AIR PRODUCTS AND CHEMICALS INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended 30 June 2005
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or Organization)
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23-1274455
(I.R.S. Employer Identification No.) |
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7201 Hamilton Boulevard, Allentown, Pennsylvania
(Address of Principal Executive Offices)
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18195-1501
(Zip Code) |
610-481-4911
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark 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 Ö No ___
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes Ö No ___
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class
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Outstanding at 29 July 2005 |
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Common Stock, $1 par value
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221,695,571 |
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
BASIS OF PRESENTATION:
The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (the
company or registrant) included herein have been prepared by the company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of the company, the
accompanying statements reflect 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. Adjustments included herein 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. The consolidated financial statements included herein should be read in
conjunction with the financial statements and notes thereto included in the companys latest annual
report on Form 10-K in order to fully understand the basis of presentation.
Results of operations for interim periods are not necessarily indicative of the results of
operations for a full year. Reference the 2005 Outlook included on pages 27-29 in Managements
Discussion and Analysis of Financial Condition and Results of Operations. Risk factors that could
impact results are discussed under Forward-Looking Statements on page 31.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(Millions of dollars, except for share data) |
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30 June 2005 |
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30 September 2004 |
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ASSETS |
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CURRENT ASSETS
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Cash and cash items |
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$82.1 |
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$146.3 |
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Trade receivables, less allowances for doubtful accounts |
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1,485.2 |
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1,454.7 |
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Inventories |
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516.7 |
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505.9 |
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Contracts in progress, less progress billings |
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83.9 |
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71.3 |
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Other current assets |
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254.6 |
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238.7 |
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TOTAL CURRENT ASSETS |
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2,422.5 |
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2,416.9 |
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INVESTMENTS IN NET ASSETS OF AND ADVANCES TO EQUITY
AFFILIATES |
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661.3 |
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629.8 |
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PLANT AND EQUIPMENT, at cost |
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12,732.4 |
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12,201.5 |
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Less accumulated depreciation |
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6,935.7 |
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6,499.3 |
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PLANT AND EQUIPMENT, net |
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5,796.7 |
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5,702.2 |
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GOODWILL |
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901.1 |
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830.5 |
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INTANGIBLE ASSETS, net |
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98.3 |
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101.4 |
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OTHER NONCURRENT ASSETS |
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429.9 |
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359.6 |
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TOTAL ASSETS |
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$10,309.8 |
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$10,040.4 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES
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Payables and accrued liabilities |
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$1,222.4 |
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$1,319.6 |
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Accrued income taxes |
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134.0 |
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105.9 |
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Short-term borrowings |
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276.6 |
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35.4 |
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Current portion of long-term debt |
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177.0 |
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244.7 |
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TOTAL CURRENT LIABILITIES |
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1,810.0 |
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1,705.6 |
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LONG-TERM DEBT |
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2,061.3 |
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2,113.6 |
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DEFERRED INCOME & OTHER NONCURRENT LIABILITIES |
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806.9 |
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820.3 |
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DEFERRED INCOME TAXES |
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837.6 |
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788.0 |
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TOTAL LIABILITIES |
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5,515.8 |
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5,427.5 |
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MINORITY INTEREST IN SUBSIDIARY COMPANIES |
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179.1 |
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168.9 |
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SHAREHOLDERS EQUITY |
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Common stock (par value $1 per share; 2005 and 2004 -
249,455,584 shares) |
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249.4 |
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249.4 |
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Capital in excess of par value |
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602.3 |
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551.8 |
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Retained earnings |
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5,216.1 |
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4,887.1 |
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Accumulated other comprehensive income (loss) |
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(379.0 |
) |
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(440.7 |
) |
Treasury stock, at cost (2005 - 26,227,728 shares; 2004
- - 22,153,707 shares) |
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(1,073.9 |
) |
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(764.8 |
) |
Shares in trust (2004 - 1,527,101 shares) |
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(38.8 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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4,614.9 |
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4,444.0 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$10,309.8 |
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$10,040.4 |
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The accompanying notes are an integral part of these statements.
3
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
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(Millions of dollars, except for share data) |
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Three Months Ended |
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Nine Months Ended |
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30 June |
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30 June |
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2005 |
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2004 |
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2005 |
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2004 |
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SALES |
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$2,078.4 |
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$1,892.5 |
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$6,072.7 |
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$5,433.9 |
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COSTS AND EXPENSES |
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Cost of sales |
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1,531.7 |
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1,388.3 |
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4,476.1 |
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3,988.1 |
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Selling and administrative |
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261.1 |
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243.7 |
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771.1 |
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725.5 |
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Research and development |
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33.3 |
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31.1 |
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99.5 |
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93.1 |
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Other (income) expense, net |
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(10.5 |
) |
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(4.3 |
) |
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(27.3 |
) |
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(15.4 |
) |
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OPERATING INCOME |
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262.8 |
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233.7 |
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753.3 |
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642.6 |
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Equity affiliates income |
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26.3 |
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24.2 |
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77.0 |
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65.8 |
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Interest expense |
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25.9 |
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29.5 |
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83.5 |
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92.7 |
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INCOME BEFORE TAXES AND MINORITY
INTEREST |
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263.2 |
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228.4 |
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746.8 |
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615.7 |
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Income tax provision |
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64.3 |
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63.4 |
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197.0 |
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169.6 |
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Minority interest (a) |
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8.3 |
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2.0 |
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17.1 |
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10.1 |
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NET INCOME |
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$190.6 |
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$163.0 |
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$532.7 |
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$436.0 |
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BASIC EARNINGS PER COMMON
SHARE |
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$.84 |
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$.73 |
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$2.35 |
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$1.95 |
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DILUTED EARNINGS PER COMMON
SHARE |
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$.82 |
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$.71 |
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$2.29 |
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$1.91 |
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WEIGHTED AVERAGE OF COMMON
SHARES OUTSTANDING (in millions) |
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226.7 |
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224.5 |
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227.1 |
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223.4 |
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WEIGHTED AVERAGE OF COMMON
SHARES OUTSTANDING ASSUMING
DILUTION (in millions) |
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232.4 |
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229.4 |
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232.9 |
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228.4 |
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DIVIDENDS DECLARED PER COMMON
SHARE Cash |
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$.32 |
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$.29 |
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$.93 |
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$.75 |
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(a) Minority interest primarily includes before-tax amounts.
The accompanying notes are an integral part of these statements.
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
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(Millions of dollars) |
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Three Months Ended |
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30 June |
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2005 |
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2004 |
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NET INCOME |
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$ |
190.6 |
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$ |
163.0 |
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OTHER COMPREHENSIVE INCOME, net of tax: |
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Net unrealized holding gain on investments, net of
income tax of $0 and $1.7 |
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.1 |
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3.0 |
|
Net unrecognized gain on derivatives qualifying as
hedges, net of income tax (benefit) of $.9 and $(.5) |
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1.8 |
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(.5 |
) |
Foreign currency translation adjustments, net of
income tax (benefit) of $45.7 and $(2.0) |
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(82.6 |
) |
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(28.8 |
) |
Change in minimum pension liability, net of income
tax of $21.5 |
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33.5 |
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TOTAL OTHER COMPREHENSIVE INCOME |
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(47.2 |
) |
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(26.3 |
) |
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COMPREHENSIVE INCOME |
|
$ |
143.4 |
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|
$ |
136.7 |
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(Millions of dollars) |
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Nine Months Ended |
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30 June |
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2005 |
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2004 |
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NET INCOME |
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$ |
532.7 |
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$ |
436.0 |
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OTHER COMPREHENSIVE INCOME, net of tax: |
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Net unrealized holding gain on investments, net of
income tax of $2.2 and $5.2 |
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3.8 |
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8.7 |
|
Net unrecognized gain (loss) on derivatives qualifying
as hedges, net of income tax (benefit) of $(2.4) and
$0 |
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(3.3 |
) |
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Foreign currency translation adjustments, net of
income tax (benefit) of $19.9 and $(24.9) |
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27.7 |
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42.2 |
|
Change in minimum pension liability, net of income
tax of $21.5 |
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33.5 |
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TOTAL OTHER COMPREHENSIVE INCOME |
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61.7 |
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50.9 |
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COMPREHENSIVE INCOME |
|
$ |
594.4 |
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|
$ |
486.9 |
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|
The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(Millions of dollars) |
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Nine Months Ended |
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30 June |
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|
2005 |
|
2004 |
|
OPERATING ACTIVITIES |
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|
|
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Net Income |
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$532.7 |
|
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|
$436.0 |
|
Adjustments to reconcile income to cash provided by operating activities: |
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|
|
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|
Depreciation and amortization |
|
|
531.8 |
|
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|
524.0 |
|
Deferred income taxes |
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|
19.2 |
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|
111.1 |
|
Undistributed earnings of unconsolidated affiliates |
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(42.2 |
) |
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|
(28.4 |
) |
Gain on sale of assets and investments |
|
|
(7.1 |
) |
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|
(1.8 |
) |
Other |
|
|
58.6 |
|
|
|
77.7 |
|
|
Subtotal |
|
|
1,093.0 |
|
|
|
1,118.6 |
|
Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures: |
|
|
|
|
|
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|
|
Trade receivables |
|
|
(34.1 |
) |
|
|
(272.7 |
) |
Inventories and contracts in progress |
|
|
(30.4 |
) |
|
|
(5.3 |
) |
Payables and accrued liabilities |
|
|
(138.9 |
) |
|
|
(22.6 |
) |
Other |
|
|
46.6 |
|
|
|
(121.9 |
) |
|
CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
936.2 |
|
|
|
696.1 |
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
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|
Additions to plant and equipment (a) |
|
|
(678.8 |
) |
|
|
(494.8 |
) |
Investment in and advances to unconsolidated affiliates |
|
|
(7.3 |
) |
|
|
(18.2 |
) |
Acquisitions, less cash acquired (b) |
|
|
(72.7 |
) |
|
|
(62.6 |
) |
Proceeds from sale of assets and investments |
|
|
54.0 |
|
|
|
18.9 |
|
Other |
|
|
3.7 |
|
|
|
.7 |
|
|
CASH USED FOR INVESTING ACTIVITIES |
|
|
(701.1 |
) |
|
|
(556.0 |
) |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Long-term debt proceeds |
|
|
505.4 |
|
|
|
255.3 |
|
Payments on long-term debt |
|
|
(593.3 |
) |
|
|
(296.6 |
) |
Net increase (decrease) in commercial paper and short-term borrowings |
|
|
238.0 |
|
|
|
(61.1 |
) |
Dividends paid to shareholders |
|
|
(204.7 |
) |
|
|
(153.7 |
) |
Purchase of Treasury Stock |
|
|
(376.4 |
) |
|
|
|
|
Proceeds from stock option exercises |
|
|
132.6 |
|
|
|
117.9 |
|
|
CASH USED FOR FINANCING ACTIVITIES |
|
|
(298.4 |
) |
|
|
(138.2 |
) |
|
Effect of Exchange Rate Changes on Cash |
|
|
(.9 |
) |
|
|
11.4 |
|
|
(Decrease) Increase in Cash and Cash Items |
|
|
(64.2 |
) |
|
|
13.3 |
|
Cash and Cash Items Beginning of Year |
|
|
146.3 |
|
|
|
76.2 |
|
|
Cash and Cash Items End of Period |
|
|
$82.1 |
|
|
|
$89.5 |
|
|
(a) Excludes capital lease additions of $2.3 and $7.0 in 2005 and 2004, respectively.
