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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended 30 September 2005
OR
| o | 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)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
23-1274455 (IRS Employer Identification No.) |
| 7201 Hamilton Boulevard, Allentown, Pennsylvania (Address of Principal Executive Offices) |
18195-1501 (Zip Code) |
Registrant’s telephone number, including area code (610) 481-4911
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered |
|
| Common Stock, par value $1.00 per share | New York | |
| Preferred Stock Purchase Rights | New York | |
| 8 3/4 % Debentures Due 2021 | New York |
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 þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). YES þ NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
The aggregate market value of the voting stock held by non-affiliates of the registrant on 31
March 2005 was $14.4 billion. For purposes of the foregoing calculations (i) all directors and/or
executive officers have been deemed to be affiliates, but the registrant disclaims that any such
director and/or executive officer is an affiliate and (ii) registrant’s grantor trust, described
under Item 12 of this Report, is deemed a non-affiliate. The number of shares of common stock
outstanding as of 10 November 2005 was 222,106,958.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended 30 September 2005. With the
exception of those portions that are incorporated by reference into Parts I, II, and IV of this
Form 10-K, the Annual Report is not deemed to be filed.
Proxy Statement for Annual Meeting of Shareholders to be held 26 January 2006 . . . Part III.
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FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current expectations at the
time the document was originally prepared regarding important risk factors. Management does not
anticipate publicly updating any of its expectations except as part of the quarterly earnings
announcement process.
Actual results may differ materially from those forward-looking statements expressed. In addition
to important risk factors and uncertainties referred to in the Management’s Discussion and
Analysis, which is included under Item 7 herein, 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 Company’s
goods and services; 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 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 recovery of
insurance proceeds; 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.
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PART I
ITEM 1. Business.
Through internal development and by acquisitions, Air Products and Chemicals, Inc. has
established an internationally recognized industrial gas and related industrial process equipment
business and developed strong positions as a producer of certain chemicals.
The gases business segment recovers and distributes industrial gases such as oxygen, nitrogen,
helium, argon, and hydrogen, and a variety of medical and specialty gases, and also includes the
Company’s healthcare business. The chemicals business segment produces and markets performance
materials and chemical intermediates. The equipment business segment supplies cryogenic and other
process equipment and related engineering services.
Financial information concerning the Company’s business segments appears in Note 21 to the
Consolidated Financial Statements included under Item 8 herein, which information is incorporated
herein by reference, as are all other specific references herein to information appearing in such
2005 Financial Review Section of the Annual Report.
As used in this Report, the term “Air Products” or “Company” includes subsidiaries and
predecessors of the registrant or its subsidiaries, unless the context indicates otherwise.
GASES
The principal industrial gases sold by the Company are oxygen, nitrogen, argon (primarily
recovered by the cryogenic distillation of air), hydrogen, carbon monoxide, carbon dioxide
(purchased, purified, or recovered through the processing of natural gas or the by-product streams
from process plants), synthesis gas (combined streams of hydrogen and carbon monoxide), and helium
(purchased or refined from crude helium). Medical and specialty gases (which include fluorine
products; rare gases such as xenon, krypton, and neon; and more common gases of high purity) are
manufactured or precisely blended by the Company or purchased for resale. The gases segment
includes the Company’s electronics business, global healthcare, power generation, and flue gas
treatment businesses.
The Company’s gas business involves three principal modes of supply:
“On-site/Pipeline” Supply—For large volume or “tonnage” users of industrial gases, a plant is
built adjacent to, on, or near the customer’s facility—hence the term “on-site.” Alternatively, the
gases are delivered through a pipeline from nearby locations. Supply is generally made under
long-term contracts, typically five to twenty years in duration. In numerous areas—the Houston
(Texas) Ship Channel including the Port Arthur, Texas, area; “Silicon Valley,” California; Los
Angeles, California; Phoenix, Arizona; Decatur, Alabama; Central Louisiana; Rotterdam, the
Netherlands; Korea; Singapore; Taiwan; Malaysia; and Brazil—Air Products’ hydrogen, oxygen, carbon
monoxide, or nitrogen gas pipelines serve multiple customers from one or more centrally located
plants. Industrial gas companies in which the Company has less than controlling interests have
pipelines in Thailand, Singapore, and South Africa.
Liquid Bulk Supply—Smaller volumes of industrial gas products are delivered to thousands of
customers in liquid or gaseous form by tanker trucks or tube trailers. These liquid bulk customers
use equipment designed and installed by Air Products to store the product near the point of use,
normally in liquid state, and vaporize the product into gaseous state for their use as needed. Some
customers are also supplied by small on-site generators using noncryogenic technology based on
adsorption and membrane technology which, in certain circumstances, the Company sells to its
customers. Liquid bulk customers’ contract terms normally are from three to five years.
