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 December 2000
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
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(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 610-481-4911
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Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
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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 9 February 2001
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Common Stock, $1 par value 229,079,641
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
Part I. Financial Information
Consolidated Balance Sheets -
31 December 2000 and 30 September 2000 .......................... 4
Consolidated Income -
Three Months Ended 31 December 2000 and 1999 .................... 5
Consolidated Statement of Comprehensive Income
Three Months Ended 31 December 2000 and 1999 .................... 6
Consolidated Cash Flows -
Three Months Ended 31 December 2000 and 1999 .................... 7
Summary by Business Segments -
Three Months Ended 31 December 2000 and 1999..................... 8
Summary by Geographic Regions -
Three Months Ended 31 December 2000 and 1999..................... 10
Notes to Consolidated Financial Statements ......................... 11
Management's Discussion and Analysis ............................... 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .......................... 18
Signatures ......................................................... 19
REMARKS:
The consolidated financial statements of Air Products and Chemicals, Inc. and
its subsidiaries (the "company" or "registrant") included herein have been
prepared by the company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the company, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented not
misleading. Such adjustments are of a normal, recurring nature unless otherwise
disclosed in the notes to consolidated financial statements. However, the
results
2
for the periods indicated herein reflect certain adjustments, such as the
valuation of inventories on the LIFO cost basis, which can only be finally
determined on an annual basis. It is suggested that these consolidated condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the company's latest annual report on Form 10-K.
Results of operations for any three month period are not necessarily indicative
of the results of operations for a full year.
3
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
- ---------------------------------------------------------------------------------------------------------------------
31 December 2000 30 September 2000
ASSETS (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash items $ 85.3 $ 94.1
Trade receivables, less allowances for doubtful accounts 1,058.3 982.7
Inventories 401.5 388.8
Contracts in progress, less progress billings 101.1 93.4
Other current assets 186.5 246.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,832.7 1,805.0
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INVESTMENTS IN NET ASSETS OF AND ADVANCES TO EQUITY 491.0 466.6
AFFILIATES
PLANT AND EQUIPMENT, at cost 10,470.8 10,310.9
Less - Accumulated depreciation 5,219.4 5,054.2
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PLANT AND EQUIPMENT, net 5,251.4 5,256.7
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GOODWILL AND OTHER NONCURRENT ASSETS 726.2 742.2
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,301.3 $8,270.5
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Payables, trade and other $ 581.4 $ 578.4
Accrued liabilities 341.3 357.2
Accrued income taxes 54.2 10.0
Short-term borrowings 137.8 249.7
Current portion of long-term debt 170.7 179.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,285.4 1,374.8
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LONG-TERM DEBT 2,655.3 2,615.8
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 569.0 561.3
DEFERRED INCOME TAXES 765.2 781.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,274.9 5,333.7
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MINORITY INTEREST IN SUBSIDIARY COMPANIES 117.5 115.5
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock (par value $1 per share, issued fiscal 2001 and 2000-249,455,584 249.4 249.4
shares)
Capital in excess of par value 344.3 342.2
Retained earnings 3,762.7 3,667.9
Unrealized gain on investments 14.9 15.7
Minimum pension liability adjustments (2.7) (2.7)
Cumulative translation adjustments (438.4) (420.8)
Net gains on cash flow hedges 1.4 --
Treasury Stock, at cost (fiscal 2001 and 2000-20,150,393 shares) (681.6) (681.6)
Shares in trust (fiscal 2001-14,744,254 shares; fiscal 2000-15,086,482 shares) (341.1) (348.8)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,908.9 2,821.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,301.3 $8,270.5
=====================================================================================================================
The accompanying notes are an integral part of these statements.