(b) Excludes $.6 of capital lease obligations assumed in acquisitions in 2005.
The accompanying notes are an integral part of these statements.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars) |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
30 June |
|
30 June |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gases |
|
|
$1,479.1 |
|
|
|
$1,337.9 |
|
|
|
$4,333.6 |
|
|
|
$3,826.3 |
|
Chemicals |
|
|
482.4 |
|
|
|
452.9 |
|
|
|
1,442.0 |
|
|
|
1,345.7 |
|
Equipment |
|
|
116.9 |
|
|
|
101.7 |
|
|
|
297.1 |
|
|
|
261.9 |
|
|
Segment and Consolidated Totals |
|
|
$2,078.4 |
|
|
|
$1,892.5 |
|
|
|
$6,072.7 |
|
|
|
$5,433.9 |
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gases |
|
|
$210.5 |
|
|
|
$213.0 |
|
|
|
$637.1 |
|
|
|
$584.7 |
|
Chemicals |
|
|
49.1 |
|
|
|
29.9 |
|
|
|
114.1 |
|
|
|
89.1 |
|
Equipment |
|
|
11.3 |
|
|
|
5.3 |
|
|
|
25.2 |
|
|
|
4.8 |
|
|
Segment Totals |
|
|
270.9 |
|
|
|
248.2 |
|
|
|
776.4 |
|
|
|
678.6 |
|
|
Corporate research and
development and other income
(expense) |
|
|
(8.1 |
) |
|
|
(14.5 |
) |
|
|
(23.1 |
) |
|
|
(36.0 |
) |
|
Consolidated Totals |
|
|
$262.8 |
|
|
|
$233.7 |
|
|
|
$753.3 |
|
|
|
$642.6 |
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gases |
|
|
$21.9 |
|
|
|
$19.7 |
|
|
|
$67.0 |
|
|
|
$56.4 |
|
Chemicals |
|
|
4.4 |
|
|
|
4.6 |
|
|
|
10.0 |
|
|
|
9.4 |
|
Equipment |
|
|
|
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
Segment and Consolidated Totals |
|
|
$26.3 |
|
|
|
$24.2 |
|
|
|
$77.0 |
|
|
|
$65.8 |
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars) |
|
|
30 June |
|
30 September |
|
|
2005 |
|
2004 |
|
Identifiable assets (a) |
|
|
|
|
|
|
|
|
Gases |
|
|
$7,653.1 |
|
|
|
$7,339.8 |
|
Chemicals |
|
|
1,355.6 |
|
|
|
1,402.5 |
|
Equipment |
|
|
239.5 |
|
|
|
226.4 |
|
|
Segment Totals |
|
|
9,248.2 |
|
|
|
8,968.7 |
|
|
Corporate assets |
|
|
400.3 |
|
|
|
441.9 |
|
|
Consolidated Totals |
|
|
$9,648.5 |
|
|
|
$9,410.6 |
|
|
(a) Identifiable assets are equal to total assets less investments in equity affiliates.
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars) |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
30 June |
|
30 June |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,185.0 |
|
|
$ |
1,086.9 |
|
|
$ |
3,473.9 |
|
|
$ |
3,073.2 |
|
Canada |
|
|
18.4 |
|
|
|
16.7 |
|
|
|
54.2 |
|
|
|
57.8 |
|
|
Total North America |
|
|
1,203.4 |
|
|
|
1,103.6 |
|
|
|
3,528.1 |
|
|
|
3,131.0 |
|
|
United Kingdom |
|
|
155.9 |
|
|
|
180.6 |
|
|
|
450.1 |
|
|
|
506.2 |
|
Spain |
|
|
122.9 |
|
|
|
115.1 |
|
|
|
353.0 |
|
|
|
328.2 |
|
Other Europe |
|
|
301.0 |
|
|
|
258.7 |
|
|
|
905.8 |
|
|
|
795.6 |
|
|
Total Europe |
|
|
579.8 |
|
|
|
554.4 |
|
|
|
1,708.9 |
|
|
|
1,630.0 |
|
|
Asia |
|
|
249.0 |
|
|
|
192.9 |
|
|
|
711.3 |
|
|
|
546.0 |
|
Latin America |
|
|
46.2 |
|
|
|
41.6 |
|
|
|
124.4 |
|
|
|
126.9 |
|
|
Total |
|
$ |
2,078.4 |
|
|
$ |
1,892.5 |
|
|
$ |
6,072.7 |
|
|
$ |
5,433.9 |
|
|
|
|
|
Note: |
|
Geographic information is based on country of origin. The Other Europe segment operates
principally in Belgium, France, Germany, and the Netherlands. The Asia segment operates
principally in China, Japan, Korea, and Taiwan. |
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except for share data)
MAJOR ACCOUNTING POLICIES
Refer to the companys 2004 annual report on Form 10-K for a description of major accounting
policies. There have been no material changes to these accounting policies during 2005.
Share-Based Compensation
At 30 June 2005, the company had various stock-based compensation plans as described in Note 15 to
the consolidated financial statements in the companys 2004 annual report on Form 10-K. The
company accounts for its stock option plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No compensation expense has been recognized in net income for stock
options, as options granted had an exercise price equal to the market value of the underlying
common stock on the date of grant. In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment, (SFAS No. 123R) as discussed under New Accounting Standards below.
The following table illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to its stock option plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
30 June |
|
30 June |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net income, as reported |
|
|
$190.6 |
|
|
|
$163.0 |
|
|
|
$532.7 |
|
|
|
$436.0 |
|
Deduct total stock option
employee compensation
expense determined under
fair value based method,
net of related tax
effects |
|
|
(6.9 |
) |
|
|
(7.8 |
) |
|
|
(20.6 |
) |
|
|
(22.9 |
) |
|
Pro forma net income |
|
|
$183.7 |
|
|
|
$155.2 |
|
|
|
$512.1 |
|
|
|
$413.1 |
|
|
Basic Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
$.84 |
|
|
|
$.73 |
|
|
|
$2.35 |
|
|
|
$1.95 |
|
Pro forma |
|
|
$.81 |
|
|
|
$.69 |
|
|
|
$2.26 |
|
|
|
$1.85 |
|
|
Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
$.82 |
|
|
|
$.71 |
|
|
|
$2.29 |
|
|
|
$1.91 |
|
Pro forma |
|
|
$.79 |
|
|
|
$.68 |
|
|
|
$2.20 |
|
|
|
$1.81 |
|
|
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and spoilage. SFAS No. 151 requires that these
costs be recognized as current-period charges. In addition, this Statement requires that
allocation of fixed production overheads be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning
after 15 June 2005. The company will adopt this Statement as of 1 October 2005. Adoption of SFAS
No. 151 will not have a material effect on the companys consolidated financial statements because
its inventory accounting policies are consistent with the requirements of this Statement.
9
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of
APB Opinion No. 29. The amendments made by SFAS No. 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.
SFAS No. 153 eliminates the narrow exception from fair value measurement for nonmonetary exchanges
of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial substance if
the entitys future cash flows are expected to change significantly as a result of the exchange.
The company adopted SFAS No. 153 as of 1 January 2005 and will apply the provisions of this
Statement prospectively to nonmonetary asset exchange transactions. This Statement is not expected
to have a material impact on the companys consolidated financial statements.
The company currently applies APB Opinion No. 25, Accounting for Stock Issued to Employees, in
accounting for its stock option plans. Accordingly, no compensation expense has been recognized
for employee stock options. In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment, (SFAS No. 123R) which requires companies to expense the grant-date fair
value of employee stock options. SFAS No. 123R was effective for interim or annual periods
beginning after 15 June 2005, with earlier adoption encouraged. However, in April 2005, the
Securities and Exchange Commission announced a compliance date effective for fiscal years beginning
after 15 June 2005. The company is planning to adopt this Statement on 1 October 2005 and restate
prior periods. The impact of expensing stock options in 2004 is a reduction of diluted earnings
per share of $.13 per the pro forma disclosures required by SFAS No. 123. The estimated impact in
2005 is expected to reduce diluted earnings per share by approximately $.12. The impact of SFAS
No. 123R in 2006 and beyond is dependent upon the design of future share-based compensation awards
granted by the company and the grant-date fair value calculated for these awards.
In December 2004, the FASB issued a FASB Staff Position (FSP) No. FAS 109-1, Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004 (the Act). FSP FAS 109-1 clarifies
that the tax deduction for manufacturers provided for in the Act should be accounted for as a
special deduction rather than as a tax rate reduction. The manufacturers deduction is not
available to the company until fiscal year 2006. The company is evaluating the effect the
manufacturers deduction will have in future fiscal years.
