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 2001
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
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(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 610-481-4911
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Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
--- --
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at 10 August 2001
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Common Stock, $1 par value 227,325,340
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
Page No.
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Part I. Financial Information
Consolidated Balance Sheets -
30 June 2001 and 30 September 2000 ............................. 3
Consolidated Income -
Three Months and Nine Months Ended 30 June 2001 and 2000 ....... 4
Consolidated Statement of Comprehensive Income -
Three Months and Nine Months Ended 30 June 2001 and 2000 ....... 5
Consolidated Cash Flows -
Nine Months Ended 30 June 2001 and 2000 ........................ 6
Summary by Business Segments -
Three Months and Nine Months Ended 30 June 2001 and 2000 ....... 7
Summary by Geographic Regions -
Three Months and Nine Months Ended 30 June 2001 and 2000 ....... 10
Notes to Consolidated Financial Statements ........................ 11
Management's Discussion and Analysis .............................. 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ......................... 20
Signatures ........................................................ 21
REMARKS:
The consolidated financial statements of Air Products and Chemicals, Inc. and
its subsidiaries (the "company" or "registrant") included herein have been
prepared by the company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the company, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented not
misleading. Such adjustments are of a normal, recurring nature unless otherwise
disclosed in the notes to consolidated financial statements. However, the
interim results for the periods indicated herein do not reflect certain
adjustments, such as the valuation of inventories on the LIFO cost basis, which
can only be finally determined on an annual basis. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the company's latest annual
report on Form 10-K.
Results of operations for any three month 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)
- -------------------------------------------------------------------------------------------------------------
30 June 2001 30 September 2000
ASSETS (Unaudited)
- -------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash items $ 116.1 $ 94.1
Trade receivables, less allowances for 946.2 982.7
doubtful accounts
Inventories 414.8 388.8
Contracts in progress, less progress billings 92.4 93.4
Other current assets 210.6 246.0
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,780.1 1,805.0
- -------------------------------------------------------------------------------------------------------------
INVESTMENTS IN NET ASSETS OF AND ADVANCES 511.9 466.6
TO EQUITY AFFILIATES
PLANT AND EQUIPMENT, at cost 10,509.4 10,310.9
Less - Accumulated depreciation 5,327.2 5,054.2
- -------------------------------------------------------------------------------------------------------------
PLANT AND EQUIPMENT, net 5,182.2 5,256.7
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GOODWILL AND OTHER NONCURRENT ASSETS 744.6 742.2
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TOTAL ASSETS $ 8,218.8 $ 8,270.5
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Payables, trade and other $ 533.5 $ 578.4
Accrued liabilities 287.0 357.2
Accrued income taxes 3.1 10.0
Short-term borrowings 85.9 249.7
Current portion of long-term debt 286.4 179.5
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TOTAL CURRENT LIABILITIES 1,195.9 1,374.8
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LONG-TERM DEBT 2,542.6 2,615.8
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES 510.1 561.3
DEFERRED INCOME TAXES 833.2 781.8
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TOTAL LIABILITIES 5,081.8 5,333.7
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MINORITY INTEREST IN SUBSIDIARY COMPANIES 118.1 115.5
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SHAREHOLDERS' EQUITY
Common stock (par value $1 per share, issued fiscal 2001 and 249.4 249.4
2000-249,455,584 shares)
Capital in excess of par value 380.4 342.2
Retained earnings 3,905.8 3,667.9
Unrealized gain on investments 25.1 15.7
Minimum pension liability adjustments (2.7) (2.7)
Cumulative translation adjustments (508.3) (420.8)
Net gains on cash flow hedges 5.1 --
Treasury Stock, at cost (fiscal 2001-21,974,644 shares; 2000- (756.5) (681.6)
20,150,393 shares)
Shares in trust (fiscal 2001-12,038,177 shares; fiscal 2000- (279.4) (348.8)
15,086,482 shares)
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TOTAL SHAREHOLDERS' EQUITY 3,018.9 2,821.3
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,218.8 $ 8,270.5
=============================================================================================================
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)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
30 June 30 June
2001 2000 2001 2000
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SALES AND OTHER INCOME
Sales $1,415.9 $1,406.4 $4,355.5 $4,018.0
Other income (expense), net 8.1 (4.5) 12.4 9.4
- ------------------------------------------------------------------------------------------------------------------
1,424.0 1,401.9 4,367.9 4,027.4
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COSTS AND EXPENSES
Cost of sales 1,004.3 993.7 3,134.2 2,796.4
Selling and administrative 173.3 189.5 536.3 537.2
Research and development 31.0 32.3 90.3 92.3
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 215.4 186.4 607.1 601.5
Income from equity affiliates, net of 21.8 20.4 59.6 62.0
related expenses
Loss on currency hedges related to -- 482.5 -- 730.4
BOC transaction and expenses
Interest expense 48.7 52.9 147.4 141.0
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES 188.5 (328.6) 519.3 (207.9)
AND MINORITY INTEREST
Income taxes (benefits) 53.8 (137.6) 152.1 (120.2)
Minority interest(a) 2.4 1.5 4.7 6.6
- ------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 132.3 $ (192.5) $ 362.5 $ (94.3)
==================================================================================================================
BASIC EARNINGS (LOSS) PER $.62 $(.90) $1.69 $(.44)
COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER $.60 $(.90) $1.65 $(.44)
COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER 214.9 213.4 214.7 213.3
OF COMMON SHARES (in
millions)
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WEIGHTED AVERAGE NUMBER 220.5 213.4 219.1 213.3
OF COMMON AND COMMON
EQUIVALENT SHARES (in millions)(b)(c)
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DIVIDENDS DECLARED PER $ .20 $ .19 $ .58 $ .55
COMMON SHARE - Cash
- ------------------------------------------------------------------------------------------------------------------
(a) Minority interest primarily includes before-tax amounts.