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME
(Unaudited)
(Millions of dollars, except per share)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
31 December
2000 1999
- ---------------------------------------------------------------------------------------------------------
SALES AND OTHER INCOME
Sales $1,441.3 $1,264.4
Other income, net 13.3 6.8
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1,454.6 1,271.2
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COSTS AND EXPENSES
Cost of sales 1,025.1 877.1
Selling and administrative 173.5 167.8
Research and development 28.5 30.1
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME 227.5 196.2
Income from equity affiliates, net of related expenses 20.9 20.3
Loss on currency hedges related to BOC transaction and -- 113.2
expenses
Interest expense 48.4 41.3
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES AND MINORITY INTEREST 200.0 62.0
Income taxes 61.7 9.1
Minority interest (a) 2.7 2.3
- ---------------------------------------------------------------------------------------------------------
NET INCOME $135.6 $50.6
=========================================================================================================
BASIC EARNINGS PER COMMON SHARE $.63 $.24
- ---------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $.62 $.23
- ---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 214.4 213.2
(in millions)
- ---------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND 217.9 215.5
COMMON EQUIVALENT SHARES (in millions)(b)
- ---------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE - Cash $.19 $.18
- ---------------------------------------------------------------------------------------------------------
(a) Minority interest primarily includes before-tax amounts.
(b) The dilution of earnings per common share is due mainly to the impact of
unexercised stock options.
The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended
31 December
2000 1999
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $135.6 $50.6
- ---------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
- ---------------------------------------------------------------------------------------------------------------
Unrealized holding (losses) on investments arising during the (.8) (4.0)
period
- ---------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments:
Consolidated subsidiaries and joint ventures 25.4 (61.5)
Cumulative effect of a change in accounting for hedges of net (1.7) --
investments in foreign entities
Transaction gains (losses) resulting from hedges of net (41.3) 16.7
investments in foreign entities
- ---------------------------------------------------------------------------------------------------------------
Total foreign currency translation adjustments (17.6) (44.8)
- ---------------------------------------------------------------------------------------------------------------
Cash flow hedges:
Cumulative effect of a change in accounting for cash flow (.8) --
hedges
Net gains arising during the period 2.5 --
Reclassification adjustment for (losses) reclassified into (.3) --
income
- ---------------------------------------------------------------------------------------------------------------
Net gains on cash flow hedges 1.4 --
- ---------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE (LOSS) (17.0) (48.8)
- ---------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $118.6 $ 1.8
===============================================================================================================
The accompanying notes are an integral part of these statements.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED CASH FLOWS
(Unaudited)
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------
Three Months Ended
31 December
2000 1999
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $135.6 $50.6
Adjustments to reconcile income to cash provided
by operating activities:
Depreciation 148.4 131.7
Deferred income taxes (4.8) 3.2
Loss on BOC transaction -- 109.3
Undistributed (earnings) of unconsolidated affiliates (4.9) (13.2)
(Gain) on sale of assets and investments (1.3) (4.4)
Other 15.7 (10.2)
Working capital changes that provided (used) cash, net of effects of
acquisitions:
Trade receivables (69.8) (27.9)
Inventories and contracts in progress (18.1) (20.5)
Payables, trade and other (1.3) 43.8
Other 84.4 (13.6)
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CASH PROVIDED BY OPERATING ACTIVITIES 283.9 248.8
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INVESTING ACTIVITIES
Additions to plant and equipment (a) (138.0) (194.4)
Acquisitions, less cash acquired (b) -- (162.7)
Investment in and advances to unconsolidated affiliates (16.9) (16.0)
Proceeds from sale of assets and investments 18.6 16.1
Other 12.1 (13.7)
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CASH USED FOR INVESTING ACTIVITIES (124.2) (370.7)
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FINANCING ACTIVITIES
Long-term debt proceeds 3.9 4.2
Payments on long-term debt (26.0) (161.6)
Net (decrease) increase in commercial paper and other short-term (103.9) 335.3
borrowings
Dividends paid to shareholders (40.7) (38.4)
Other 5.1 .3
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CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (161.6) 139.8
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Effect of Exchange Rate Changes on Cash (6.9) --
- --------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Items (8.8) 17.9
Cash and Cash Items - Beginning of Year 94.1 61.6
- --------------------------------------------------------------------------------------------------------
Cash and Cash Items - End of Period $85.3 $79.5
========================================================================================================
(a) Excludes capital lease additions of $8.5 million and $7.5 million in fiscal
2001 and 2000, respectively.