In December 2004, the FASB also issued FSP No. FAS 109-2, Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The
Act creates a temporary incentive for U. S. corporations to repatriate accumulated income earned
abroad by providing an 85% dividends received deduction for certain dividends from controlled
foreign corporations. The company may elect to apply this provision to qualifying earnings
repatriations in either fiscal year 2005 or 2006. The deduction is subject to several limitations,
and uncertainty remains as to how to interpret numerous provisions in the Act. FSP FAS 109-2
provides additional time for the company to evaluate the impact of the Act in applying SFAS No.
109. Pending evaluation and interpretation of key elements in the Act, the company is unable to
determine if it will utilize the temporary incentive and therefore is unable to determine the
amount of possible earnings repatriation or the tax impact of the dividends deduction.
In March 2005, the FASB issued Financial Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47). FIN 47 clarifies the term, conditional asset retirement
obligation, as used in SFAS No. 143 Accounting for Asset Retirement Obligations, which refers to
a legal obligation to perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event. Uncertainty about the timing and (or) method of
settlement of a conditional asset retirement obligation should be factored into the measurement of
the liability when sufficient information exists. FIN 47 is effective no later than the end of
fiscal years ending after 15 December 2005. The company is evaluating the effect FIN 47 will have
on its consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective
application for changes in accounting principle whenever practicable, rather than including the
cumulative effect of an accounting change in net income in the period of change. SFAS No. 154
applies to voluntary changes in accounting principle and also changes required by new accounting
pronouncements if specific transition provisions are not provided. The company will adopt this
Statement as of 1 October 2005.
10
GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the nine months ended 30
June 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gases |
|
Chemicals |
|
Equipment |
|
Total |
|
Balance as of 30 September 2004 |
|
$ |
721.2 |
|
|
$ |
99.3 |
|
|
$ |
10.0 |
|
|
$ |
830.5 |
|
Acquisitions and adjustments |
|
|
60.3 |
|
|
|
|
|
|
|
|
|
|
|
60.3 |
|
Currency translation |
|
|
10.0 |
|
|
|
.1 |
|
|
|
.2 |
|
|
|
10.3 |
|
|
Balance as of 30 June 2005 |
|
$ |
791.5 |
|
|
$ |
99.4 |
|
|
$ |
10.2 |
|
|
$ |
901.1 |
|
|
The increase in goodwill is primarily related to acquisitions within the U.S. homecare businesses.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
30 June |
|
30 June |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
NUMERATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income used in basic
and diluted EPS |
|
|
$190.6 |
|
|
|
$163.0 |
|
|
|
$532.7 |
|
|
|
$436.0 |
|
|
DENOMINATOR (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares used in basic
EPS |
|
|
226.7 |
|
|
|
224.5 |
|
|
|
227.1 |
|
|
|
223.4 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
5.1 |
|
|
|
4.3 |
|
|
|
5.2 |
|
|
|
4.4 |
|
Other award plans |
|
|
.6 |
|
|
|
.6 |
|
|
|
.6 |
|
|
|
.6 |
|
|
|
|
|
5.7 |
|
|
|
4.9 |
|
|
|
5.8 |
|
|
|
5.0 |
|
|
Weighted average number of
common shares and dilutive
potential common shares used
in diluted EPS |
|
|
232.4 |
|
|
|
229.4 |
|
|
|
232.9 |
|
|
|
228.4 |
|
|
BASIC EPS |
|
|
$.84 |
|
|
|
$.73 |
|
|
|
$2.35 |
|
|
|
$1.95 |
|
|
DILUTED EPS |
|
|
$.82 |
|
|
|
$.71 |
|
|
|
$2.29 |
|
|
|
$1.91 |
|
|
11
PENSION AND OTHER POSTRETIREMENT BENEFITS
The
components of net pension cost for the defined benefit plans and other postretirement benefit cost
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 30 June |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
Pension Benefits |
|
Other Benefits |
|
Service cost |
|
|
$18.4 |
|
|
$ |
18.0 |
|
|
|
$1.1 |
|
|
|
$1.2 |
|
Interest cost |
|
|
34.8 |
|
|
|
32.2 |
|
|
|
1.3 |
|
|
|
1.4 |
|
Expected return on plan assets |
|
|
(36.4 |
) |
|
|
(31.2 |
) |
|
|
|
|
|
|
|
|
Prior service cost amortization |
|
|
.9 |
|
|
|
.8 |
|
|
|
(.6 |
) |
|
|
(.2 |
) |
Actuarial loss amortization |
|
|
9.4 |
|
|
|
8.3 |
|
|
|
.3 |
|
|
|
.1 |
|
Settlement and curtailment charges |
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
Special termination benefits |
|
|
.3 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
Other |
|
|
.8 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
|
$28.2 |
|
|
|
$30.9 |
|
|
|
$2.1 |
|
|
|
$2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended 30 June |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
Pension Benefits |
|
Other Benefits |
|
Service cost |
|
|
$56.0 |
|
|
|
$54.1 |
|
|
|
$3.3 |
|
|
|
$3.6 |
|
Interest cost |
|
|
105.0 |
|
|
|
96.1 |
|
|
|
3.9 |
|
|
|
4.2 |
|
Expected return on plan assets |
|
|
(109.5 |
) |
|
|
(92.4 |
) |
|
|
|
|
|
|
|
|
Prior service cost amortization |
|
|
2.7 |
|
|
|
2.5 |
|
|
|
(1.7 |
) |
|
|
(.7 |
) |
Actuarial loss amortization |
|
|
28.5 |
|
|
|
25.6 |
|
|
|
1.0 |
|
|
|
.3 |
|
Transition amount amortization |
|
|
.1 |
|
|
|
(.2 |
) |
|
|
|
|
|
|
|
|
Settlement and curtailment charges |
|
|
.2 |
|
|
|
8.7 |
|
|
|
(.6 |
) |
|
|
|
|
Special termination benefits |
|
|
4.2 |
|
|
|
.8 |
|
|
|
|
|
|
|
|
|
Other |
|
|
1.5 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
|
$88.7 |
|
|
|
$97.5 |
|
|
|
$5.9 |
|
|
|
$7.4 |
|
|
During the nine months ended 30 June 2005, contributions of $119 were made. The company expects to
contribute approximately $13 to the pension plans during the remainder of 2005. For the nine
months ended 30 June 2004, contributions of $204 were made. During 2004, total contributions were
$277.
Effective 1 January 2005, the company amended the U.S. Retirement Savings Plan (see Note 18 to the
companys 2004 annual report) which resulted in a remeasurement of the pension expense and
liability related to the plan. The significant assumptions as of the 1 January 2005 remeasurement
date did not differ from those used in the 30 September 2004 valuation. The remeasurement resulted
in a reduction in the additional minimum liability of $33.5 after-tax, which has been reported as a
component of comprehensive income within shareholders equity. The reduction in the additional
minimum liability resulted principally from improved plan asset positions. The impact of the
remeasurement on 2005 pension expense was not material.
12
COMMITMENTS AND CONTINGENCIES
In the normal course of business the company has commitments, lawsuits, contingent liabilities and
claims. However, the company does not expect that any sum it may have to pay in connection with
these matters, or the matters described below, will have a materially adverse effect on its
consolidated financial condition, liquidity or results of operations.
In 1999, the company made an investment in INOX, an Indian industrial gases company. As part of
that transaction, put options were issued which gave the other (joint 50%) shareholders the right
to require the company to purchase their shares (approximately 5.1 million) of INOX (renamed
INOXAP) at a predefined price. The option period began January 2004 and extended through January
2006. On 22 January 2005, the company and the other shareholders extended and revised the terms of
the option agreement. The other shareholders may give notice to exercise the revised put option
between October and December 2010. The option, if exercised, would be effective on 31 July 2011.
The option may also be exercised within six months of the death or permanent incapacity of the
current Managing Director of INOXAP. The revised option price is based on a multiple of earnings
formula, but not less than 630 Rupees per share. The U.S. dollar price of purchasing all 5.1
million shares at the minimum per share amount based on the current exchange rate would be
approximately $74.
In July 2003, Honeywell International, Inc. and GEM Microelectronics Materials, LLC (Honeywell)
filed suit against the company alleging breach of contract resulting from the termination of a
strategic alliance agreement dated 1 October 1998. On 6 August 2004, the Delaware Chancery Court
decided that the company must pay damages in the amount of $8.1. The amount was recorded against
previously established accruals. Honeywell filed an appeal of the courts decision and the company
filed a cross appeal. On 29 March 2005, the Delaware Supreme Court affirmed the Delaware Chancery
Court opinion in part and reversed in part, ruling that Honeywell was entitled to a recalculation
of the award based upon five years of damages versus two years used for the 6 August 2004 judgment.
On 13 April 2005, the company filed a motion with the Delaware Supreme Court to reconsider the
ruling. On 12 May 2005, the Delaware Supreme Court denied the request to reconsider its earlier
ruling; the matter was remanded to the trial court for further proceedings consistent with the
Supreme Courts 29 March 2005 opinion. The trial court, at a hearing on 15 July 2005, ruled that
it will hold a damages hearing on this matter later this year.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Millions of dollars, except for share data)
The disclosures in this quarterly report are complementary to those made in the companys 2004
annual report on Form 10-K. An analysis of results for the third quarter and first nine months of
2005, including an update to the companys 2005 Outlook, is provided in the Managements Discussion
and Analysis to follow.
All comparisons are to the corresponding period in the prior year unless otherwise stated. All
amounts presented are in accordance with accounting principles generally accepted in the United
States of America.
