UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) 21 January 2000
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Air Products and Chemicals, Inc.
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(Exact name of registrant as specified in charter)
Delaware 1-4534 23-1274455
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(State of other jurisdiction of incorporation) (Commission file number) (IRS Identification number)
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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Item 5. Other Events.
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The registrant reported income from operations of $121 million, or diluted
earnings per share of 56 cents, for the first quarter ended December 31, 1999.
This excludes an after-tax charge of $71 million, or 33 cents per share,
primarily related to accounting charges recorded on purchased option and forward
exchange contracts entered into to hedge the currency exposure of the BOC
acquisition. The accompanying footnotes contain a full explanation of the
accounting treatment. Income from operations was up three percent compared to
last year's $118 million, or 55 cents per share on a diluted basis. Sales of
$1.3 billion were down about one percent compared to the same period last year.
The following discussion excludes the disclosed special items.
In reviewing the quarter, Air Products Chairman H. A. Wagner said, "Our gases
team delivered strong performance worldwide, overcoming the substantial decline
we anticipated in the equipment business. Faced with considerable raw material
cost pressure, our chemicals group achieved encouraging results also, mainly due
to significant volume growth. The volume momentum we saw this quarter, combined
with the capacity we have in place, should provide extensive operating leverage
going forward."
Industrial gas sales increased four percent, operating income increased 11
percent, and the worldwide gases operating margin increased to 19.6 percent
mainly because of strong performance in the electronics segment and in Asia.
Specialty gas sales increased more than 20 percent, while the wholly-owned
Schumacher unit's sales of electronic chemicals and equipment were up more than
60 percent compared to the prior year. Asian profits grew as volumes increased
by more than 20 percent and from the consolidation of some joint ventures that
are now wholly-owned. Gases equity affiliates' income was up significantly due
to strong performance.
2
Chemicals sales were up eight percent on strong volume across all businesses.
Operating income fell two percent as the favorable volume impact was more than
offset by higher raw material prices in the polymers division, some price
declines, and costs associated with a plant turn. The Company has announced
price increases on select products to recover its raw material cost increases.
Additionally, Goldman, Sachs & Co. has been engaged to help assess strategic
alternatives for the polyvinyl alcohol business.
As expected, Equipment reported lower sales and operating income due to reduced
business activity. Operating income fell $24 million, or approximately seven
cents per share, to $1 million.
Mr. Wagner concluded by saying, "Our employees' strategic focus and execution
have strengthened the competitive positions of our businesses, and their hard
work is reflected in these results. At the start of the year, we projected
earnings growth of approximately 10 percent before the impact of the BOC
transaction. Given our performance this quarter, we have increased confidence in
our ability to achieve that target."
***NOTE: 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. Important risk factors and uncertainties
include the impact of worldwide economic growth, pricing of both the Company's
products and raw materials such as electricity, customer outages and customer
demand, and other factors resulting from fluctuations in interest rates and
foreign currencies, the impact of competitive products and pricing, success of
cost control programs, and the impact of tax and other legislation and other
regulations in the jurisdictions in which the Company and its affiliates
operate.
Factors that might cause forward-looking statements related to the BOC
acquisition to differ materially from actual results include, among other
things, requirements or delays imposed by regulatory authorities to permit the
transaction to be consummated; unanticipated tax and other costs in separating
3
the ownership of BOC's businesses and assets; ability to amortize goodwill over
40 years; overall economic and business conditions; demand for the goods and
services of Air Products, BOC or their respective affiliates; competitive
factors in the industries in which each of them competes; changes in government
regulation; success of implementing synergies and other cost reduction programs;
the timing, impact and other uncertainties of future acquisitions or
combinations within relevant industries; fluctuations in interest rates and
foreign currencies, and the price at which Air Products would issue additional
equity; and the impact of tax and other legislation and other regulations in the
jurisdictions in which Air Products, BOC and their respective affiliates
operate.***
Financial tables follow:
4
AIR PRODUCTS AND CHEMICALS, INC.
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
(Millions of dollars, except per share)
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Three Months Ended
31 December
1999 1998
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Sales $1,264.4 $1,274.6
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Net Income:
As reported $50.6(a) $126.4(b)
Exclusive of special items $121.2 $117.9
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Basic Earnings Per Share:
As reported $.24(a) $.60(b)
Exclusive of special items $.57 $.56
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Diluted Earnings Per Share:
As reported $.23(a) $.59(b)
Exclusive of special items $.56 $.55
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Operating Return on Net Assets (c) 10.0% 12.0%
Capital Expenditures $404.8 $245.4(d)
Depreciation $131.7 $127.8
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(a) Includes an after-tax charge of $70.6 million, or $.33 per share, for
costs related to the BOC acquisition. This amount consists primarily of
accounting charges recorded on purchased option and forward exchange
contracts entered into to hedge the currency exposure of the BOC
acquisition.