(b) Excludes $24.2 million of long-term debt assumed in acquisitions in fiscal
2000.
The accompanying notes are an integral part of these statements.
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
Business segment information is shown below:
(Millions of dollars)
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Three Months Ended
31 December
2000 1999
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Revenues from external customers
Gases $992.2 $780.6
Equipment 55.8 50.6
Chemicals 393.3 433.2
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Segment Totals 1,441.3 1,264.4
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Consolidated Totals $1,441.3 $1,264.4
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Operating income
Gases $191.4 $153.3
Equipment 1.1 1.2
Chemicals 37.0 51.6
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Segment Totals 229.5 206.1
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Corporate research and development and other (expense) (2.0) (9.9)
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Consolidated Totals $227.5 $196.2
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Equity affiliates' income
Gases $18.7 $16.4
Equipment .7 .3
Chemicals 1.5 3.6
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Segment Totals 20.9 20.3
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Consolidated Totals $20.9 $20.3
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Total assets
Gases $6,409.8 $6,203.8
Equipment 233.0 252.7
Chemicals 1,537.6 1,689.5
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Segment Totals 8,180.4 8,146.0
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Corporate assets 120.9 368.9
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Consolidated Totals $8,301.3 $8,514.9
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Operating Return On Net Assets (ORONA)(a)
Gases 12.6% 10.5%
Equipment 7.2% 4.9%
Chemicals 11.8% 12.5%
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Segment Totals 12.3% 10.8%
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Consolidated Totals 11.5% 10.0%
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(a) Operating return on net assets (ORONA) is calculated as the rolling four
quarter sum of operating income (excluding special items) divided by the
rolling five quarter average of total assets less investments in equity
affiliates.
8
A reconciliation of total segment operating income to consolidated income before
income taxes and minority interest is as follows:
(Millions of dollars)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
31 December
2000 1999
- ---------------------------------------------------------------------------------------------------------
Total segment operating income $229.5 $206.1
Corporate research and development and other (2.0) (9.9)
(expense)
- --------------------------------------------------------------------------------------------------------
Consolidated operating income 227.5 196.2
- --------------------------------------------------------------------------------------------------------
Segment equity affiliates' income 20.9 20.3
Loss on currency hedges related to BOC transaction and -- 113.2
expenses
Interest expense 48.4 41.3
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Consolidated income before taxes and minority interest $200.0 $62.0
========================================================================================================
9
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------
Three Months Ended
31 December
2000 1999
- -----------------------------------------------------------------------------------------------------
Revenues from external customers
United States $969.8 $839.2
- -----------------------------------------------------------------------------------------------------
United Kingdom 102.8 121.1
Spain 69.8 76.8
Other Europe 141.2 140.8
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Total Europe 313.8 338.7
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Canada/Latin America 65.9 58.4
Asia 91.7 28.0
All Other .1 .1
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Total $1,441.3 $1,264.4
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Note: Geographic information is based on country of origin. The other Europe
segment operates principally in France, Germany, the Netherlands, and
Belgium.
10
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted earnings per
share:
(Millions, except per share)
- --------------------------------------------------------------------------------------
Three Months Ended
31 December
2000 1999
- --------------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income $135.6 $50.6
Denominator for basic EPS
- -weighted average shares 214.4 213.2
Effect of dilutive securities:
Employee stock options 2.8 1.6
Other award plans .7 .7
- --------------------------------------------------------------------------------------
3.5 2.3
Denominator for diluted EPS
- -weighted average shares and
assumed conversions 217.9 215.5
- --------------------------------------------------------------------------------------
Basic EPS $.63 $.24
- --------------------------------------------------------------------------------------
Diluted EPS $.62 $.23
- --------------------------------------------------------------------------------------
Options on 5.8 million and 6.6 million shares of common stock were not included
in computing diluted EPS for the first quarter of fiscal 2001 and 2000,
respectively because their effects were antidilutive.