THIRD QUARTER 2005 VS. THIRD QUARTER 2004
THIRD QUARTER 2005 IN SUMMARY
|
|
|
Sales of $2,078 were up 10% from the prior year, reflecting strong performance
across the Gases, Chemicals and Equipment segments. |
|
|
|
|
Operating income of $263 increased 12%, driven by continued improvement in Chemicals and
Equipment. |
|
|
|
|
In the Gases segment, volumes increased in almost all businesses with the largest gains
in Electronics, Asia, and North American liquid bulk. |
|
|
|
|
In the Chemicals segment, operating income increased significantly from increased
pricing to recover higher raw material costs, and improved productivity. |
|
|
|
|
In the Equipment segment, results improved mainly on higher liquefied natural gas (LNG)
heat exchanger activity. |
|
|
|
|
Results benefited from a lower effective tax rate resulting from the companys ongoing
tax strategies. |
|
|
|
|
Net income of $191 increased 17% and diluted earnings per share of $.82 increased 15%. A
summary table of changes in earnings per share is presented below. |
|
|
|
|
The company purchased treasury stock for $376 as part of its $500 share repurchase
program. |
|
|
|
|
For a discussion of the challenges, risks, and opportunities on which management is
focused, refer to the update to the companys 2005 Outlook provided on pages 27-29. |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Earnings per Share |
|
|
Three Months Ended |
|
Increase |
|
|
30 June |
|
(Decrease) |
|
|
2005 |
|
2004 |
|
|
|
|
|
Diluted Earnings per Share |
|
|
$.82 |
|
|
|
$.71 |
|
|
|
$.11 |
|
|
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Divestitures |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Currency |
|
|
|
|
|
|
|
|
|
|
.02 |
|
Underlying business |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.12 |
|
Price/raw materials |
|
|
|
|
|
|
|
|
|
|
(.02 |
) |
Costs |
|
|
|
|
|
|
|
|
|
|
(.05 |
) |
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Effective tax rate |
|
|
|
|
|
|
|
|
|
|
.03 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
(.02 |
) |
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
|
Other |
|
|
|
|
|
|
|
|
|
|
.02 |
|
|
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
$.11 |
|
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
|
Three Months Ended |
|
|
|
|
30 June |
|
|
|
|
2005 |
|
2004 |
|
% Change |
|
Sales |
|
|
$2,078.4 |
|
|
|
$1,892.5 |
|
|
|
10 |
% |
Cost of sales |
|
|
1,531.7 |
|
|
|
1,388.3 |
|
|
|
10 |
% |
Selling and administrative |
|
|
261.1 |
|
|
|
243.7 |
|
|
|
7 |
% |
Research and development |
|
|
33.3 |
|
|
|
31.1 |
|
|
|
7 |
% |
Other (income) expense, net |
|
|
(10.5 |
) |
|
|
(4.3 |
) |
|
|
144 |
% |
Operating Income |
|
|
262.8 |
|
|
|
233.7 |
|
|
|
12 |
% |
Equity affiliates income |
|
|
26.3 |
|
|
|
24.2 |
|
|
|
9 |
% |
Interest expense |
|
|
25.9 |
|
|
|
29.5 |
|
|
|
(12 |
%) |
Effective tax rate |
|
|
25.2 |
% |
|
|
28.0 |
% |
|
|
(2.8 |
%) |
Net Income |
|
|
190.6 |
|
|
|
163.0 |
|
|
|
17 |
% |
Basic Earnings per Share |
|
|
$.84 |
|
|
|
$.73 |
|
|
|
15 |
% |
Diluted Earnings per Share |
|
|
$.82 |
|
|
|
$.71 |
|
|
|
15 |
% |
|
15
Discussion of Consolidated Results
|
|
|
Sales |
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
1% |
Divestitures |
|
(1%) |
Currency |
|
2% |
Natural gas/raw material cost pass through |
|
2% |
Underlying business |
|
|
Volume |
|
5% |
Price/mix |
|
1% |
|
Total Consolidated Change |
|
10% |
|
Sales of $2,078.4 increased 10%, or $185.9. Underlying base business growth increased sales 6%.
Sales increased 5% from improved volumes, primarily in the Gases segment, as discussed in the
Segment Analysis which follows. Overall the impact of pricing was favorable, increasing sales by
1%. Price increases within the Chemicals segment were partially offset by decreases within
Gases, primarily due to the lower average selling prices for electronic specialty materials.
The acquisitions of U.S. homecare companies accounted for 1% of the increase. Divestitures of
the companys European methylamines and derivatives business (EM&D) and its Mexican polymers
business accounted for a 1% decrease. Sales increased 2% from favorable currency effects, driven
primarily by the weakening of the U.S. dollar against the Euro and the Pound Sterling. Higher
natural gas/raw material contractual cost pass through to customers accounted for an additional
2% of the sales increase.
Operating Income
Operating income of $262.8 increased 12%, or $29.1. Favorable operating income variances resulted
from higher volumes for $40 and favorable currency effects for $8. The favorable impact from
higher volumes, as discussed in the Segment Analysis which follows, was driven by strong volumes
broadly across the Gases segment and also higher LNG activity in the Equipment segment. In the
Chemicals segment, operating income increased by $10 from improved recovery of raw material cost
increases. In the Gases segment, the overall impact of pricing net of variable costs was
unfavorable by $19, driven by the lower average selling prices for electronic specialty materials
and higher power and fuel expenses. Operating income was unfavorably impacted by higher costs for
$14, including implementation costs for productivity initiatives and inflation which were partially offset by productivity
gains.
Equity Affiliates Income
Income from equity affiliates of $26.3 increased $2.1, or 9%. Gases equity affiliates income
increased $2.2, driven by the higher results reported by the Latin American, Asian, and European
affiliates.
16
Selling and Administrative Expense (S&A)
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
3% |
Divestitures |
|
(1%) |
Currency |
|
2% |
Other costs |
|
3% |
|
Total S&A Change |
|
7% |
|
S&A expense of $261.1 increased 7%, or $17.4. S&A as a percent of sales declined to 12.6% from
12.9% in 2004. The acquisitions of U.S. homecare companies increased S&A by 3%. Currency effects,
driven by the weakening of the U.S. dollar against the Euro and the Pound Sterling, increased S&A
by 2%. Underlying costs increased 3%, principally due to increased business volumes.
Research and Development (R&D)
R&D increased 7%, or $2.2. R&D spending as a percent of sales was 1.6% in both 2005 and 2004.
Other (Income) Expense, Net
Other income of $10.5 increased $6.2. Items recorded to other income arise from transactions and
events not directly related to the principal income earning activities of the company. Results in
2004 included an accrual for costs associated with uninsured litigation. Otherwise, no individual
items were material in comparison to the prior year.
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
Three Months |
|
|
Ended 30 June |
|
|
2005 |
|
2004 |
|
Interest incurred |
|
$ |
29.7 |
|
|
$ |
30.8 |
|
Less: interest capitalized |
|
|
3.8 |
|
|
|
1.3 |
|
|
Interest expense |
|
$ |
25.9 |
|
|
$ |
29.5 |
|
|
Interest incurred decreased $1.1. The decrease resulted primarily from lower average interest
rates, partially offset by the impact of a weaker U.S. dollar on the translation of foreign
currency interest. Capitalized interest was higher by $2.5 due to higher levels of construction in
progress for plant and equipment built by the company, particularly from projects within Energy and
Process Industries (EPI), Asia Gases, and Electronics.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income before taxes less minority
interest.
The effective tax rate was 25.2% in 2005 and 28.0% in 2004. The third quarter results included a
year-to-date adjustment such that the companys effective tax rate for the nine months ended 30
June 2005 is 27.0%, comparable to the 2004 rate of 27.3% for the twelve months ended 30 September
2004.
17
Net Income
Net income was $190.6 compared to $163.0 in 2004. Diluted earnings per share of $.82 compared to
$.71 in 2004. A summary table of changes in earnings per share is presented on page 15.
Segment Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Gases |
|
|
Three Months |
|
|
|
|
Ended 30 June |
|
|
|
|
2005 |
|
2004 |
|
% Change |
|
Sales |
|
$ |
1,479.1 |
|
|
$ |
1,337.9 |
|
|
|
11 |
% |
Operating income |
|
|
210.5 |
|
|
|
213.0 |
|
|
|
(1 |
%) |
Equity affiliates income |
|
|
21.9 |
|
|
|
19.7 |
|
|
|
11 |
% |
|
|
|
|
Gases Sales |
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
1% |
Divestitures |
|
|
Currency |
|
2% |
Natural gas/raw material cost pass through |
|
1% |
Underlying business |
|
|
Volume |
|
7% |
Price/mix |
|
|
|
Total Gases Change |
|
11% |
|
Sales of $1,479.1 increased 11%, or $141.2. The acquisitions of U.S. homecare companies
accounted for 1% of the increase. Sales increased 2% from favorable currency effects,
driven primarily by the weakening of the U.S. dollar against the Euro and the Pound
Sterling. Higher natural gas contractual cost pass through to customers accounted for an
additional 1% of the sales increase.
Underlying base business sales growth of 7% was driven by higher volumes broadly across the
Gases segment, with the largest gains in Electronics, Asia and North American liquid bulk.
|
|
|
Electronic specialty materials volumes increased, due to growth in both the
semiconductor and flat-panel display markets. Volume gains kept pace with pricing
declines. |
|
|
|
On-site and pipeline volumes in EPI were up 3%. Oxygen and nitrogen volumes in
North America improved from increased volumes sold to competitors and the refining
industry. HYCO (hydrogen and carbon monoxide) volumes in North America benefited
from new plant capacity. |
|
|
|
Liquid bulk volumes in North America improved 8% overall, with higher volumes
across most product lines. Liquid oxygen (LOX) and liquid nitrogen (LIN) volumes
improved 9%, driven by strong demand in the food and government sectors, as well as
strong LIN demand in oilfield services. Liquid hydrogen volumes improved from
demand by the government sector. Helium volumes improved due to increased MRI
activity. |
|
|
|
Liquid bulk volumes in Europe declined 2%. While underlying base business has
grown from the signing of new customer accounts, these additions did not fully
offset lost business, including reduced demand at existing accounts and the
conversion of certain liquid customers to on-site supply. |
|
|
|
Packaged gas volumes in Europe were flat, reflecting a weak manufacturing
environment. |
|
|
|
LOX/LIN volumes in Asia were up a strong 22%, driven by continued solid demand
growth across the region, particularly in Korea and Taiwan. |
18
Overall, the impact of pricing on sales was slightly unfavorable, primarily driven by lower
average selling prices of electronic specialty materials.
|
|
|
The average selling price for electronic specialty materials declined as pricing
pressure continued. |
|
|
|
Average pricing for LOX/LIN in North America decreased 1%, primarily from the
unfavorable mix impact of sales to higher volume customers. |
|
|
|
LOX/LIN pricing in Europe improved 1%, due to pricing programs and favorable
customer mix. |
Gases Operating Income
Operating income of $210.5 decreased 1%, or $2.5. Favorable operating income variances
resulted from higher volumes for $35, favorable currency effects for $7, and acquisitions
for $4. Operating income declined $27 from higher costs, including higher plant
maintenance spending and productivity implementation costs. The impact of pricing net of
variable costs reduced operating income by $19, driven by the lower average selling price
for electronic specialty materials and higher power and fuel expenses.