(b) The dilution of earnings per common share is due mainly to the impact of
unexercised stock options.
(c) Common equivalent shares were not considered in fiscal year 2000 due to the
net loss position.
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
2001 2000 2001 2000
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NET INCOME (LOSS) $132.3 $(192.5) $362.5 $ (94.3)
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OTHER COMPREHENSIVE INCOME
(LOSS), net of tax
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Unrealized holding gains (losses) on 9.7 - 9.4 (2.7)
investments arising during the period
- ---------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments:
Consolidated subsidiaries and joint ventures (38.2) (60.1) (106.7) (164.1)
Cumulative effect of a change in ccounting - - (1.7) -
for hedges of net investments in foreign entities
Transaction gains resulting from hedges of net 28.0 8.9 20.9 49.6
investments in foreign entities
- ---------------------------------------------------------------------------------------------------------------------------
Total foreign currency translation adjustments (10.2) (51.2) (87.5) (114.5)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flow hedges:
Cumulative effect of a change in accounting - - (.8) -
or cash flow hedges
Net gains arising during the period 1.3 - 9.4 -
Reclassification adjustment for gains (losses) 2.5 - (3.5) -
reclassified into income
- ---------------------------------------------------------------------------------------------------------------------------
Net gains on cash flow hedges 3.8 - 5.1 -
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE 3.3 (51.2) (73.0) (117.2)
INCOME (LOSS)
- ---------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $135.6 $(243.7) $289.5 $(211.5)
===========================================================================================================================
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
2001 2000
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OPERATING ACTIVITIES
Net Income (Loss) $ 362.5 $ (94.3)
Adjustments to reconcile income (loss) to cash provided
by operating activities:
Depreciation 433.6 426.7
Deferred income taxes 26.5 3.4
Impairment of long-lived assets 6.4 --
Loss on BOC transaction -- 706.1
Undistributed (earnings) of unconsolidated affiliates (45.2) (43.1)
(Gain) loss on sale of assets and investments 1.2 (9.0)
Other (25.4) 115.8
Working capital changes that provided (used) cash, net of effects of acquisitions:
Trade receivables 8.5 (89.8)
Inventories and contracts in progress (33.2) (27.1)
Payables, trade and other (38.1) 56.1
Other (8.4) (167.5)
- ---------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 688.4 877.3
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INVESTING ACTIVITIES
Additions to plant and equipment (a) (510.1) (586.2)
Acquisitions, less cash acquired (b) -- (169.7)
Investment in and advances to equity affiliates (27.8) (15.8)
BOC transaction costs -- (665.8)
Proceeds from sale of assets and investments 42.4 42.0
Other 30.1 (2.9)
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CASH USED FOR INVESTING ACTIVITIES (465.4) (1,398.4)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Long-term debt proceeds 120.5 534.0
Payments on long-term debt (42.1) (426.9)
Net (decrease) increase in commercial paper and other (157.4) 576.4
short-term borrowings
Purchase of treasury stock (75.0) --
Dividends paid to shareholders (122.2) (115.2)
Other 77.6 5.6
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CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (198.6) 573.9
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Effect of Exchange Rate Changes on Cash (2.4) (1.1)
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Increase in Cash and Cash Items 22.0 51.7
Cash and Cash Items - Beginning of Year 94.1 61.6
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Items - End of Period $ 116.1 $ 113.3
===========================================================================================================================
(a) Excludes capital lease additions of $.6 million and $17.2 million in fiscal
2001 and 2000, respectively.