(b) Includes an after-tax gain of $21.4 million, or $.10 per share, related to
the formation of Air Products Polymers and an after-tax charge of $12.9
million, or $.06 per share, related to a global cost reduction plan.
(c) Operating return on net assets (ORONA) is calculated as the rolling four
quarter sum of operating income divided by the rolling five quarter average
of total assets less investments in equity affiliates. The ORONA
calculation for the three months ended 31 December 1998 excludes
$20.3 million in charges related to a global cost reduction plan.
(d) Excludes the Company's contribution of $121.4 million of assets to the
Air Products Polymers venture.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME
(Unaudited)
(Millions of dollars, except per share)
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Three Months Ended
31 December
1999 1998
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SALES AND OTHER INCOME
Sales $1,264.4 $1,274.6
Other income (expense), net 6.8 4.9
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1,271.2 1,279.5
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COSTS AND EXPENSES
Cost of sales 877.1 875.6
Selling and administrative 167.8 183.2
Research and development 30.1 31.7
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OPERATING INCOME 196.2 189.0
Income from equity affiliates, net of 20.3 9.8
related expenses
Net gain on formation of polymer venture -- 31.2
Loss on currency hedges related to BOC 113.2 --
transaction and preacquisition expenses
Interest expense 41.3 40.4
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INCOME BEFORE TAXES AND MINORITY INTEREST 62.0 189.6
Income taxes 9.1 59.9
Minority interest (a) 2.3 3.3
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NET INCOME $50.6 $126.4
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BASIC EARNINGS PER COMMON SHARE $.24 $.60
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DILUTED EARNINGS PER COMMON SHARE $.23 $.59
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES (in millions) 213.2 211.4
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WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON 215.5 215.4
EQUIVALENT SHARES (in millions) (b)
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DIVIDENDS DECLARED PER COMMON SHARE - Cash $.18 $.17
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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.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions of dollars)
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31 December
ASSETS 1999 1998
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CURRENT ASSETS
Cash and cash items $79.5 $57.8
Trade receivables, less allowances for 921.5 886.1
doubtful accounts
Inventories 430.5 452.1
Contracts in progress, less progress 95.9 136.6
billings
Other current assets 335.7 129.2
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TOTAL CURRENT ASSETS 1,863.1 1,661.8
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INVESTMENTS IN NET ASSETS OF AND ADVANCES 492.5 440.8
TO EQUITY AFFILIATES
OTHER INVESTMENTS AND ADVANCES 38.9 24.5
PLANT AND EQUIPMENT, at cost 10,381.5 9,687.2
Less - Accumulated depreciation 5,055.5 4,793.5
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PLANT AND EQUIPMENT, net 5,326.0 4,893.7
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GOODWILL 339.0 346.4
OTHER NONCURRENT ASSETS 455.4 351.7
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TOTAL ASSETS $8,514.9 $7,718.9
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LIABILITIES AND SHAREHOLDER'S EQUITY
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CURRENT LIABILITIES
Payables, trade and other $554.8 $480.4
Accrued liabilities 494.5 269.6
Accrued income taxes 61.5 54.3
Short-term borrowings 763.7 252.7
Current portion of long-term debt 321.0 310.1
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TOTAL CURRENT LIABILITIES 2,195.5 1,367.1
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LONG-TERM DEBT 2,010.3 2,123.2
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 505.8 605.2
DEFERRED INCOME TAXES 745.7 733.9
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TOTAL LIABILITIES 5,457.3 4,829.4
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MINORITY INTERESTS IN SUBSIDIARY COMPANIES 128.3 117.0
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SHAREHOLDERS' EQUITY
Common stock, par value $1 per share 249.4 249.4
Capital in excess of par value 342.4 331.1
Retained earnings 3,714.0 3,490.5
Accumulated other comprehensive income (323.2) (203.3)
Treasury Stock, at cost (681.6) (681.6)
Shares in trust (371.7) (413.6)
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TOTAL SHAREHOLDERS' EQUITY 2,929.3 2,772.5
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,514.9 $7,718.9
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7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(Millions of dollars)
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Three Months Ended
31 December
1999 1998
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NET INCOME $50.6 $126.4
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OTHER COMPREHENSIVE INCOME, net of tax