Gases Equity Affiliates Income
Gases equity affiliates income of $21.9 increased $2.2, with higher income reported by the
Latin American, Asian and European affiliates.
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals |
|
|
Three Months |
|
|
|
|
Ended 30 June |
|
|
|
|
2005 |
|
2004 |
|
% Change |
|
Sales |
|
$ |
482.4 |
|
|
$ |
452.9 |
|
|
|
7 |
% |
Operating income |
|
|
49.1 |
|
|
|
29.9 |
|
|
|
64 |
% |
Equity affiliates income |
|
|
4.4 |
|
|
|
4.6 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
Chemicals Sales |
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
|
|
|
Divestitures |
|
|
(4 |
%) |
Currency |
|
|
2 |
% |
Natural gas/raw material cost pass
through |
|
|
4 |
% |
Underlying business |
|
|
|
|
Volume |
|
|
(2 |
%) |
Price/mix |
|
|
7 |
% |
|
Total Chemicals Change |
|
|
7 |
% |
|
Sales of $482.4 increased 7%, or $29.5. Sales decreased 4% from the impact of the
divestitures, which included the companys European methylamines and derivatives business
(EM&D) and its Mexican polymers business. Sales increased 2% from favorable currency
effects, driven primarily by the weakening of the U.S. dollar against the Euro. Higher raw
material costs contractually passed through to customers accounted for an additional 4% of
the sales increase. Sales increased 7% from pricing, driven by price increases in the
emulsions and higher amines product lines.
Overall, sales declined 2% from the impact of lower volumes.
|
|
|
In Performance Materials, base business volumes were about flat as gains in epoxy
additives were offset by lower emulsions volumes. Epoxy additive growth was driven by
higher volumes in all regions in the industrial coatings and construction markets.
Worldwide emulsion volumes decreased, as the company managed price increases across this
business in a difficult raw material cost environment. |
|
|
|
In Chemical Intermediates, base business volumes declined 7%, driven by lower volumes in
higher amines, due to a poor growing season in South America and lost volumes in response
to the companys pricing actions. |
19
Chemicals Operating Income
Operating income of $49.1 increased 64%, or $19.2. Operating income increased by $10 from improved
recovery of raw material cost increases. Improved cost performance and productivity increased
operating income by $6.
Chemicals Equity Affiliates Income
Chemicals equity affiliates income of $4.4 compared to $4.6 in 2004. Chemicals equity affiliates
income consists primarily of a global polymer joint venture.
|
|
|
|
|
|
|
|
|
Equipment |
|
|
Three Months |
|
|
Ended 30 June |
|
|
2005 |
|
2004 |
|
Sales |
|
$ |
116.9 |
|
|
$ |
101.7 |
|
Operating income |
|
|
11.3 |
|
|
|
5.3 |
|
|
Equipment Sales and Operating Income
Sales and operating income increased primarily from higher liquefied natural gas (LNG) heat
exchanger sales activity.
All Other
All other comprises corporate expenses and income not allocated to the segments, primarily
corporate research and development expense. The operating loss of $8.1 was lower by $6.4. Results
in 2004 included an accrual for costs associated with uninsured litigation. Otherwise, no items
individually were material in comparison to the prior year.
20
NINE MONTHS 2005 VS. NINE MONTHS 2004
NINE MONTHS 2005 IN SUMMARY
|
|
|
Sales of $6,073 were up 12% from the prior year, driven by higher volumes across
all business segments. Gases segment volumes were strong, driven by higher volumes in
Electronics, EPI, and Asia and North America base gases. In Chemicals, volumes improved in
Performance Materials, driven by gains in epoxy additives. Equipment segment sales
increased, mainly on higher liquefied natural gas (LNG) heat exchanger sales activity. |
|
|
|
|
Operating income of $753 increased 17%. Strong volume increases, favorable currency
effects and productivity gains were partially offset by higher costs, including
implementation costs for productivity initiatives, and lower electronics specialty material
pricing. |
|
|
|
|
Challenges in the Chemicals segment continued during the first quarter of 2005 as rising
feedstock costs outpaced price increases. Since the second quarter, operating income has
increased significantly and margins are improving from increased pricing to recover raw
material costs and from improved cost performance. |
|
|
|
|
As part of the global cost reduction plan announced in the third quarter of 2003, the
company decided to pursue the sale of its European methylamines and derivatives business
(EM&D). After a long regulatory process, the sale of the EM&D business was completed in
December 2004. |
|
|
|
|
Net income of $533 increased 22% and diluted earnings per share of $2.29 increased 20%.
A summary table of changes in earnings per share is presented below. |
|
|
|
|
The company purchased treasury stock for $376 as part of its $500 share repurchase
program. |
|
|
|
|
For a discussion of the challenges, risks, and opportunities on which management is
focused, refer to the update to the companys 2005 Outlook provided on pages 27-29. |
21
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Earnings per Share |
|
|
Nine Months Ended |
|
Increase |
|
|
30 June |
|
(Decrease) |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
2.29 |
|
|
$ |
1.91 |
|
|
$ |
.38 |
|
|
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
.03 |
|
Divestitures |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Currency |
|
|
|
|
|
|
|
|
|
|
.08 |
|
Underlying business |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.39 |
|
Price/raw materials |
|
|
|
|
|
|
|
|
|
|
(.08 |
) |
Costs |
|
|
|
|
|
|
|
|
|
|
(.08 |
) |
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
.04 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
.03 |
|
Effective tax rate |
|
|
|
|
|
|
|
|
|
|
.03 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
(.03 |
) |
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
(.04 |
) |
|
Other |
|
|
|
|
|
|
|
|
|
|
.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
$ |
.38 |
|
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
|
Nine Months Ended |
|
|
|
|
30 June |
|
|
|
|
2005 |
|
2004 |
|
% Change |
|
Sales |
|
|
$6,072.7 |
|
|
|
$5,433.9 |
|
|
|
12 |
% |
Cost of sales |
|
|
4,476.1 |
|
|
|
3,988.1 |
|
|
|
12 |
% |
Selling and administrative |
|
|
771.1 |
|
|
|
725.5 |
|
|
|
6 |
% |
Research and development |
|
|
99.5 |
|
|
|
93.1 |
|
|
|
7 |
% |
Other (income) expense, net |
|
|
(27.3 |
) |
|
|
(15.4 |
) |
|
|
77 |
% |
Operating Income |
|
|
753.3 |
|
|
|
642.6 |
|
|
|
17 |
% |
Equity affiliates income |
|
|
77.0 |
|
|
|
65.8 |
|
|
|
17 |
% |
Interest expense |
|
|
83.5 |
|
|
|
92.7 |
|
|
|
(10 |
%) |
Effective tax rate |
|
|
27.0 |
% |
|
|
28.0 |
% |
|
|
(1.0 |
%) |
Net Income |
|
|
532.7 |
|
|
|
436.0 |
|
|
|
22 |
% |
Basic Earnings per Share |
|
|
$2.35 |
|
|
|
$1.95 |
|
|
|
21 |
% |
Diluted Earnings per Share |
|
|
$2.29 |
|
|
|
$1.91 |
|
|
|
20 |
% |
|
22
Discussion of Consolidated Results
|
|
|
Sales |
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
1% |
Divestitures |
|
(1%) |
Currency |
|
2% |
Natural gas/raw material cost pass through |
|
2% |
Underlying business |
|
|
Volume |
|
7% |
Price/mix |
|
1% |
|
Total Consolidated Change |
|
12% |
|
Sales of $6,072.7 increased 12%, or $638.8. Underlying base business growth accounted for 8% of
the increase. Sales increased 7% from improved volumes across all business segments, as
discussed in the Segment Analysis which follows. The acquisitions of U.S. homecare companies
accounted for 1% of the increase. Divestitures of the companys EM&D business and its Mexican
polymers business accounted for a 1% decrease. Sales increased 2% from favorable currency
effects, driven primarily by the weakening of the U.S. dollar against the Euro and the Pound
Sterling. Higher natural gas/raw material contractual cost pass through to customers accounted
for an additional 2% of the sales increase.
Operating Income
Operating income of $753.3 increased 17%, or $110.7. Favorable operating income variances resulted
from higher volumes for $125, favorable currency effects for $26, and acquisitions for $10. The
favorable impact from higher volumes, as discussed in the Segment Analysis which follows, resulted
from improved volumes across all business segments. In the Gases segment, the overall impact of
pricing net of variable costs was unfavorable by $35, driven by the lower average selling prices
for electronic specialty materials and higher power and fuel expenses. Operating income decreased
$23 from higher costs, including costs to implement productivity initiatives.
Equity Affiliates Income
Income from equity affiliates of $77.0 increased $11.2, or 17%. Gases equity affiliates income
increased $10.6, with higher income reported by the Latin American, European, Asian and worldwide
Electronics affiliates.
Selling and Administrative Expense (S&A)
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
3% |
Divestitures |
|
|
Currency |
|
2% |
Other costs |
|
1% |
|
Total S&A Change |
|
6% |
|
S&A expense of $771.1 increased 6%, or $45.6. S&A as a percent of sales declined to 12.7% from
13.4% in 2004. The acquisitions of U.S. homecare companies increased S&A by 3%. Currency effects,
driven by the weakening of the U.S. dollar against the Euro and the Pound Sterling, increased S&A
by 2%. Underlying costs increased 1%, as the unfavorable impacts of implementation costs
associated with productivity initiatives and inflation were partially offset by productivity gains.