(b) Excludes $24.3 million of long-term debt assumed in acquisitions in fiscal
2000.
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
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Revenues from external customers
Gases $ 983.9 $ 894.8 $3,019.3 $2,517.5
Equipment 57.3 65.0 177.9 169.4
Chemicals 374.7 446.6 1,158.3 1,331.1
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Segment Totals 1,415.9 1,406.4 4,355.5 4,018.0
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $1,415.9 $1,406.4 $4,355.5 $4,018.0
- --------------------------------------------------------------------------------------------------------------------------
Operating income
Gases $ 175.2 $ 157.3 $ 523.4 $ 481.6
Equipment 2.7 (3.6) 7.3 3.2
Chemicals 39.7 44.8 95.2 146.4
- --------------------------------------------------------------------------------------------------------------------------
Segment Totals 217.6 198.5 625.9 631.2
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Corporate research and development (2.2) (12.1) (18.8) (29.7)
and other (expense)
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Consolidated Totals $ 215.4 $ 186.4 $ 607.1 $ 601.5
- --------------------------------------------------------------------------------------------------------------------------
Operating income (excluding special
items)
Gases $ 175.2 $ 189.3(b) $ 549.7(a) $ 507.3(c)(d)
Equipment 2.7 3.3(b) 7.3 10.1(c)
Chemicals 39.7 51.7(b) 99.8(a) 162.0(c)
- --------------------------------------------------------------------------------------------------------------------------
Segment Totals 217.6 244.3 656.8 679.4
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Corporate research and development and (2.2) (11.2)(b) (12.8)(e) (28.8)(c)
other (expense)
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Consolidated Totals $ 215.4 $ 233.1 $ 644.0 $ 650.6
- --------------------------------------------------------------------------------------------------------------------------
Equity affiliates' income
Gases $ 17.8 $ 18.4 $ 53.1 $ 52.6
Equipment .4 1.0 1.3 1.8
Chemicals 3.7 2.0 5.2 8.7
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Segment Totals 21.9 21.4 59.6 63.1
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Other (.1) (1.0) -- (1.1)
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Consolidated Totals $ 21.8 $ 20.4 $ 59.6 $ 62.0
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7
(Millions of dollars)
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30 June
2001 2000
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Total assets
Gases $6,380.1 $6,264.3
Equipment 210.1 233.9
Chemicals 1,459.0 1,677.7
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Segment Totals 8,049.2 8,175.9
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Corporate assets 169.6 390.9
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Consolidated Totals $8,218.8 $8,566.8
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Twelve Months Ended
30 June
2001 2000
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Operating Return On Net Assets (ORONA) (f)
Gases 12.6% 11.4%
Equipment 6.2% 5.8%
Chemicals 9.1% 13.1%
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Segment Totals 11.7% 11.6%
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Consolidated Totals 11.1% 10.6%
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(a) The results for the nine months ended 30 June 2001 exclude a cost reduction
charge in gases ($26.3 million) and chemicals ($4.6 million).
(b) The results for the three months ended 30 June 2000 exclude a cost
reduction charge in gases ($32.0 million), equipment ($6.9 million),
chemicals ($6.9 million) and corporate ($.9 million).
(c) The results for the nine months ended 30 June 2000 exclude a cost reduction
charge in gases ($32.0 million), equipment ($6.9 million), chemicals ($15.6
million) and corporate ($.9 million).
(d) The results for the nine months ended 30 June 2000 exclude a gain on the
sale of packaged gas facilities of $6.3 million.
(e) The results for the nine months ended 30 June 2001 exclude a litigation
settlement charge of $6.0 million.
(f) Operating return on net assets (ORONA) is calculated as the rolling four
quarter sum of operating income divided by the rolling five quarter average
of total assets less investments in equity affiliates. The ORONA
calculation excludes all special items impacting operating income.