In July 1999, the company, The BOC Group plc (BOC) and L'Air Liquide S.A. (Air
Liquide) of France announced that they had agreed to the terms of a recommended
offer for the share capital of BOC. In May 2000, the company and Air Liquide
announced that the Federal Trade Commission had indicated it would not approve
the offer by 12 May 2000, the date on which the period for satisfying the
preconditions to the offer would expire, and the offer was not extended beyond
12 May 2000. As a result, certain costs and financing fees that had been
deferred were expensed in the third quarter of fiscal 2000.
The results for the three 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 transaction. 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 transaction.
Income from equity affiliates, net of related expenses, contributed $.09 per
share to diluted earnings per share for the three months ended 31 December 2000
and 31 December 1999.
11
The fiscal 2000 cost reduction plan included staff reductions of 450 employees
and resulted in a before-tax charge to earnings of $47.9 million. This charge
was recognized in the second and third quarters of fiscal 2000. As of 31
December 2000, 291 positions were eliminated with completion of this plan
expected by June 2001. Termination related expenses of $31.8 million have been
incurred with $16.1 million remaining in accrued liabilities.
Adoption of SFAS Nos. 133 and 138
The company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", an amendment of FASB Statement No. 133, on 1 October 2000. SFAS
No. 133 requires the transition adjustment resulting from adopting these
Statements to be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle.
There was no transition adjustment impact on earnings as a result of recognizing
all derivatives designated as fair value hedging instruments at fair value. The
amount of the transition adjustment recorded in accumulated other comprehensive
income as a result of recognizing all derivatives that are designated as cash
flow hedging instruments at fair value amounted to a net loss of $.8 million.
The amount of the transition adjustment recorded in accumulated other
comprehensive income as a result of recognizing all derivatives that are
designated as a hedge of a net investment in a foreign operation at fair value
amounted to a net loss of $1.7 million. The company expects to reclassify as
earnings during the next twelve months $.5 million from the transition
adjustments that were recorded in accumulated other comprehensive income. The
amount of the transition adjustment recorded in earnings as a result of
recognizing all derivatives not designated as a hedge at fair value was a loss
of $.3 million. Due to the immateriality of this amount, this transition
adjustment is included as a component of other income.
Accounting for Derivative Instruments and Hedging Activities
The company recognizes all derivatives on the balance sheet at fair value. On
the date the derivative instrument is entered into, the company generally
designates the derivative as either (1) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value
hedge), (2) a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability (cash
flow hedge), or (3) a hedge of a net investment in a foreign operation. Changes
in the fair value of a derivative that is designated as and meets all the
required criteria for a fair value hedge, along with the gain or loss on the
hedged asset or liability that is attributable to the hedged risk, are recorded
in current period earnings. Changes in the fair value of a derivative that is
designated as and meets all the required criteria for a cash flow hedge are
recorded in accumulated other comprehensive income and reclassified into
earnings as the underlying hedged item affects earnings. Changes in the fair
value of a derivative or non-derivative that is designated as and meets all the
required criteria for a hedge of a net investment are recorded in the cumulative
translation adjustments account. Changes in the fair value of a derivative that
is not designated as a hedge are recorded immediately in earnings.
The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes relating all
derivatives that are designated as fair value or cash flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. The company also formally assesses, both at the
inception of the hedge and on an ongoing basis, whether each derivative is
highly effective in offsetting changes in fair values or cash flows of the
hedged item. If it is determined
12
that a derivative is not highly effective as a hedge or if a derivative ceases
to be a highly effective hedge, the company will discontinue hedge accounting
prospectively.