Research and Development (R&D)
R&D increased 7%, or $6.4. R&D spending declined slightly as a percent of sales to 1.6% from 1.7%
in 2004.
23
Other (Income) Expense, Net
Other income of $27.3 increased $11.9. Items recorded to other income arise from transactions and
events not directly related to the principal income earning activities of the company. Results in
2004 included an accrual for costs associated with uninsured litigation. Otherwise, no individual
items were material in comparison to the prior year.
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
Nine Months |
|
|
Ended 30 June |
|
|
2005 |
|
2004 |
|
Interest incurred |
|
$ |
92.1 |
|
|
$ |
96.7 |
|
Less: interest capitalized |
|
|
8.6 |
|
|
|
4.0 |
|
|
Interest expense |
|
$ |
83.5 |
|
|
$ |
92.7 |
|
|
Interest incurred decreased $4.6. The decrease resulted from a lower average debt balance
excluding currency effects and lower average interest rates, partially offset by the impact of a
weaker U.S. dollar on the translation of foreign currency interest. Capitalized interest was
higher by $4.6 due to higher levels of construction in progress for plant and equipment built by
the company, particularly from projects within Asia Gases, EPI, and Electronics.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income before taxes less minority
interest.
The effective tax rate was 27.0% in 2005 and 28.0% in 2004. The effective tax rate of 27.0% is
comparable to the 2004 rate of 27.3% for the twelve months ended 30 September 2004.
Net Income
Net income was $532.7 compared to $436.0 in 2004. Diluted earnings per share of $2.29 compared to
$1.91 in 2004. A summary table of changes in earnings per share is presented on page 22.
Segment Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
Gases |
|
|
Nine Months |
|
|
|
|
Ended 30 June |
|
|
|
|
2005 |
|
2004 |
|
% Change |
|
Sales |
|
$ |
4,333.6 |
|
|
$ |
3,826.3 |
|
|
|
13 |
% |
Operating income |
|
|
637.1 |
|
|
|
584.7 |
|
|
|
9 |
% |
Equity affiliates income |
|
|
67.0 |
|
|
|
56.4 |
|
|
|
19 |
% |
|
|
|
|
Gases Sales |
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
2% |
Divestitures |
|
|
Currency |
|
2% |
Natural gas/raw material cost pass through |
|
2% |
Underlying business |
|
|
Volume |
|
8% |
Price/mix |
|
(1%) |
|
Total Gases Change |
|
13% |
|
24
Sales of $4,333.6 increased 13%, or $507.3. The acquisitions of U.S. homecare companies
accounted for 2% of the increase. Sales increased 2% from favorable currency effects,
driven primarily by the weakening of the U.S. dollar against the Euro and also the Pound
Sterling. Higher natural gas cost contractual pass through to customers accounted for an
additional 2% of the sales increase.
Underlying base business sales growth increased sales 7%, with an 8% increase driven by
higher volumes in Electronics, EPI, and Asia and North America base gases.
|
|
|
Electronic specialty materials volumes increased, due to growth in both the
semiconductor and flat-panel display markets. |
|
|
|
On-site and pipeline volumes in EPI were up 8%, led by stronger HYCO (hydrogen
and carbon monoxide) volumes. Volumes in 2005 benefited from new plant capacity.
Hydrogen growth continues to be led by the ongoing trend for refiners to meet lower
sulfur specifications. |
|
|
|
Liquid bulk volumes in North America improved 6%. Liquid oxygen (LOX) and
liquid nitrogen (LIN) volumes improved 5%, along with the improving economy. Liquid
hydrogen volumes improved from demand by the government sector. Helium volumes
improved from favorable customer order patterns and increased MRI activity. |
|
|
|
Liquid bulk volumes in Europe declined 2%. While underlying base business has
grown from the signing of new customer accounts, these additions did not fully
offset lost business, including reduced demand at existing accounts and the
conversion of certain liquid customers to on-site supply. |
|
|
|
Packaged gas volumes in Europe declined 1%, reflecting a weak manufacturing
environment. |
|
|
|
LOX/LIN volumes in Asia were up a strong 21%, driven mainly by solid demand
growth across the region, particularly in Korea and Taiwan. |
Overall, the net impact of pricing decreased sales by 1%, with lower average selling prices
of electronic specialty materials partially offset by higher liquid bulk pricing in Europe.
|
|
|
The average selling price for electronic specialty materials declined as pricing
pressure continued. |
|
|
|
Average pricing for LOX/LIN in North America was flat compared to the prior
year. |
|
|
|
LOX/LIN pricing in Europe increased 2%, due to pricing programs and favorable
customer mix. |
Gases Operating Income
Operating income of $637.1 increased 9%, or $52.4. Favorable operating income variances resulted
from higher volumes for $97, favorable currency effects for $21, and acquisitions for $10.
Operating income declined $41 from higher costs, including costs to implement productivity
initiatives and higher plant maintenance spending. The impact of lower pricing net of variable
costs decreased operating income by $35, driven by the lower average selling prices for electronic
specialty materials and higher power and fuel expenses.
Gases Equity Affiliates Income
Gases equity affiliates income of $67.0 increased $10.6, with higher income reported by
the Latin American, European, Asian and worldwide Electronics affiliates.
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals |
|
|
Nine Months |
|
|
|
|
Ended 30 June |
|
|
|
|
2005 |
|
2004 |
|
% Change |
|
Sales |
|
$ |
1,442.0 |
|
|
$ |
1,345.7 |
|
|
|
7 |
% |
Operating income |
|
|
114.1 |
|
|
|
89.1 |
|
|
|
28 |
% |
Equity affiliates income |
|
|
10.0 |
|
|
|
9.4 |
|
|
|
6 |
% |
|
25
|
|
|
Chemicals Sales |
|
|
% Change from |
|
|
Prior Year |
|
Acquisitions |
|
|
Divestitures |
|
(4%) |
Currency |
|
1% |
Natural gas/raw material cost pass
through |
|
5% |
Underlying business |
|
|
Volume |
|
1% |
Price/mix |
|
4% |
|
Total Chemicals Change |
|
7% |
|
Sales of $1,442.0 increased 7%, or $96.3. Sales decreased 4% from the impact of the
divestitures, which included the companys EM&D business and its Mexican polymers business.
Sales increased 1% from favorable currency effects, driven primarily by the weakening of
the U.S. dollar against the Euro. Higher raw material costs contractually passed through
to customers accounted for 5% of the sales increase.
Underlying base business increased sales 5%. Sales increased 4% from pricing, driven by
price increases in the emulsions and higher amines product lines. Sales increased 1% from
higher base business volumes.
|
|
|
In Performance Materials, base business volumes increased 2% as gains in epoxy
and polyurethane additives were partially offset by lower emulsion volumes. Epoxy
and polyurethane additive volumes were strong in Asia and North America but
relatively weak in Europe. Worldwide emulsions volumes declined, as the company
continues to focus on raising prices across this business to recover sharp
increases in raw material costs. |
|
|
|
In Chemical Intermediates, base business volumes were flat, as improvements in
polyurethane intermediates (PUI) were offset by lower volumes in higher amines. PUI volumes
improved compared to 2004, which reflected the unfavorable impact from customer outages,
and volumes increased from new or expanded supply relationships with several customers.
Volumes in higher amines were lower due to the companys efforts to raise prices, raw
material shortages in the first quarter, and the impact of a poor growing season in South
America in the second and third quarters. |
Chemicals Operating Income
Operating income of $114.1 increased 28%, or $25.0. Higher volumes accounted for an increase of $9
in operating income. Favorable variances resulted from currency for $5, divestitures for $5, and
lower operating costs by $4. In the first quarter, operating income declined $14 from higher costs
for major raw materials not contractually passed through to customers or recovered via price
increases. However, in the second quarter, higher raw material costs were recovered through a
combination of higher prices and contractual pass through. In the third quarter, operating income
increased by $10 from improved recovery of raw material cost increases. Beginning in the first
quarter, the company benefited from the favorable impact of a long-term supply agreement to
purchase methanol for domestic methylamines production.
Chemicals Equity Affiliates Income
Chemicals equity affiliates income of $10.0 increased $.6. Chemicals equity affiliates income
consists primarily of a global polymer joint venture.
|
|
|
|
|
|
|
|
|
Equipment |
|
|
Nine Months |
|
|
Ended 30 June |
|
|
2005 |
|
2004 |
|
Sales |
|
$ |
297.1 |
|
|
$ |
261.9 |
|
Operating income |
|
|
25.2 |
|
|
|
4.8 |
|
|
26
Equipment Sales and Operating Income
Sales and operating income increased primarily from higher liquefied natural gas (LNG) heat
exchanger sales activity. Currency effects improved sales by 2%, due primarily to the
strengthening of the Pound Sterling.
The sales backlog at 30 June 2005 was $624 compared to $297 at 30 September 2004. The backlog
at 30 June 2005 included ten LNG heat exchangers.
All Other
All other comprises corporate expenses and income not allocated to the segments, primarily
corporate research and development expense. The operating loss of $23.1 was lower by $12.9.
Results in 2004 included an accrual for costs associated with uninsured litigation. Otherwise, no
items individually were material in comparison to the prior year.
PENSION BENEFITS
Refer to the notes to the consolidated financial statements on page 12 for details on pension
cost and cash contributions. For additional information on the companys pension benefits and
associated accounting policies, refer to the Pension Benefits section of Managements Discussion
and Analysis and Note 18 to the consolidated financial statements in the companys 2004 annual
report on Form 10-K.
2005 OUTLOOK
The companys top priority is to improve return on capital. Action plans are in place to load
existing assets, drive productivity, focus capital spending on growth areas, and continuously
improve the companys portfolio of businesses. The discussion below highlights some of these action plans, and outlines
the areas of challenge, risk, and opportunity on which management is focused.