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 Nine Months Ended
30 June 30 June
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Total segment operating income $217.6 $ 198.5 $625.9 $ 631.2
Corporate research and (2.2) (12.1) (18.8) (29.7)
development and other (expense)
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated operating income 215.4 186.4 607.1 601.5
- ------------------------------------------------------------------------------------------------------------------------------
Equity affiliates' income 21.8 20.4 59.6 62.0
Loss on currency hedges related to - 482.5 - 730.4
BOC transaction and expenses
Interest expense 48.7 52.9 147.4 141.0
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated income (loss) before $188.5 $(328.6) $519.3 $(207.9)
taxes and minority interest
==============================================================================================================================
9
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
2001 2000 2001 2000
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Revenues from external customers
United States $ 945.9 $ 937.3 $2,934.5 $2,655.8
- ----------------------------------------------------------------------------------------------------------------------
United Kingdom 106.1 122.4 325.0 367.9
Spain 74.9 75.5 222.7 231.2
Other Europe 144.9 127.8 438.9 417.7
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Total Europe 325.9 325.7 986.6 1,016.8
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Canada/Latin America 60.9 60.4 183.2 173.8
Asia 83.1 82.9 251.0 171.3
All Other .1 .1 .2 .3
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Total $1,415.9 $1,406.4 $4,355.5 $4,018.0
- ----------------------------------------------------------------------------------------------------------------------
Note: Geographic information is based on country of origin. The other Europe
segment operates principally in France, Germany, 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 Nine Months Ended
30 June 30 June
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS-net income $132.3 $(192.5) $362.5 $(94.3)
Denominator for basic EPS
-weighted average shares 214.9 213.4 214.7 213.3
Effect of diluted securities:
Employee stock options 4.7 - 3.5 -
Other award plans .9 - .9 -
- --------------------------------------------------------------------------------------------------------------------
5.6 - 4.4 -
Denominator for diluted EPS
-weighted average shares and
assumed conversions 220.5 213.4 219.1 213.3
====================================================================================================================
Basic EPS $.62 $(.90) $1.69 $(.44)
====================================================================================================================
Diluted EPS $.60 $(.90) $1.65 $(.44)
====================================================================================================================
Since the company had a net loss for the three and nine months ended 30 June
2000, the impact of potential future stock option and other stock award
exercises would have had an antidilutive effect on the calculation of diluted
loss per share. As a result, the average number of common shares outstanding
used in calculating diluted loss per share in fiscal 2000 was the same as for
basic loss per share.
The results for the nine months ended 30 June 2001 included a charge of $30.9
million ($20.0 million after-tax) for a global cost reduction plan. The plan
includes 311 position eliminations, resulting in a charge of $22.4 million for
severance and termination benefits. A charge of $8.5 million was recognized for
asset impairments and other related restructuring costs. The restructuring
charges included in cost of sales, selling and administrative, and other expense
were $14.4 million, $9.4 million, and $7.1 million, respectively. The results
for the nine months ended 30 June 2001, also included a charge of $6.0 million
($3.7 million after-tax) related to a litigation settlement.
Income from equity affiliates, net of related expenses and taxes, contributed
$.09 and $.08 to diluted earnings per share for the three months ended 30 June
2001 and 30 June 2000, respectively. Income from equity affiliates, net of
related expenses and taxes, contributed $.25 and $.26 to diluted earnings per
share for the nine months ended 30 June 2001 and 30 June 2000, respectively.
11
The company, The BOC Group plc (BOC) and L'Air Liquide S.A. (Air Liquide) of
France announced in July 1999 that they had agreed to the terms of a recommended
offer for the share capital of BOC. In May 2000, the company and Air Liquide
announced that the Federal Trade Commission had indicated it would not approve
the offer by 12 May 2000, the date on which the period for satisfying the
preconditions to the offer would expire, and the offer was not extended beyond
12 May 2000. As a result, certain costs and financing fees that had been
deferred were expensed in the third quarter of fiscal 2000.
The results for the three and nine months ended 30 June 2000 include a charge of
$482.5 million ($301.8 million after-tax) and $730.4 million ($456.5 million
after-tax), respectively, for costs related to the BOC transaction. These costs
consist primarily of charges recorded on purchased option and forward exchange
contracts entered into to hedge the currency exposure of the BOC transaction.
The results for the three months ended 30 June 2000 include a charge of $46.7
million ($29.5 million after-tax) for the global cost reduction plan. The
restructuring charges included in cost of sales, selling and administrative,
research and development, and other expenses were $17.3 million, $21.0 million,
$.9 million, and $7.5 million, respectively.
The results for the nine months ended 30 June 2000 included a charge of $55.4
million ($35.0 million after-tax) for the global cost reduction plan. The
restructuring charges included in cost of sales, selling and administrative,
research and development, and other expenses were $20.6 million, $25.4 million,
$1.9 million, and $7.5 million, respectively.
The results for the nine months ended 30 June 2000 included a gain of $6.3
million ($4.0 million after-tax) related to the sale of packaged gas facilities.