Derivative Instruments and Hedging Activities
Currency Risk Management
The company does business in many foreign countries, therefore, its earnings,
cash flows, and financial position are exposed to foreign currency risk from
foreign currency denominated transactions and net investments in foreign
operations. These items are denominated in various foreign currencies.
It is the policy of the company to minimize its cash flow exposure to adverse
changes in currency and exchange rates. This is accomplished by identifying and
evaluating the risk that the company's cash flows will decline in value due to
changes in exchange rates and by determining the appropriate strategies
necessary to manage such exposures. The company's objective is to maintain
economically balanced currency risk management strategies that provide adequate
downside protection.
The company enters into a variety of foreign exchange contracts, including
forward, option combination, and purchased option contracts, to hedge its
exposure to fluctuations in foreign currency exchange rates. These agreements
generally involve the exchange of one currency for a second currency at some
future date.
The company enters into forward exchange and option combination contracts to
reduce the exposure to foreign currency fluctuations associated with certain
monetary assets and liabilities, as well as certain firm commitments and highly
anticipated cash flows. Forward exchange contracts are also used to hedge the
value of investments in certain foreign subsidiaries and affiliates by creating
a liability in a currency in which the company has a net equity position. The
company is also party to purchased option contracts which, if exercised, involve
the sale or purchase of foreign currency at a fixed exchange rate at a specified
period of time. Purchased option contracts are used to hedge firm commitments
and certain highly anticipated cash flows, including export sales transactions.
The company also uses foreign currency denominated debt to hedge certain net
investments in foreign operations.
Certain forward exchange contracts entered into by the company are not
designated as hedging instruments. Contacts entered into to hedge the exposure
to foreign currency fluctuations associated with certain monetary assets and
liabilities are not designated as hedging instruments and changes in the fair
value of these items are recorded in earnings to offset the foreign exchange
gains and losses of the monetary assets and liabilities. Other forward exchange
contracts may be entered into to economically hedge foreign currency exposures
which are not designated as hedging instruments due to the immaterial amount of
the underlying hedged exposures. Changes in the fair value of these contracts
are also recorded in earnings.
Debt Portfolio Management
It is the policy of the company to identify on a continuing basis the need for
debt capital and evaluate the financial risks inherent in funding the company
with debt capital. Reflecting the result of this ongoing review, the debt
portfolio and hedging program of the company is managed with the objectives and
intent to (1) reduce funding risk with respect to borrowings made or to be made
by the company to preserve the company's access to debt capital and provide debt
capital as required for funding and liquidity purposes, and (2) reduce the
aggregate interest rate risk of the debt portfolio in accordance with certain
debt management parameters.
13
The company enters into interest rate swap agreements to change the fixed/
variable interest rate mix of the debt portfolio in order to maintain the
percentage of fixed- and variable-rate debt within the parameters set by
management. In accordance with these parameters, the agreements are used to
reduce interest rate risks and costs inherent in the company's debt portfolio.
Accordingly, the company currently has one outstanding agreement to effectively
convert fixed rate-debt to variable-rate debt, which is principally indexed to
LIBOR.
The company is also party to interest rate and currency swap contracts. These
contracts entail both the exchange of fixed- and floating-rate interest payments
periodically over the life of the agreement and the exchange of one currency for
another currency at inception and at a specified future date. The contracts are
used to hedge intercompany and third party borrowing transactions.
Fair Value Hedges
For the three months ended 31 December 2000, there was no gain or loss
recognized in earnings resulting from hedge ineffectiveness or from excluding a
portion of a derivative instruments' gain or loss from the assessment of hedge
effectiveness related to derivatives designated as fair value hedges. Also,
there was no gain or loss recognized in earnings as a result of a hedged firm
commitment no longer qualifying as a fair value hedge.