Economic Environment
Domestic manufacturing activity in the first nine months of 2005 improved, up 4.3% from the prior
year. The company originally anticipated domestic manufacturing growth between 3% and 6% for the
year, and the current forecast is between 4-5%. The original estimate for growth in silicon
processed by the semiconductor industry was in the range of 0-5%, with the current estimate at -4%
to 2%.
Gases
The Gases segment demonstrated both sales and operating income growth in the first nine months and
the company expects a strong year-on-year improvement for the full year. The company has plans in
place to improve Gases operating margin going forward and expects to see progress in the fourth
quarter.
For the first nine months, EPI volumes were up 8%, led by stronger HYCO volumes. The company
expects modest volume gains in the fourth quarter, with more significant increases beginning next
fiscal year from the startup of new hydrogen plants. Hydrogen growth continues to be led by the
ongoing trend for refiners to meet lower sulfur specifications and bidding activity remains high.
The company now has five facilities currently under construction and scheduled to come on-stream
next fiscal year.
In Electronics, the company saw significant year-on-year volume gains in the first nine months,
while the average selling price for electronic specialty materials declined. The company
anticipates pricing pressure will continue on some specialty gases, but overall pricing of these
products is in line with expectations.
In North America liquid bulk, the company expects LOX/LIN volumes to remain strong through the end
of the year, in line with economic recovery. Higher energy costs have negatively impacted this
business in the first nine months of the year. The company has implemented price increases and
surcharges during the year and has plans in place to raise prices and surcharges more aggressively.
27
In Europe Gases, volumes are expected to remain behind prior year levels through the end of the
year. The company has increased its efforts on new signings and is starting to see progress. The
company has also seen increased energy costs, particularly in the United Kingdom, and is not
recovering these increased energy costs. As in North America, the company has plans in place to
raise prices and increase surcharges such that it expects to see a recovery beginning in the fourth
quarter.
The company expects to see strong year-on-year growth in Asia for the remainder of 2005 and beyond.
The company started up two liquid plants in China during the third quarter and has another six
plants across Asia that will start up over the next couple of years.
Growth is anticipated to continue in the Healthcare business, and spending on homecare acquisitions
is estimated in the range of $75 to $100 for 2005. During the first nine months of 2005, the
company acquired four U.S. homecare businesses for $58.
Chemicals
In the first quarter of 2005, the Chemicals segment experienced rising raw material costs which
outpaced price increases. However, during the second quarter of 2005, the companys Chemicals
business improved significantly, with higher raw material costs recovered through a combination of
higher prices and contract terms. Progress continued in the third quarter and margins improved.
The company announced and will continue to implement price increases across most of its products to
recover raw material and energy increases when they occur.
The company expects fourth quarter volumes in the Chemicals segment to be comparable to the third
quarter. However, because of a number of plant turnarounds, operating margins are expected to
decline. While emulsion volumes are lower than the prior year, they have been recovering as the
company continues to focus on new volume opportunities where our competitive advantages allow us to
earn an adequate return.
A long-term supplier of sulfuric acid, used in the production of dinitrotoluene (DNT), emerged from
Chapter 11 bankruptcy protection in June 2003. To facilitate the suppliers ability to emerge from
bankruptcy and to continue supplying product to the company, the company agreed to participate in
the suppliers financing and has continued to provide additional financing. Total loans to the
supplier at 30 June 2005 were $70.3. If the supplier does not continue to operate, the sales and
profitability of the Chemicals segment could be materially impacted because of the companys
inability to supply all of its customers base requirements. The company does not expect a
material loss related to this supplier.
Equipment
During the first nine months of 2005, the company received orders for five AP-X LNG heat
exchangers, a new, proprietary technology that can significantly increase heat exchanger capacity.
Sales backlog has increased to ten LNG heat exchangers. The company is also experiencing higher
order activity broadly across its equipment business; in large and small air separation units; and
helium containers. The company anticipates profits for 2005 of approximately $40.
Selling and Administrative Expense
The companys SAP project is focused on lowering transaction costs, which are mainly contained in
S&A. The company now has the majority of its business on its new SAP system, has identified ways
to improve productivity, and is working to drive productivity in S&A spending.
Productivity Initiatives
The company anticipates after-tax implementation costs of $.10 to $.15 per share to achieve
productivity savings.
Productivity initiatives are expected to drive margin improvement.
28
Capital Expenditures
Capital expenditures for new plant and equipment are expected to be in the range of approximately
$950 to $1,000 for 2005. The increase is primarily due to increased hydrogen and Electronics
opportunities. Growth is anticipated to continue in the Healthcare business, and spending on
homecare acquisitions is estimated in the range of $75 to $100 for 2005. In addition, the company
intends to continue to evaluate acquisition opportunities and investments in affiliated entities.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The narrative below refers to the Consolidated Statements of Cash Flows included on page 6.
Operating Activities
Net cash provided by operating activities increased $240.1, or 34%. Net income increased by $96.7.
The decrease in the deferred income tax provision of $91.9 was primarily due to a change in
temporary differences related to depreciation. The decrease in cash used for working capital of
$265.7 was due to the prior year increase in trade receivables and a decrease in pension plan
contributions, partially offset by an overall reduction of accounts payable and accrued liabilities
due to the timing of payments.
Investing Activities
Cash used for investing activities increased $145.1, due primarily to higher additions to plant and
equipment, partially offset by higher proceeds from the sale of assets and investments.
Acquisitions in 2005, totaling $72.7, principally included four U.S. homecare businesses.
Acquisitions in 2004, totaling $62.6, principally included three U.S. homecare businesses.
|
|
|
|
|
|
|
|
|
Capital expenditures are detailed in the following table: |
|
|
Nine Months Ended |
|
|
30 June |
|
|
2005 |
|
2004 |
|
Additions to plant and equipment |
|
$ |
678.8 |
|
|
$ |
494.8 |
|
Investment in and advances to unconsolidated
affiliates |
|
|
7.3 |
|
|
|
18.2 |
|
Acquisitions, less cash acquired |
|
|
72.7 |
|
|
|
62.6 |
|
Capital leases |
|
|
2.9 |
|
|
|
7.0 |
|
|
|
|
$ |
761.7 |
|
|
$ |
582.6 |
|
|
Financing Activities
Cash used for financing activities increased $160.2 in 2005. The increase is primarily due to the
purchase of treasury stock for $376.4 and higher dividends paid to shareholders of $51.0, as a
result of higher dividends per share and an increase in shares outstanding, partially offset by a
net increase in commercial paper and short-term borrowings of $299.1.
Total debt, expressed as a percentage of the sum of total debt, shareholders equity, and minority
interest, was 34% at 30 June 2005 and 30 September 2004. Total debt increased from $2,393.7 at 30
September 2004 to $2,514.9 at 30 June 2005, due primarily to long and short-term debt proceeds
exceeding repayments by $150.1. This increase was partially offset by the impact of a stronger
U.S. dollar on the translation of foreign currency debt.
The estimated fair value of the companys long-term debt, including current portion, as of 30 June
2005 is $2,327.2, compared to a book value of $2,238.3.
At 30 June 2005, no borrowings were outstanding under the companys $700 committed multicurrency
revolving facility. The facility matures in December 2008. Additional commitments totaling $42.2
are maintained by the companys foreign subsidiaries, of which $7.2 was utilized at 30 June 2005.
29
On 10 March 2005, the company issued Euro 300.0 ($388.7) of 3.875% Eurobonds maturing 10 March
2015. The proceeds were primarily used to repay the remaining Euro 280.7 ($363.7) of 6% Eurobonds
that matured on 30 March 2005.
On 17 March 2005, the Board of Directors authorized a $500.0 share repurchase program. As of 30
June 2005, the company expended $376.4 for the repurchase of
shares. The Company will complete its share repurchase program on 4
August 2005.
On 17 March 2005, the Board of Directors increased the quarterly cash dividend 10%, from 29 cents
to 32 cents per share.
CONTRACTUAL OBLIGATIONS
The company is obligated to make future payments under various contracts such as debt
agreements, lease agreements, unconditional purchase obligations and other long-term obligations.
There have been no material changes to contractual obligations as reflected in the Managements
Discussion and Analysis in the companys 2004 annual report on Form 10-K. See the discussion of
the issuance of Euro 300.0 under Financing Activities.
COMMITMENTS AND CONTINGENCIES
In the normal course of business the company has commitments, lawsuits, contingent liabilities
and claims. The company is also party to certain guarantee and warranty agreements. However, the
company does not expect that any sum it may have to pay in connection with these matters will have
a materially adverse effect on its consolidated financial condition, liquidity or results of
operations. Refer to Note 19 to the consolidated financial statements in the companys 2004 annual
report on Form 10-K and the Commitment and Contingencies note in this quarterly filing.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to off-balance sheet arrangements as reflected in the
Managements Discussion and Analysis in the companys 2004 annual report on Form 10-K. The
companys off-balance sheet arrangements are not reasonably likely to have a material impact on
financial condition, changes in financial condition, results of operations, or liquidity.
RELATED PARTY TRANSACTIONS
The companys principal related parties are equity affiliates operating in industrial gas and
chemicals businesses. The company did not engage in any material transactions involving related
parties that included terms or other aspects that differ from those which would be negotiated at
arms length with clearly independent parties.
MARKET RISKS AND SENSITIVITY ANALYSIS
Information on the companys utilization of financial instruments and an analysis of the
sensitivity of these instruments to selected changes in market rates and prices is included in the
companys 2004 annual report on Form 10-K.
For foreign currency exchange risk, the sensitivity analysis assumes an instantaneous 10% change in
the foreign currency exchange rates with all other variables (including interest rates) held
constant. A 10% strengthening of the functional currency of an entity versus all other currencies
would result in a decrease of $186 and $199 in the net liability position of financial instruments
at 30 June 2005 and 30 September 2004, respectively. A 10% weakening of the functional currency of
an entity versus all other currencies would result in an increase of $180 and $197 in the net
liability position of financial instruments at 30 June 2005 and 30 September 2004, respectively.
