the
herbicide end market.
Operating income of $47.9 increased $8.2, or 21%, due primarily to higher
chemical volumes. The operating margin of 12.4% improved from prior year's
10.6%.
Equipment - Sales of $72.9 were up $15.6, or 27%, and operating income increased
$3.0, to $5.7, primarily due to higher liquid natural gas (LNG) exchanger
activity coupled with higher shipments of helium containers. The sales backlog
for the equipment segment at 30 June 2002 was $145.7 compared to $132.4 at 30
June 2001 and $227.2 at 30 September 2001.
INTEREST
Interest expense of $27.5 decreased $21.2, or 44%. A third of this decline
resulted from lower average interest rates with the remainder driven by lower
average debt outstanding.
INCOME TAXES
The effective tax rate for the third quarter of 2002 was 30.0%, after minority
interest of $3.4. The comparable rate in the prior year was 28.9%. Excluding
the impact of special items, the effective tax rate for the nine months ended
30 June 2002 and 2001 was 30.0%, respectively.
15
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
NINE MONTHS FISCAL 2002 VS. NINE MONTHS FISCAL 2001
- -------------------------------------------------------------------------------
(Millions of dollars, except per share)
RESULTS OF OPERATIONS
Consolidated - Sales for the nine months ended 30 June 2002 of $4,003.2 were 10%
lower than the $4,461.2 reported in the prior year. Operating income of $554.1
declined $53.0, or 9%. Income from equity affiliates was $56.4 compared with
$59.6. Net income was $381.1, or $1.71 diluted earnings per share, compared to
net income of $362.5, or $1.65 diluted earnings per share. The results for the
nine months ended 30 June 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 nine months ended 30 June 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 nine months ended
30 June 2002 of $374.3 declined $11.9, or 3%, from the prior year. Excluding
special items, diluted earnings per share of $1.68 declined $.08, or 5%, from
prior year.
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. The exclusion of special items focuses the discussion
of the results on the ongoing operations of the company and its segments. 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 nine months of 2002 were $2,706.6 compared to
$3,125.0, down $418.4 or 13%. Excluding natural gas cost pass-through,
acquisitions, divestitures, and currency effects, sales declined 3% 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 $467.4 declined $82.3, or 15%, 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 maintenance spending in CPI and the
effect of the U.S. packaged gas divestiture also contributed to the decline in
operating income. Higher merchant gases pricing partially offset the operating
income decline. Currency and exchange related effects had minimal impact on
operating income. Operating margin of 17.3% was down 0.3% compared to 17.6%.
Electronics volume decline resulted from continued depressed conditions in the
global electronics market. Electronics was affected by a sharp reduction in
customers' global silicon wafer processing due to soft demand. Overall CPI
tonnage volume grew 6% as significantly increased HYCO demand was coupled with
modest recovery in GOX/GAN. Liquid bulk volume declined 7% in North America,
reflecting continued soft 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 volume decline. Average LOX/LIN prices increased 3% as a
direct result of pricing and surcharge initiatives. The surcharges were
discontinued in the third quarter of 2002.
A 4% increase in the European LOX/LIN price was tempered by a 4% decline in
European liquid bulk volumes due to weakness in United Kingdom and Southern
Europe manufacturing. The Asian liquid bulk volume increase
16
of 2% due to growth in Southern and Eastern China and Thailand was partially
offset by lower demand by northern Chinese steel makers.
Gases equity affiliates' income was down $6.6, or 12%, 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 one-time tax benefit related to an
asset revaluation in an Italian affiliate.
Chemicals - Sales in the first nine months of 2002 were $1,092.5 compared to
$1,158.3, down 6%. Excluding the effects of natural gas cost pass-through and
some prior year polyvinyl alcohol (PVOH) post-sale export revenues, sales
declined 2%. Unfavorable currency impacts had minimal effect on revenues. The
overall volume index increase was 1%, excluding the impact of PVOH.
Performance chemicals experienced a volume increase of 3%, while chemical
intermediates volume declined 3%. This decline in chemicals intermediates volume
resulted primarily from weaker demand in specialty and higher amines.
Operating income of $135.0 increased 35%, or $35.2. Improved margins resulting
from lower natural gas and feedstock costs, and reduced overhead costs drove the
significant increase in operating income. Currency and exchange related effects
had minimal impact on operating income. The operating margin of 12.4% was
significantly improved from 8.6%.
Equity affiliates' income increased $3.3 primarily 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 its 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
$5.6 was drawn at 30 June 2002. The company also entered into a product
prepayment agreement with this supplier. At 30 June 2002, the unamortized
balance was $5.4. The company expects to fully recover these advances.
Equipment - Sales of $204.1 grew $26.2 while operating income of $11.7 increased
$4.4. The improved results reflected increased activity across several product
lines.
INTEREST
Interest expense of $93.6 decreased $53.8, or 36%. The decrease resulted from a
combination of lower average debt outstanding and lower interest rates.
INCOME TAXES
The effective tax rate for the first nine months of 2002 was 32.0%, after
minority interest of $12.5. The effective rate excluding the impact of special
items was 30.0% for both 2002 and 2001.
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
Capital expenditures during the first nine months of 2002 totaled $508.0
compared to $538.5. Additions to plant and equipment were $459.8 during the
first nine months of 2002 compared to $510.1. Investments in and advances to
unconsolidated affiliates were $35.2 during the current period versus $27.8.
Capital expenditures for new plant and equipment are expected to be between $650
and $700 in 2002. In addition, the company intends to
17
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 30 June 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
$2,214.0 at 30 June 2002.
There was no commercial paper outstanding at 30 June 2002. The company's total
revolving credit commitments amounted to $600.0 at 30 June 2002. No borrowings
were outstanding under these commitments. Additional commitments totaling $63.4
are maintained by the company's foreign subsidiaries, of which $27.2 was
utilized at 30 June 2002.
The estimated fair value of the company's long-term debt, including current
portion, as of 30 June 2002 is $2,253.1 compared to a book value of $2,180.6.
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 nine months ended
30 June 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 $2,243.1 at 30 June 2002 primarily due to scheduled
repayments of outstanding long-term debt partially offset by the impact of a
weaker U.S. Dollar on the translation of foreign currency 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
18
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; and estimated costs to be incurred for
environmental matters, contract disputes, and settlement of litigation.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations." In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In April 2002,
the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." In June 2002,
the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." See the notes to the consolidated financial statements for
information concerning the company's implementation and impact of these new
standards.
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 of outcomes that the company anticipates, as well
as, among other things, overall economic and business conditions and 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.
19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)(10.1) Confidential Transition and Retirement
Agreement and General Release
(a)(10.2) Employment Agreement
(a)(12) Computation of Ratios of Earnings to Fixed
Charges
(a)99.1 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(a)99.2 Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) During the quarter ended 30 June 2002, the
Registrant filed Current Reports on Form 8-K
dated 23 April 2002, 10 May 2002 and 4 June
2002 in which Item 5 of such form was reported,
and 23 April 2002 in which Item 5 and Item 9 of
such form were reported.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Air Products and Chemicals, Inc.
--------------------------------
(Registrant)
Date: August 13, 2002 By: /s/John R. Owings
----------------------------------------
John R. Owings
Vice President and 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 30 June 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) Confidential Transition and Retirement Agreement
and General Release
(a)(10.2) Employment Agreement
(a)(12) Computation of Ratios of Earnings to Fixed Charges
(a)99.1 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(a)99.2 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002