Cash Flow Hedges
Sales for the three months ended 31 December 2000, includes $.9 million of net
losses related to the volatility value component of purchased foreign currency
options used to hedge certain highly anticipated export sales transactions.
Other income for the three months ended 31 December 2000, includes $.3 million
of net losses related to the volatility value component of purchased foreign
currency options used to hedge intercompany royalty income. The volatility value
component of these cash flow hedges are excluded from the assessment of hedge
effectiveness. There was no other hedge ineffectiveness related to cash flow
hedges during the period to be recognized in earnings.
Changes in the fair value of derivatives qualifying as cash flow hedges are
reported in accumulated other comprehensive income. The gains and losses are
reclassified into earnings as the underlying hedged item affects earnings, such
as when the hedged export sale occurs. It is expected that $.8 million of net
gains in accumulated other comprehensive income will be reclassified into
earnings within the next twelve months. There was no gain or loss reclassified
from accumulated other comprehensive income into earnings as a result of the
discontinuance of a cash flow hedge due to the probability of the original
forecasted transaction not occurring.
As of 31 December 2000, the maximum length of time over which the company is
hedging its exposure to the variability in future cash flows for forecasted
transactions is nine months.
Hedges of Net Investments in Foreign Operations
For the three months ended 31 December 2000, $41.3 million of net losses
related to hedges of net investments in foreign operations were included in the
cumulative translation adjustments account.
14
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST QUARTER FISCAL 2001 VS. FIRST QUARTER FISCAL 2000
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the first quarter of fiscal 2001 of $1,441.3 million were up 14%, or
$176.9 million, compared with the same quarter in the prior year. Operating
income was $227.5 million, up $31.3 million, or 16%. Profits of equity
affiliates were $20.9 million compared with $20.3 million in the prior year. Net
income was $135.6 million, or $.62 diluted earnings per share, compared to net
income of $50.6 million, or $.23 diluted earnings per share in the year-ago
quarter. Last year's results included an after-tax charge of $70.6 million, or
$.33 per share, for the BOC transaction. This amount consisted principally of
accounting charges recorded on purchased option and forward exchange contracts
entered into to hedge the currency exposure of the transaction. Excluding this
special item, net income of the first quarter of fiscal 2000 was $121.2 million,
or diluted earnings per share of $.56. Net income for the first quarter of
fiscal 2001 increased 12% compared to net income, excluding special items, of
the comparable period last year.
Gases - Sales increased 27% to $992.2 million in the first quarter of fiscal
2001 principally due to broad-based volume gains in key markets including
chemical and processing industries (CPI), electronics, and Asia. Unfavorable
currency impacts reduced sales growth by 5%, while the consolidation of Korea
Industrial Gases (KIG) contributed 5% to sales growth as a result of the
purchase of the remaining 51.1% of the former equity affiliate in December 1999.
Natural gas cost pass-through added 7% to sales.
Electronics volume growth continued with strong demand for specialty gases such
as nitrogen trifluoride, tungsten hexafluoride, the Solkatronic-Brand products
and the Schumacher specialty chemicals. Demand in this business remains strong
globally. Expected additions to production capacity in key specialty products,
particularly nitrogen trifluoride, are important to sustained growth. CPI
tonnage volume grew 6% globally, primarily due to increased hydrogen/carbon
monoxide (HYCO) demand and new facilities. Liquid bulk volume increased only 1%
in North America, reflecting softening demand, particularly in the steel end
market. Average liquid oxygen/liquid nitrogen (LOX/LIN) prices increased 7% as a
result of pricing and surcharge initiatives. The surcharge somewhat lags the
recovery of increased fuel and energy cost increases. Cylinder volume declined
3%, primarily due to divestitures.
In spite of the strong U.S. dollar, European business continued to improve.
Overall liquid bulk volume increased 4%. Southern Europe achieved solid volume
growth. The European LOX/LIN price index was up 1% from the prior year,
reflecting pricing and the Service Plus program initiatives. Cylinder volume
declined 1% overall, primarily related to industrial gas cylinders in the United
Kingdom. However, specialty gas cylinder volumes remained strong.