Packaged Gases Supply—Industrial and various specialty and medical gases also can be delivered
in cylinders, dewars, and lecture bottle sizes. The Company operates packaged gas businesses in
Europe, Asia, and Brazil, but in the United States only sells packaged gases for electronics gases,
helium used in magnetic resonance imaging, and oxygen used by patients in their homes.
Oxygen, nitrogen, argon, and hydrogen sold to liquid bulk customers are usually recovered or
generated at large “stand-alone” facilities located near industrial areas or high-tech centers or
at small noncryogenic generators, or are taken from on-site plants used primarily to supply tonnage
users. On-site plants are frequently designed to have more capacity than is required by their
principal customer to recover additional product that is liquefied for sale to a liquid bulk
market. Air Products also designs and builds systems for recovering oxygen, hydrogen, nitrogen, carbon
monoxide, and low dew point gases using adsorption technology.
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Sales of atmospheric gases—oxygen, nitrogen, and argon—constituted approximately 23 percent of
Air Products’ consolidated sales in fiscal year 2005, 24 percent in fiscal year 2004, and 25
percent in fiscal year 2003.
The largest markets are chemical processing, electronics, refining (which uses inert nitrogen
for oil well stimulation and field pressurization and hydrogen and oxygen for refining), food
processing (which uses liquid nitrogen for food freezing), and medical gases. Air Products is a
leading liquefier of hydrogen, which it supplies to many customers, including the National
Aeronautics and Space Administration for its space shuttle program. The Company has its largest
industrial gas market positions in the United States and Europe.
The
Company was impacted by Hurricanes Dennis, Katrina, and Rita.
The Company’s New Orleans industrial gas complex sustained extensive damage from Hurricane
Katrina in August 2005. This facility is expected to return to substantial operations by the end of the calendar year.
For a discussion of the financial impact from these Hurricanes see Note 20 to the Consolidated Financial Statements included under Item 8 herein.
The global healthcare business of Air Products is directed at two main markets: institutional
and homecare. The institutional market uses medical gases in hospitals, clinics, and nursing homes,
as well as helium for use in magnetic resonance imaging. The homecare business involves the
delivery of respiratory therapy services, infusion services, and home medical equipment to patients
in their homes in Europe, South America, and principally in the eastern United States.
The electronics business of Air Products is a materials and services solutions provider to the
electronics industry supplying consumable products that surround its customers’ process tools.
These products include industrial gases, electronic specialty gases (such as silane, arsine,
silicon tetrafluoride, nitrogen trifluoride, carbon tetrafluoride, hexafluoromethane, and tungsten
hexafluoride), electronic specialty chemicals, high purity wet process chemicals, and
photolithography products. In certain circumstances the Company sells equipment related to the use,
handling, and storage of such electronic gases and chemicals.
Sales of industrial gases and sales of specialty products are made principally through
regional offices in the United States, Europe, South America, Africa, and Asia.
Electricity and hydrocarbons, including natural gas as a feedstock for producing certain
gases, are important to Air Products’ gas business. See “Raw Materials and Energy.” The Company’s
large truck fleet, which delivers products to liquid bulk customers, requires a readily available
supply of gasoline or diesel fuel. Also, environmental and health laws and regulations will
continue to affect the Company’s gas businesses. See “Environmental Controls.”
Air Products operates and has 50 percent interests in a 49-megawatt fluidized-bed coal-fired
power generation facility in Stockton, California and in a 24-megawatt gas-fired combined cycle
power generation facility near Rotterdam, the Netherlands. A 112-megawatt gas-fueled power
generation facility, in which the Company has a 48.8 percent interest, operates in Thailand and
supplies electricity to a state-owned electricity generating authority and steam and electricity to
an Air Products industrial gases affiliate. The Company also constructed, operates, and has a 50
percent interest in a flue gas treatment facility in Indiana.
CHEMICALS
The Company’s chemicals businesses consist of performance materials and chemical
intermediates, where the Company is able to differentiate itself by the performance of its products
in the customer’s application, the technical service that the Company provides, and the scale of
production and the production technology employed by the Company.
Chemical sales are supported from various locations in North America, Europe, Asia, and
Africa, and through sales representatives or distributors in most industrialized countries. Dry
products are delivered in railcars, trucks, drums, bags, and cartons. Liquid products are delivered
by barge, rail tank cars, tank trailers, drums and pails, and, at one location, by pipeline.