12
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIRD QUARTER FISCAL 2001 VS. THIRD QUARTER FISCAL 2000
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the third quarter of fiscal 2001 of $1,415.9 million were up 1%, or
$9.5 million compared with the same quarter in the prior year. Operating income
of $215.4 million increased $29.0 million, or 16%. Income from equity affiliates
was $21.8 million compared with $20.4 million in the prior year. Net income was
$132.3 million, or $.60 diluted earnings per share, compared with a net loss of
$192.5 million, or $(.90) diluted earnings per share in the prior year. The
results of the quarter ended 30 June 2000 were significantly impacted by two
special items: an after-tax charge of $301.8 million for costs related to the
BOC transaction; and an after-tax charge of $29.5 million for a global cost
reduction plan. Excluding special items, net income and diluted earnings per
share for the quarter ended 30 June 2000 were $138.8 million and $.64,
respectively. Diluted earnings per share declined 6% compared with prior year
earnings per share of $.64, excluding disclosed items in the 2000 quarter. The
remaining discussion and analysis of the results of operations excludes the
impact of special items. See Summary of Business Segments for details of special
items by segment.
Gases -Sales increased 10% to $983.9 million in the third quarter of fiscal
2001. Natural gas cost pass-through added 7% to sales growth, while unfavorable
currency impacts reduced sales growth about 3%. The balance of the sales
increase was principally due to higher shipments of HYCO (hydrogen, carbon
monoxide, and syngas-a mix of hydrogen and carbon monoxide) products.
Sales to the electronics industry were essentially unchanged from the prior
year. Chemical and processing industries (CPI) tonnage volume increased 1%
overall, and experienced a favorable product sales mix. HYCO volume increased
significantly, while gaseous oxygen/nitrogen (GOX/GAN) declined due to customer
outages and weak petro-chemical market demand.
Liquid bulk volume declined 7% in North America as demand softened in several
end markets, particularly steel and metals processing. Cylinder volume declined
slightly on weakness in the automotive market. The average price for liquid
oxygen/nitrogen (LOX/LIN) increased 10% as the result of base price and
surcharge initiatives.
The liquid bulk volume index in Europe declined 2% as market weakness in the
United Kingdom more than offset gains on the continent. The European LOX/LIN
price index was up 3% from the prior year. Cylinder volume was essentially
unchanged from the prior year, primarily due to weak industrial activity in the
United Kingdom.
Liquid bulk volume increased 11% in Asia with strong growth in China, Singapore,
Thailand, and Korea.
13
Operating income of $175.2 million declined 7%, or $14.1 million from the prior
year. Excluding unfavorable currency and exchange related effects, operating
income declined 4%. While electronic division's sales were flat, the division's
operating results declined, principally due to lower volumes and a less
favorable product mix. After six quarters of significant economic expansion, the
electronics division was affected by the dramatic slowdown in the electronics
manufacturing sector. Operating results for the global CPI division improved on
higher sales of HYCO. In Asia, higher liquid volumes contributed to better
results. European performance improved on a constant currency basis, primarily
due to strong sales to the medical market. A combination of weaker volumes and
higher natural gas and power costs resulted in lower operating results for North
American gases.
The operating margin was 17.8% compared to 21.2% in the prior year. Excluding
the unfavorable margin impact of natural gas cost pass-through revenues, the
operating margin in the current year was 18.9%.
Equipment- Sales were $57.3 million, a $7.7 million decline from the prior year.
Operating income of $2.7 million declined $.6 million from the prior year due to
an unfavorable product mix. The sales backlog at 30 June 2001 was $132 million
compared to $100 million at 30 June 2000. The increase in sales backlog resulted
from the receipt of two liquid natural gas (LNG) heat exchanger orders.
Chemicals- Sales in the third quarter of fiscal 2001 were $374.7 million
compared to $446.6 million in the prior year, down 16%. Excluding the impact of
the divested polyvinyl alcohol (PVOH) business, sales declined 6%. Sales growth
was reduced 1% due to unfavorable currency impacts. The overall volume decline
was 12%, excluding the impact of PVOH. The volume decline resulted from the
economic slowdown and outages at key customer plants.
Performance chemicals experienced an overall 8% volume decline. Emulsions volume
declined due to general economic slowdown in most markets. Weak end markets also
produced volume declines in specialty additives and polyurethane additives.
Chemical intermediates volume declined 19%, as polyurethane intermediates was
significantly lower due to extended customer outages. Amines volume was
unfavorably impacted by market share losses driven by price increases and by a
customer outage.
Operating income of $39.7 million declined 23%, or $12.0 million from the prior
year, primarily due to lower volumes across all major product lines. The
operating margin of 10.6% declined from 11.6% in the prior year.
Equity affiliates' income was $3.7 million compared to $2.0 million in the prior
year, due to improved results in the redispersible powders venture.
Corporate and Other- Operating expense was $2.2 million compared to $11.2
million in the prior year. Operating expense for the quarter ended 30 June 2001
was favorably impacted by lower corporate costs, foreign exchange gains, and
higher interest income.