Asian results improved significantly because of the KIG consolidation. The Asian
liquid bulk volume index increased 25%, mainly due to strong growth in China.
Higher volumes, particularly in CPI, electronics, Europe and Asia drove the 25%
increase in operating income. Unfavorable currency and exchange related effects
reduced operating income growth about 6%, offsetting the favorable impact of the
KIG consolidation. The gases segment operating margin was 19.3%, down .3% from
the
15
19.6% reported in the prior year. The impact of natural gas cost
pass-through contributed more to revenues than to operating income and
therefore, depressed the operating margin.
Gases equity affiliates' income of $18.7 million, was up $2.3 million over the
prior year. Asian results include increased liquid bulk volume and higher
specialty gases sales, helping to offset the impact of consolidation of the
former KIG affiliate.
Equipment - Sales of $55.8 million were up modestly over the $50.6 million
reported in the prior year. Operating income was essentially unchanged. The
sales backlog for the equipment segment at 31 December 2000 was $131 million.
This compares to $144 million at 31 December 1999 and $149 million at 30
September 2000.
Chemicals - Sales in the first quarter of fiscal 2001 were $393.3 million
compared to $433.2 million in the prior year, down 9%. Operating income declined
$14.6 million to $37.0 million, or 28%. Unfavorable currency impacts reduced
sales growth about 2%. Excluding the impact of the polyvinyl alcohol divestiture
concluded in September 2000, sales were essentially unchanged and overall volume
declined 1%.
Performance chemicals experienced a 4% volume decline as emulsions volumes
declined in response to price increases implemented to recover cost increases.
Epoxy additives growth continued. Softness in some end markets, such as
automotive, negatively impacted volumes in both specialty and polyurethane
additives. Chemical intermediates had an overall 1% volume growth. Polyurethane
intermediates maintained strong growth, while amines volumes declined due to
prices increases.
Operating income declined substantially due to continued raw material and energy
cost pressures as well as unfavorable currency and exchange related effects. The
operating margin of 9.4% declined from 11.9% reported in the prior year.
Productivity gains and price increases did not offset the impact of the dramatic
increase in energy costs and continued raw material cost increases. Aggressive
price increases continue, but lag the raw material and energy cost growth.
INTEREST
Interest expense of $48.4 million increased $7.1 million, or 17% over the prior
year. The increase primarily resulted from lower capitalized interest.
INCOME TAXES
The effective tax rate for the first quarter of fiscal 2001 was 31.3%, after
minority interest of $2.7 million. The comparable rate in the prior year,
excluding the tax impact of the BOC special item, was 29.9%. The 1.4% increase
was due to lower after-tax equity affiliates' income and tax credits and
adjustments in the current year.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first three months of fiscal 2001 totaled
$163.4 million compared to $404.8 million in the corresponding period of the
prior year. Additions to plant and equipment decreased from $194.4 million
during the first three months of fiscal 2000 to $138.0 million during the
current period. Investments in unconsolidated affiliates were $16.9 million
during the first three months of fiscal 2001 versus $16.0 million last year.
There were no expenditures for acquisitions during the current period compared
to expenditures of $162.7 million during the first three months of fiscal 2000.
The prior year amount included the acquisition of the remaining 51.1 percent of
the shares in KIG, the largest industrial gas company in Korea. Capital
expenditures
16
are expected to be approximately $900.0 million in fiscal 2001. It is
anticipated these expenditures will be funded with cash from operations.
Total debt at 31 December 2000 and 30 September 2000, expressed as a percentage
of the sum of total debt, shareholders' equity, and minority interest, was 49%
and 51%, respectively. Total debt decreased from $3,045.0 million at 30
September 2000 to $2,963.8 million at 31 December 2000.