30
The sensitivity analysis related to the fixed portion of the companys debt portfolio assumes an
instantaneous 100 basis point move in interest rates with all other variables (including foreign
exchange rates) held constant. A 100 basis point increase in market interest rates would result in
a decrease of $62 and $40 in the net liability position of financial instruments at 30 June 2005
and 30 September 2004, respectively. A 100 basis point decrease in market interest rates would
result in an increase of $66 and $43 in the net liability position of financial instruments at 30
June 2005 and 30 September 2004, respectively.
The net financial instrument position of the company decreased from a liability of $2,531.4 at 30
September 2004 to a liability of $2,342.0 at 30 June 2005, primarily due to a reduction of
long-term debt, the maturity of certain foreign exchange forward contracts and the impact of a
stronger U.S. dollar on the translation of foreign currency debt and the market value of foreign
exchange forward contracts and interest rate and currency swaps.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of the companys financial condition and results of
operations is based on the consolidated financial statements and accompanying notes that have been
prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
The significant accounting policies of the company are described in Note 1 to the consolidated
financial statements and the critical accounting policies and estimates are described in the
Managements Discussion and Analysis included in the 2004 annual report on Form 10-K. Information
concerning the companys implementation and impact of new accounting standards issued by the
Financial Accounting Standards Board (FASB) is included in the notes to the consolidated financial
statements. There have been no other changes in accounting policy in the current period that had a
material impact on the companys financial condition, change in financial condition, liquidity or
results of operations.
NEW ACCOUNTING STANDARDS
See the notes to the consolidated financial statements for information concerning the
companys implementation and impact of new accounting standards.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current expectations
regarding important risk factors. Actual results may differ materially from those expressed.
Factors that might cause forward-looking statements to differ materially from actual results
include those specifically referenced as future events or outcomes that the company anticipates, as
well as, among other things, overall economic and business conditions different than those
currently anticipated and demand for the companys goods and services during that time; competitive
factors in the industries in which it competes; interruption in ordinary sources of supply; the
ability to recover unanticipated increased energy and raw material costs from customers; uninsured
litigation judgments or settlements; changes in government regulations; consequences of acts of war
or terrorism impacting the United States and other markets; charges related to currently unplanned
portfolio management and cost reduction actions; the success of implementing cost reduction
programs; the timing, impact, and other uncertainties of future acquisitions or divestitures;
significant fluctuations in interest rates and foreign currencies from that currently anticipated;
the impact of tax and other legislation and regulations in jurisdictions in which the company and
its affiliates operate; the impact of new financial accounting standards, including the expensing
of employee stock options; and the timing and rate at which tax credits can be utilized.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Market Risks and Sensitivity Analysis on page 30 of Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
Under the supervision of the Chief Executive Officer and Chief Financial Officer, the companys
management conducted an evaluation of the effectiveness of the design and operation of the
companys disclosure controls and procedures as of 30 June 2005. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design and operation of its
disclosure controls and procedures have been effective. As previously disclosed, the company is in
the midst of an SAP implementation. As a result, certain changes have been made to the companys
internal control structure, in connection with the SAP implementation, which management believes
will strengthen their internal control structure. There have been no other significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent
to the date of such evaluation.
32
PART II. OTHER INFORMATION
|
|
|
|
|
Item 2. |
|
|
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
Purchases of Equity Securities by the Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number (or |
|
|
|
|
|
|
(c) Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
Shares (or Units) |
|
Value) of Shares (or |
|
|
(a) Total Number of |
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|
|
Purchased as Part of |
|
Units) that May Yet Be |
|
|
Shares (or Units) |
|
(b) Average Price Paid |
|
Publicly Announced |
|
Purchased Under the |
Period |
|
Purchased |
|
per Share (or Unit) |
|
Plans or Programs |
|
Plans
or
Programs(1)(2) |
29 April 2005 |
|
221,000 |
|
$58.45 |
|
221,000 |
|
$487,082,743 |
2-31 May 2005 |
|
4,049,100 |
|
$59.73 |
|
4,049,100 |
|
$245,230,586 |
1-30 June 2005 |
|
2,277,700 |
|
$61.14 |
|
2,277,700 |
|
$105,976,779 |
Total |
|
6,547,800 |
|
$60.18 |
|
6,547,800 |
|
$105,976,779 |
|
|
|
(1) |
|
On 18 March 2005, the Company announced plans to purchase up to $500 million of Air
Products and Chemicals, Inc. common stock under a share repurchase program approved by the
Companys Board of Directors on 17 March 2005. The program
does not have a stated expiration date. |
|
(2) |
|
As of 30 June 2005, the Company expended
$376.4 million in cash for the repurchase of shares;
$17.6 million was reported as an accrued liability on the
balance sheet for share repurchases settling in July.
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Item 6. |
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Exhibits. |
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Exhibits required by Item 601 of Regulation S-K |
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12.
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|
Computation of Ratios of Earnings to Fixed Charges. |
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31.1
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|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
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|
|
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31.2
|
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
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|
32.
|
|
Certification by the Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
33
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.
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Air Products and Chemicals, Inc. |
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(Registrant) |
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Date: 3 August 2005
|
|
By:
|
|
/s/Paul E. Huck |
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|
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|
Paul E. Huck |
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Vice President and |
|
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Chief Financial Officer |
34
EXHIBIT INDEX
|
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|
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|
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12.
|
|
Computation of Ratios of Earnings to Fixed Charges. |
|
|
|
|
|
|
|
31.1
|
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
31.2
|
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
32.
|
|
Certification by the Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
35
EX-12
Exhibit 12
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
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Nine |
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Months |
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Ended |
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Year Ended 30 September |
|
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30 June |
|
|
|
2000 |
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|
2001 |
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2002 |
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2003 |
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|
2004 |
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|
2005 |
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Earnings: |
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|
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|
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|
|
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Income from continuing operations |
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$124.2 |
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|
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$465.6 |
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|
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$525.4 |
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$400.2 |
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|
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$604.1 |
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|
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$532.7 |
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Add (deduct): |
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|
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|
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Provision for income taxes |
|
|
(7.5 |
) |
|
|
196.2 |
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|
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247.5 |
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154.0 |
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232.5 |
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203.1 |
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Fixed charges, excluding capitalized interest |
|
|
232.6 |
|
|
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226.5 |
|
|
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150.3 |
|
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150.6 |
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149.3 |
|
|
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107.0 |
|
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Capitalized interest amortized during the
period |
|
|
6.6 |
|
|
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7.1 |
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7.2 |
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6.5 |
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9.1 |
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4.8 |
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|
|
Undistributed earnings of
less-than-fifty-percent-owned affiliates |
|
|
(32.1 |
) |
|
|
(34.3 |
) |
|
|
(42.8 |
) |
|
|
(2.6 |
) |
|
|
(31.1 |
) |
|
|
(35.6 |
) |
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|
Earnings, as adjusted |
|
|
$323.8 |
|
|
|
$861.1 |
|
|
|
$887.6 |
|
|
|
$708.7 |
|
|
|
$963.9 |
|
|
|
$812.0 |
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|
Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Interest on indebtedness, including capital lease
obligations |
|
|
$210.3 |
|
|
|
$201.6 |
|
|
|
$126.4 |
|
|
|
$126.9 |
|
|
|
$124.4 |
|
|
|
$86.2 |
|
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|
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|
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|
Capitalized interest |
|
|
19.7 |
|
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|
8.8 |
|
|
|
11.7 |
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|
6.2 |
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7.9 |
|
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11.5 |
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|
|
Amortization of debt discount premium and expense |
|
|
3.1 |
|
|
|
5.6 |
|
|
|
2.2 |
|
|
|
2.1 |
|
|
|
1.4 |
|
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|
3.3 |
|
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|
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|
|
Portion of rents under operating leases
representative of the interest factor |
|
|
19.3 |
|
|
|
19.3 |
|
|
|
21.7 |
|
|
|
21.6 |
|
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23.5 |
|
|
|
17.5 |
|
|
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|
Fixed charges |
|
|
$252.4 |
|
|
|
$235.3 |
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|
|
$162.0 |
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|
$156.8 |
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|
$157.2 |
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$118.5 |
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|
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|
|
Ratio of Earnings to Fixed Charges (1) |
|
|
1.3 |
|
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|
3.7 |
|
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|
5.5 |
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4.5 |
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6.1 |
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6.9 |
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(1) |
|
The ratio of earnings to fixed charges is determined by dividing earnings, which
includes income before taxes,
undistributed earnings of less than fifty percent owned affiliates, and fixed charges, by
fixed charges. Fixed
charges consist of interest on all indebtedness plus that portion of operating lease rentals
representative of
the interest factor (deemed to be 21% of operating lease rentals). |
EX-31.1
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICERS CERTIFICATION
I, John P. Jones III, certify that:
|
1. |
|
I have reviewed this quarterly report on form 10-Q of Air Products and Chemicals,
Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
|
Exhibit 31.1
|
|
|
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
Date: 3 August 2005
/s/ John P. Jones III
John P. Jones III
Chairman, President, and Chief Executive Officer
EX-31.2
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICERS CERTIFICATION
I, Paul E. Huck, certify that:
|
1. |
|
I have reviewed this quarterly report on form 10-Q of Air Products and Chemicals,
Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
|
Exhibit 31.2
|
|
|
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
Date: 3 August 2005
/s/ Paul E. Huck
Paul E. Huck
Vice President and Chief Financial Officer
EX-32
Exhibit
32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Air Products and Chemicals, Inc. (the Company) on
Form 10-Q for the period ending 30 June 2005, as filed with the Securities and Exchange Commission
on the date hereof (the Report), we, John P. Jones III, Chief Executive Officer of the Company,
and Paul E. Huck, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
|
The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and |
|
|
2. |
|
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company. |
|
|
|
Dated: 3 August 2005
|
|
/s/ John P. Jones III |
|
|
|
|
|
John P. Jones III |
|
|
Chief Executive Officer |
|
|
|
|
|
/s/ Paul E. Huck |
|
|
|
|
|
Paul E. Huck |
|
|
Chief Financial Officer |