INTEREST
Interest expense of $48.7 million declined $4.2 million, or 8% from the prior
year. The impact of lower average debt outstanding more than offset lower
capitalized interest.
14
INCOME TAXES
The effective tax rate for the third quarter of fiscal 2001 was 28.9%, after
minority interest of $2.4 million. The comparable effective tax rate for the
prior year was 41.7%. The fiscal 2000 rate was significantly impacted by the BOC
transaction and the global cost reduction program. Excluding the tax impact of
these transactions, the effective tax rate in the prior year quarter was 30.3%.
The 1.4% decline was due to increased tax credits and adjustments.
GLOBAL COST REDUCTION
Under the fiscal 2000 global cost reduction plan, the results for the quarter
ended 30 June 2000 reflected a before-tax charge of $39.2 million for 347 staff
reductions. The results for the quarter also included a charge of $7.5 million
for assets impairments related to the rationalization of three facilities in
Europe. The plan was completed in the quarter ended 30 June 2001 with 313
position eliminations and total termination related expenses incurred of $37.0
million. In the quarter ended 30 June 2001 the balance of $2.2 million in
accrued liabilities was credited to other income.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations". SFAS
No. 141 requires all business combinations be accounted for by the purchase
method and adds disclosure requirements related to business combination
transactions. SFAS No. 141 also establishes criteria for the recognition of
intangible assets apart from goodwill. This Statement applies to all business
combinations accounted for using the purchase method for which the acquisition
date was 1 July 2001 or later. The company does not believe this Statement will
have a material effect on the company's financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The Statement provides that goodwill and
some intangibles will no longer be amortized on a recurring basis. SFAS No. 142
provides specific guidance for testing goodwill for impairment. The Statement
also requires new disclosure of information about goodwill and other intangible
assets subsequent to their acquisition. The Statement is effective for fiscal
years beginning after 15 December 2001, however early adoption is permitted for
entities with fiscal years beginning after 15 March 2001. The company is
reviewing the provisions of SFAS No. 142.
POWER GENERATION FACILITIES
In fiscal 2000, the company decided to explore possible divestiture of its
interests in most of the power generation facilities and the flue gas
desulfurization facility. The company has entered into agreements for the sale
of its power generation facilities located in Cambria County, Pennsylvania and
Orlando, Florida and expects to close on the sale during the quarter ending 30
September 2001. The company continues to assess the possible divestiture of most
of its remaining power generation facilities and the flue gas desulfurization
facility.
15
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
NINE MONTHS FISCAL 2001 VS. NINE MONTHS FISCAL 2000
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales for the nine months ended 30 June 2001 of $4,355.5 million were 8% higher
than the $4,018.0 million reported in the prior year. Operating income of $607.1
million increased $5.6 million, or 1% versus prior year. Income from equity
affiliates was $59.6 million compared with $62.0 million in the prior year. Net
income was $362.5 million, or $1.65 diluted earnings per share, compared with a
net loss of $94.3 million, or $(.44) diluted earnings per share in the prior
year. The results for the nine months ended 30 June 2001 included an after-tax
charge of $20.0 million for a cost reduction program and an after-tax charge of
$3.7 million related to a litigation settlement. The nine months ended 30 June
2000 included an after-tax charge of $456.5 million for costs related to the BOC
transaction. These costs consisted principally of charges recorded on purchased
option and forward exchange contracts entered into to hedge the currency
exposure of the transaction. The results of the first nine months of the prior
year also included an after-tax charge of $35.0 million for a cost reduction
program and an after-tax gain of $4.0 million related to the sale of packaged
gas facilities. Excluding these special items, current year net income of $386.2
million declined $7.0 million, or 2% from the prior year. Excluding special
items, diluted earnings per share of $1.76 declined 3% from the prior year. The
remaining discussion and analysis of the results of operations excludes the
impact of special items. See Summary of Business Segments for details of special
items by segment.
Gases- Sales of $3,019.3 million increased 20%, or $501.8 million, over the
first nine months of fiscal 2000. Natural gas cost pass-through added 9% to
sales growth. Unfavorable currency impacts reduced sales growth by 3%, while the
consolidation of Korea Industrial Gases (KIG) contributed about 2% to sales
growth. The balance of the sales increase was principally due to higher
shipments to the electronics industry and higher HYCO volumes.
Electronics volume growth resulted from strong global demand for specialty gases
and chemicals during the first six months of the fiscal year, with a significant
slowdown in the electronics-manufacturing sector in the quarter ended 30 June
2001. CPI tonnage volume increased 1% overall, and experienced a favorable
product sales mix. HYCO volume increased significantly, while (GOX/GAN)
declined.