Foreign currency translation adjustments (44.8) 24.3
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during (4.0) 3.9
the period
Less: reclassification adjustment for gains -- --
included in net income
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Net unrealized gains (losses) on investments (4.0) 3.9
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TOTAL OTHER COMPREHENSIVE INCOME (48.8) 28.2
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COMPREHENSIVE INCOME $1.8 $154.6
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8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED CASH FLOWS
(Unaudited)
(Millions of dollars)
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Three Months Ended
31 December
1999 1998
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OPERATING ACTIVITIES
Net Income $50.6 $126.4
Adjustments to reconcile income to cash provided
by operating activities:
Depreciation 131.7 127.8
Deferred income taxes 3.2 21.4
Gain on formation of polymer venture -- (31.2)
(Gain) loss on currency options related to BOC 109.3 --
transaction
Undistributed (earnings) of unconsolidated (13.2) 6.7
affiliates
(Gain) loss on sale of assets and investments (4.4) .5
Other (10.2) 58.5
Working capital changes that provided (used) cash,
net of effects of acquisitions:
Trade receivables (27.9) 6.7
Other receivables (42.8) 45.5
Inventories and contracts in progress (20.5) (47.5)
Payables, trade and other 43.8 2.1
Accrued liabilities 36.2 (73.5)
Accrued income taxes (7.3) 23.7
Other .3 6.0
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CASH PROVIDED BY OPERATING ACTIVITIES 248.8 273.1
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INVESTING ACTIVITIES
Additions to plant and equipment (194.4) (189.5)
Acquisitions, less cash acquired (162.7) (4.6)
Investment in and advances to unconsolidated (16.0) (50.4)
affiliates
Proceeds from sale of assets and investments 16.1 17.3
Other (13.7) 14.7
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CASH USED FOR INVESTING ACTIVITIES (370.7) (212.5)
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FINANCING ACTIVITIES
Long-term debt proceeds 4.2 .8
Payments on long-term debt (161.6) 4.2
Net increase (decrease) in commercial paper 290.6 (16.1)
Net increase (decrease) in other short-term borrowings 44.7 (1.2)
Dividends paid to shareholders (38.4) (36.0)
Purchase of Treasury Stock -- (24.6)
Other .3 7.6
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CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 139.8 (65.3)
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Effect of Exchange Rate Changes on Cash -- 1.0
Increase in Cash and Cash Items 17.9 (3.7)
Cash and Cash Items - Beginning of Year 61.6 61.5
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Cash and Cash Items - End of Period $79.5 $57.8
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9
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1999, Air Products and L'Air Liquide S.A. ("Air Liquide") of France
agreed to the terms of a recommended offer under which they would acquire BOC,
the leading British industrial gases company, for UK (pound sterling) 14.60 per
share in cash, or a total of approximately UK (pound sterling) 7.2 billion.
Air Products has a UK (pound sterling) 3,950.0 million credit agreement to
provide backup for commercial paper or direct funding for its 50% share of the
offer price. Fees incurred to secure this credit agreement have been deferred
and will be amortized on a straight-line basis over the term of the related
debt. The offer will formally commence in the United Kingdom and the United
States upon receipt of the necessary regulatory clearances, which are expected
in the first quarter of calendar year 2000. The Company expects the transaction
will be included in the Company's financial results for approximately six
months of fiscal 2000. Due to the joint control with Air Liquide, the
operations will initially be accounted for under the equity method. As the
Company gains control and ownership of approximately one-half of the BOC assets
expected to be allocated to it, the operations will be accounted for as
consolidated entities. Excluding transaction and integration charges, the
impact of the transaction should be modestly accretive to earnings per share
before goodwill amortization, and approximately 10% dilutive to reported
earnings per share after goodwill amortization. Air Products has filed a
Form 8-K on 13 July 1999 with the United States Securities and Exchange
Commission which provides additional details of this transaction.
The results for the three months ended 31 December 1999 include a charge of
$113.2 million ($70.6 million after-tax, or $.33 per share) for costs related to
the BOC acquisition. Of this amount, $109.3 million ($68.2 million after-tax, or
$.32 per share) of accounting charges were recorded on purchased currency option
and forward exchange contracts entered into to hedge the currency exposure of
the BOC acquisition. The remaining charge of $3.9 million ($2.4 million
after-tax, or $.01 per share) consists of preacquisition expenses including $2.4
million of credit facility fees.