The chemicals business depends on adequate energy sources, including natural gas as a
feedstock for the production of certain products (see “Raw Materials and Energy”), and will
continue to be affected by various environmental and health laws and regulations (see
“Environmental Controls”).
Performance Materials
The principal businesses of performance materials are performance polymers, performance
solutions, and performance products. Total sales from the performance materials business
constituted approximately 14 percent of Air Products’ consolidated sales in fiscal year 2005, 15
percent in fiscal year 2004, and 15 percent in fiscal year 2003. Air
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Products’ performance
materials are differentiated from the competition’s based on their functionality when used in the
customer’s products and applications, and by the technical service the Company provides.
Performance Polymers— Air Products owns 65 percent of a worldwide joint venture with
Wacker-Chemie GmbH that produces polymer emulsions and pressure-sensitive adhesives. The Company
also owns 20 percent of a worldwide joint venture with Wacker-Chemie GmbH that produces
redispersible powders made from polymer emulsions.
Air Products’ polymers are water-based and water-soluble emulsion products derived primarily
from vinyl acetate monomer. The Company’s major emulsions products are AIRFLEX® vinyl
acetate-ethylene copolymer emulsions and vinyl acetate homopolymer emulsions. The Company also
produces emulsions that incorporate vinyl chloride and various acrylates in the polymer. These
products are used in adhesives, nonwoven fabric binders, paper coatings, paints, inks, and carpet
backing binder formulations.
Performance Solutions—These products are primarily acetylenic alcohols and amines that are
used as performance additives in coatings, lubricants, electro-deposition processes, agricultural
formulations, and corrosion inhibitors.
Performance Products—These products include polyurethane catalysts and surfactants that are
used as performance control additives and processing aids in the production of both flexible and
rigid polyurethane foam around the world. The principal end markets for polyurethane foams include
furniture cushioning, insulation, carpet underlay, bedding, and automobile seating.
Performance products also include epoxy additives such as polyamides, aromatic amines,
cycloaliphatic amines, reactive diluents, and specialty epoxy resins that are used as performance
additives in epoxy formulations by epoxy manufacturers worldwide. The end markets for epoxies are
coatings, flooring, adhesives, reinforced composites, and electrical laminates.
Chemical Intermediates
The chemical intermediates businesses use the Company’s proprietary technology and scale of
production to differentiate themselves from the competition. The principal intermediates sold by
the Company include amines and polyurethane intermediates. The Company also produces nitric acid as
a raw material for its products. Total third-party sales from the chemical intermediates businesses
constituted 9 percent of Air Products’ consolidated sales in 2005 and 10 percent of consolidated
sales in 2004 and 2003.
Amines—The Company produces a broad range of amines using ammonia, methanol, and other alcohol
feedstocks purchased from various suppliers. Substantial quantities of these products are sold
under long-term contracts to a small number of customers. These products are used by the Company’s
customers as raw materials in the manufacture of herbicides, pesticides, water treatment chemicals,
animal nutrients, polyurethane coatings, rubber chemicals, and pharmaceuticals. In 2004 the Company
shut down its methanol and ammonia production facilities and began purchasing all of its methanol
and ammonia requirements. The Company sold its European methylamines and derivatives business in December
2004. In 2005, the Company solicited offers to purchase its ammonium nitrate
prills business.
Polyurethane Intermediates—The Company produces dinitrotoluene (“DNT”) and toluene diamine
(“TDA”) for use as intermediates by the Company’s customers in the manufacture of a major precursor
of flexible polyurethane foam. The principal end markets for flexible polyurethane foams include
furniture cushioning, carpet underlay, bedding, and seating in automobiles. Most of the Company’s
production of DNT and TDA is sold under long-term contracts to a small number of customers. In
2005, one of these customers closed its facility and another terminated its contract. Additional
operating income of $16 million was recognized during the fourth quarter in connection with the
contract termination for the present value of the contractual termination payments required under
the supply contract. This contract termination and the customer shutdown are expected to
significantly reduce the profitability of this product line in 2006.
EQUIPMENT
The Company designs and manufactures equipment for cryogenic air separation, gas processing,
natural gas liquefaction, and hydrogen purification. Air Products also designs and builds systems
for recovering hydrogen, nitrogen, carbon monoxide, carbon dioxide, and low dew point gases using
membrane technology. This segment further designs and builds cryogenic transportation containers
for liquid helium and hydrogen. Customers include companies involved in chemical and petrochemical
manufacturing, oil and gas recovery and processing, power generation, and steel and primary metals
processing. Additionally, a broad range of plant design, engineering, procurement, and construction
management
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services is provided for the above areas. Equipment is manufactured for use by the gases
segment and for sale in industrial markets that include the Company’s international industrial gas
joint ventures.