The liquid bulk volume index in North America declined 3% year-on-year. Cylinder
volume declined 1%. General weakness in manufacturing activity impacted both
liquid bulk and cylinder volumes. Average LOX/LIN prices increased 9% as a
result of pricing and surcharge initiatives.
The liquid bulk volume index in Europe increased slightly, while cylinder volume
declined slightly from the prior year. Weakness in United Kingdom end markets
impacted both liquid bulk and cylinder volumes. The LOX/LIN price increased
about 2% over the prior year.
Liquid bulk volume in Asia grew about 17%.
16
Operating income of $549.7 million increased $42.4 million, or 8% over the prior
year. Higher volume in electronics and improved operating performance in CPI
drove the increase. Unfavorable currency and exchange related effects reduced
operating income growth by 4%. The operating margin in the first nine months of
fiscal 2001 was 18.2% compared to 20.2% in the prior year. Excluding the
unfavorable margin impact of the natural gas cost pass-through on revenues, the
operating margin in the current year was 19.7%, down .5% from the prior year.
Equipment- Sales of $177.9 million rose $8.5 million from the prior year.
Operating income of $7.3 million declined $2.8 million from the prior year due
to an unfavorable project mix.
Chemicals- Sales in the first nine months of fiscal 2001 of $1,158.3 million
declined 13% from $1,331.1 million in the prior year. Excluding the impact of
the divested PVOH business, sales declined 3% from prior year. Sales growth was
reduced 1% due to unfavorable currency impacts. The overall volume decline was
8%, excluding the impact of PVOH. The volume decline resulted from the slowing
economy, lost market share due to price increases, and customer outages.
Performance chemicals experienced an overall 7% volume decline. Emulsions
declined globally due to market share loss in response to price increases as
well as a general economic slowdown. Epoxy additives volume grew modestly, while
specialty additives and polyurethane additives declined on market weakness.
Chemical intermediates volume declined 9%. Polyurethane intermediates were down
primarily due to customer outages. The amines volume was impacted by market
share loss in response to price increases and a customer outage.
Operating income of $99.8 million declined 38%, or $62.2 million from the prior
year. Lower volumes and higher raw material and energy costs drove the
significant decline in operating income. Aggressive price increases have been
partially successful in recovering the rapid rise in costs. Unfavorable currency
and exchange related effects reduced operating income about 5%. The operating
margin of 8.6% declined from 12.2% in the prior year.
Equity affiliates' income declined $3.5 million as the emulsions business
experienced global volume and margin pressure.
Corporate and Other- Operating expense was $12.8 million compared to $28.8
million in the prior year. The reduction in operating expense primarily resulted
from foreign exchange gains and lower corporate expenses.
INTEREST
Interest expense of $147.4 million increased $6.4 million, or 5% over the prior
year. The increase primarily resulted from lower capitalized interest.
17
INCOME TAXES
The effective tax rate for the first nine months of fiscal 2001 was 29.6%, after
minority interest of $4.7 million. The effective rate excluding the impact of
special items was 30.0%. The prior year effective tax rate was 56.0%, after
minority interest of $6.6 million. The fiscal 2000 rate was significantly
impacted by the BOC transaction, the global cost reduction plan, and the sale of
packaged gas facilities. Excluding the impact of the special items, the
effective rate in the prior year was 30.4%.
GLOBAL COST REDUCTION
The results for the nine months ended 30 June 2001 included a before-tax charge
of $30.9 million for a global cost reduction plan initiated in the quarter ended
31 March 2001. The plan included 311 staff position eliminations resulting in a
charge of $22.4 million for severance and termination benefits. A charge of $8.5
million was recognized for asset impairments and restructuring costs related to
the rationalization of several facilities. Asset impairments and other
restructuring expenses of $11.9 million have been incurred and $19.0 million was
reflected in accrued liabilities as of 30 June 2001. Positions eliminated as of
30 June 2001 were 62. Benefits from the plan are expected to be approximately $9
million in fiscal years 2002 and 2003.
Staff reductions related to the $22.4 million charge will be completed by 31
March 2002. Of the 311 position eliminations in the plan, 120 are related to
restructuring of customer service centers and regional management centers at
Carburos Metalicos S.A. (Carburos) in Spain. The total Carburos initiative
requires information system investments prior to completing the restructuring.
Therefore, the company anticipates an additional charge for restructuring and
related expenses for the Carburos initiative of about $11 million in the fourth
quarter of fiscal 2001.