As of 31 December 1999, the Company has entered into purchased currency option
contracts and forward exchange contracts for approximately UK (pound sterling)
1.8 billion and UK(pound sterling) 1.5 billion on an after-tax basis,
respectively. The net impact of the contracts entered into as of 31 December
1999 (after adjusting for the tax impact of the hedge placed) is that the
Company has effectively hedged 100% of the currency exposure related to the
purchase of BOC shares. Gains and losses associated with changes in the market
value of these contracts are recorded currently in earnings since hedge
accounting may not be applied to instruments which are used to hedge the
currency exposure of a business combination.
The results for the three months ended 31 December 1998 include a net gain of
$31.2 million ($21.4 million after-tax, or $.10 per share) related to the
formation of Air Products Polymers (a 65% majority owned venture with
Wacker-Chemie GmbH). The gain was partially offset by costs related to an
emulsions facility shutdown not included in the joint venture and for costs
related to indemnities provided by Air Products to the venture.
In December 1998, the Company committed to a global cost reduction plan. The
plan included a staffing reduction of 206 employees in the areas of
manufacturing, distribution and overhead. $20.3 million ($12.9 million
after-tax, or $.06 per share) related to employee termination benefits was
charged to expense in the fiscal quarter ended 31 December 1998. The final
expense and number of positions eliminated is essentially as planned. The
charges to cost of sales, selling and administrative, and research and
development were $9.9 million, $9.3 million and $1.1 million, respectively.
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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
31 December
1999 1998
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Revenues from external customers
Gases $780.6 $753.3
Equipment 50.6 119.5
Chemicals 433.2 401.8
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Segment Totals 1,264.4 1,274.6
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Consolidated Totals $1,264.4 $1,274.6
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Operating income
Gases $153.3 $121.5(a)
Equipment 1.2 22.8(a)
Chemicals 51.6 50.8(a)
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Segment Totals 206.1 195.1
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Corporate research and development and other (9.9) (6.1)(a)
income/(expense)
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Consolidated Totals $196.2 $189.0
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Operating income (excluding special items)
Gases $153.3 $137.8
Equipment 1.2 24.7
Chemicals 51.6 52.4
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Segment Totals 206.1 214.9
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Corporate research and development and other (9.9) (5.6)
income/(expense)
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Consolidated Totals $196.2 $209.3
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Equity affiliates' income
Gases $16.4 $6.7
Equipment .3 .5
Chemicals 3.6 2.1
Other -- .5
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Segment Totals 20.3 9.8
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Consolidated Totals $20.3 $9.8
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Total assets
Gases $6,203.8 $5,506.4
Equipment 252.7 299.6
Chemicals 1,689.5 1,712.7
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Segment Totals 8,146.0 7,518.7
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Corporate assets 368.9 200.2
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Consolidated Totals $8,514.9 $7,718.9
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ORONA
Gases 10.5% 11.2%
Equipment 4.9% 24.9%
Chemicals 12.5% 15.8%
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Segment Totals 10.8% 12.8%
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Consolidated Totals 10.0% 12.0%
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(a) The results for the three months ended 31 December 1998 include the cost
reduction charge in Gases ($16.3 million), Equipment ($1.9 million),
Chemicals ($1.6 million), and Corporate ($.5 million).
A reconciliation of total segment operating income to consolidated income before
income taxes and minority interest is as follows:
(Millions of dollars)
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Three Months Ended
December
1999 1998
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Total segment operating income $206.1 $195.1
Corporate research and development and other (9.9) (6.1)
income/(expense)
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Consolidated operating income 196.2 189.0
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Segment equity affiliates' income 20.3 9.8
Gain on Wacker formation -- 31.2
Loss on currency hedges related to BOC 113.2 --
transaction and preacquisition expenses
Interest expense 41.3 40.4
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Consolidated income before taxes and $62.0 $189.6
minority interest
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12
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
(Millions of dollars)
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Three Months Ended
31 December
1999 1998
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Revenues from external customers
United States $839.2 $807.9
United Kingdom 121.1 171.0
Spain 76.8 84.4
Other Europe 140.8 143.9
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Total Europe 338.7 399.3
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Canada/Latin America 58.4 58.0
Asia 28.0 9.3
All Other .1 .1
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Total $1,264.4 $1,274.6
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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.
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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.
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(Registrant)
Dated: 21 January 2000 By: /s/ Leo J. Daley
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Leo J. Daley
Vice President - Finance
(Chief Financial Officer)
14