There was $20.1 million of commercial paper outstanding at 31 December 2000. The
company's total revolving credit commitments amounted to $600.0 million at 31
December 2000. During fiscal 2000, the company had an additional $500.0 million
revolving credit commitment which matured in October 2000. No borrowings were
outstanding under these commitments. Additional commitments totaling $79.6
million are maintained by the company's foreign subsidiaries, of which $17.3
million was utilized at 31 December 2000.
The estimated fair value of the company's long-term debt, including current
portion, as of 31 December 2000 is $2,941.9 million compared to a book value of
$2,826.0 million.
On 25 January 2001, the company announced its intention to reactivate its share
repurchase program. Based on its current outlook, the company expects to
purchase between $100 million and $150 million of the company's shares during
fiscal 2001.
FINANCIAL INSTRUMENTS
There has been no material change in the net financial instrument position or
sensitivity to market risk since the disclosure in the annual report.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this release are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. Factors that might cause forward-looking
statements to differ materially from actual results include, among other things,
overall economic and business conditions; demand for the goods and services of
Air Products; competitive factors in the industries in which it competes;
whether prices of natural gas and other raw materials fall in the second half of
fiscal 2001; the ability to recover increased energy and raw material costs from
customers; the availability of utilities, particularly in California, to provide
electrical power; changes in government regulations; success of implementing
cost reduction programs; the timing, impact and other uncertainties of future
acquisitions or divestitures; fluctuations in interest rates and foreign
currencies; the impact of tax and other legislation and regulations in the
jurisdictions in which Air Products and its affiliates operate; and the timing
and rate at which tax credits can be utilized.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(b) Current Reports on Form 8-K dated 19 October 2000,
23 October 2000 and 16 November 2000, in which Item 5
of such form was reported and 6 November 2000,
22 November 2000 and 5 December 2000, in which Item 9
of such form was reported were filed by the Registrant
during the quarter ended 31 December 2000.
18
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)
Dated: 13 February 2001 By: /s/ Leo J. Daley
----------------------------------------
Leo J. Daley
Vice President - Finance and Controller
(Chief Financial Officer)
19
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
Three
Months
Ended
Year Ended 30 September 31 Dec
------------------------------------------------------------------ ---------
1996 1997 1998 1999 2000 2000
---------- ---------- ---------- ---------- ---------- ---------
Earnings:
Income before extraordinary item and
the cumulative effect of accounting
changes: $416.4 $429.3 $546.8 $450.5 $124.2 $135.6
Add (deduct):
Provision for income taxes 195.5 203.4 280.9 209.5 (7.5) 63.4
Fixed charges, excluding capitalized
interest
184.0 233.0 202.8 194.4 232.6 55.6
Capitalized interest amortized during
the period 9.4 8.3 7.4 6.1 6.6 1.9
Undistributed earnings of less-than-
fifty-percent-owned affiliates (40.6) (31.1) (25.3) (44.5) (32.1) (2.3)
-------- --------- ---------- -------- --------- ---------
Earnings, as adjusted $764.7 $842.9 $1,012.6 $816.0 $323.8 $254.2
======== ========= ========== ======== ========= =========
Fixed Charges:
Interest on indebtedness, including
capital lease obligations $171.7 $217.8 $186.7 $175.4 $210.3 $51.2
Capitalized interest 20.0 20.9 18.4 24.7 19.7 4.5
Amortization of debt discount premium
and expense 1.5 1.8 1.9 1.3 3.1 (.2)
Portion of rents under operating leases
representative of the interest factor 10.8 13.4 14.2 17.7 19.3 4.6
--------- --------- ---------- -------- -------- ---------
Fixed charges $204.0 $253.9 $221.2 $219.1 $252.4 $60.1
========= ========= ========== ======== ======== =========
Ratio of Earnings to Fixed Charges: 3.7 3.3 4.6 3.7 1.3 4.2
========= ========= ========== ======== ======== =========