The cost reduction program in fiscal 2000 included staff reductions of 450
employees and resulted in a before-tax charge of $47.9 million. This charge was
recognized in the second and third quarters of fiscal 2000. The plan was
completed in the quarter ended 30 June 2001 with 416 positions eliminated and
total termination expenses incurred of $45.7 million. In the quarter ended 30
June 2001 the balance of $2.2 million in accrued liabilities was credited to
other income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first nine months of fiscal 2001 totaled $538.5
million compared to $813.2 million in the corresponding period of the prior
year. Additions to plant and equipment decreased from $586.2 million during the
first nine months of fiscal 2000 to $510.1 million during the current period.
Investments in unconsolidated affiliates were $27.8 million during the first
nine months of fiscal 2001 versus $15.8 million last year. There were no
expenditures for acquisitions during the current period compared to expenditures
of $169.7 million during the first nine months of fiscal 2000. The prior year
amount included the acquisition of the remaining 51.1 percent of the shares in
KIG, the largest industrial gas company in Korea. Capital expenditures are
expected to be approximately $800 million in fiscal 2001. It is anticipated
these expenditures will be funded with cash from operations.
Total debt at 30 June 2001 and 30 September 2000, expressed as a percentage of
the sum of total debt, shareholders' equity, and minority interest, was 48% and
51%, respectively. Total debt decreased from $3,045.0 million at 30 September
2000 to $2,914.9 million at 30 June 2001.
18
There was no commercial paper outstanding at 30 June 2001. The company's total
revolving credit commitments amounted to $600.0 million at 30 June 2001. No
borrowings were outstanding under these commitments. Additional commitments
totaling $69.0 million are maintained by the company's foreign subsidiaries, of
which $10.9 million was utilized at 30 June 2001.
The estimated fair value of the company's long-term debt, including current
portion, as of 30 June 2001 is $2,966.8 million compared to a book value of
$2,829.0 million.
On 25 January 2001, the company announced its intention to reactivate its share
repurchase program. Through the first nine months of fiscal 2001, the company
has repurchased $75 million of its shares. Based on its current outlook, the
company expects to purchase approximately $100 million of the company's shares
during fiscal 2001.
FINANCIAL INSTRUMENTS
There has been no material change in the net financial instrument position or
sensitivity to market risk since the disclosure in the annual report.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this release are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. Factors that might cause forward-looking
statements to differ materially from actual results include, among other things,
overall economic and business conditions; demand and timing of the placing of
orders for the goods and services of Air Products; competitive factors in the
industries in which it competes; whether prices of natural gas and other raw
materials fall in the remaining quarter 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.
19
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 Report on Form 8-K dated 23 April 2001
was filed by the Registrant during the quarter
ended 30 June 2001 in which Items 5 and 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 10, 2001 By: /s/L. J. Daley
----------------------------------------
L. J. Daley
Vice President - Finance and Controller
(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 2001
Commission File No. 1-4534
-------------------
AIR PRODUCTS AND CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
================================================================================
INDEX TO EXHIBITS
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
Nine Months
Ended
Year Ended 30 September 30 June
------------------------------------------------ ---------------------
1996 1997 1998 1999 2000 2001
-------- -------- ------- -------- -------- --------
Earnings:
Income before extraordinary item and
the cumulative effect of accounting
changes: $416.4 $429.3 $546.8 $450.5 $124.2 $362.5
Add (deduct):
Provision for income taxes 195.5 203.4 280.9 209.5 (7.5) 156.8
Fixed charges, excluding capitalized
interest 184.0 233.0 202.8 194.4 232.6 169.1
Capitalized interest amortized during
the period 9.4 8.3 7.4 6.1 6.6 5.1
Undistributed earnings of less-than-
fifty-percent-owned affiliates (40.6) (31.1) (25.3) (44.5) (32.1) (37.1)
------- ------ ------ ------ ------ ------
Earnings, as adjusted $764.7 $842.9 $1,012.6 $816.0 $323.8 $656.4
====== ====== ======== ====== ====== ======
Fixed Charges:
Interest on indebtedness, including
capital lease obligations $171.7 $217.8 $186.7 $175.4 $210.3 $155.1
Capitalized interest 20.0 20.9 18.4 24.7 19.7 6.5
Amortization of debt discount premium
and expense 1.5 1.8 1.9 1.3 3.1 (0.7)
Portion of rents under operating leases
representative of the interest factor 10.8 13.4 14.2 17.7 19.3 14.6
------ ------ ------ ------ ------ ------
Fixed charges $204.0 $253.9 $221.2 $219.1 $252.4 $175.5
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges: 3.7 3.3 4.6 3.7 1.3 3.7
======= ====== ====== ====== ====== ======