The backlog of orders (including letters of intent) believed to be firm from other companies
and equity affiliates for equipment was approximately $652 million on 30 September 2005,
approximately 22 percent of which relates to cryogenic air separation, and 61 percent of which
relates to liquefied natural gas, as compared with a total backlog of approximately $297 million on
30 September 2004. It is expected that approximately $408 million of the backlog on 30 September
2005 will be completed during fiscal year 2006.
GENERAL
Foreign Operations
Air Products, through subsidiaries and affiliates, conducts business in numerous countries
outside the United States. The structure of the Air Products gas business in Europe is comparable
to the Company’s United States operation, except that in Europe, the Company is also engaged in a
broader packaged gas business. Air Products’ international business is subject to risks customarily
encountered in foreign operations, including fluctuations in foreign currency exchange rates and
controls, import and export controls, and other economic, political, and regulatory policies of
local governments.
The Company’s industrial gas segment, through investments ranging from wholly-owned
subsidiaries to minority ownership interests, does business in approximately 39 countries outside
the United States. Majority and wholly owned industrial gas subsidiaries operate in Argentina,
Brazil, and Canada, and throughout Europe and Asia in 15 and 12 countries, respectively. There are
50 percent industrial gas joint ventures in Canada, South Africa, and Trinidad and Tobago, six
countries in Europe, and six countries in Asia, and less than controlling interests in Canada,
Mexico, two countries in Africa, four countries in Europe, four countries in Central America, and
six countries in Asia. The Company has a 50 percent joint venture in the U.K. that is developing
products relating to silicon wafer polishing, chemical mechanical planarization processes, and hard
disk polishing. The Company also has a 50 percent interest in a power generation facility in the
Netherlands and a 48.8 percent interest in one in Thailand.
The principal geographic markets for the Company’s chemical products are in 11 countries, with
operations in North America, Europe, Asia, Brazil, and Mexico. Majority and wholly owned
subsidiaries operate in Brazil, Germany, Italy, the Netherlands, the United Kingdom, Japan, Korea,
China, Singapore, Taiwan, and Mexico. The polymer emulsions and pressure-sensitive adhesives joint
venture with Wacker-Chemie GmbH has headquarters in the United States and production facilities in
the United States, Germany, and Korea, along with a technical service center in Shanghai, China.
Headquarters for the 20 percent investment in the redispersible powder venture with Wacker-Chemie
GmbH are in Germany with manufacturing facilities in Germany, the United States, and China. The
Company also has controlling interests in Korea and Taiwan and less than controlling interests in
Japan in companies that sell chemicals to the electronics industry.
Financial information about Air Products’ foreign operations and investments is included in
Notes 8, 17, 18, and 21 to the Consolidated Financial Statements included under Item 8 herein.
Information about foreign currency translation is included in Note 1 to the Consolidated Financial
Statements included under Item 8 herein, under “Foreign Currency,” and information on Company
exposure to currency fluctuations is included in Note 6 to the Consolidated Financial Statements
included under Item 8 herein. Export sales from operations in the United States to unconsolidated
customers amounted to $719 million, $611 million, and $497 million in fiscal years 2005, 2004, and
2003, respectively. Total export sales in fiscal year 2005 included $419 million in export sales to
affiliated customers. The sales to affiliated customers were primarily equipment sales and
electronic specialty materials sales.
Technology Development
Air Products pursues a market-oriented approach to technology development that includes
research and development, engineering, and commercial development. The Company conducts research
and development principally in its laboratories located in Trexlertown, Pennsylvania, as well as in
Carlsbad, California and Phoenix, Arizona in the U.S.; Basingstoke, London, and Carrington in the
U.K.; Burghausen and Hamburg, Germany; Utrecht, the Netherlands; Tokyo, Japan; Shanghai, China;
Giheung, Korea; Hsinchu, Taiwan; and Barcelona and Madrid, Spain. The Company also funds and works
closely on research and development programs with a number of major universities and conducts
research work funded by others, principally the United States Government.
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Research and development expenditures during fiscal year 2005 were $133 million, $127 million
in fiscal year 2004, and $121 million in fiscal year 2003. Amounts expended by the Company on
customer-sponsored research activities during fiscal year 2005 were $17 million, $14 million in
fiscal year 2004, and $15 million in fiscal year 2003.
In the gases and equipment segments, technology development is directed primarily to
developing new and improved processes and equipment for the production and delivery of industrial
gases, electronic specialty gases, electronic specialty chemicals, and hydrocarbons; developing new
products; and developing new and improved applications for such products. It is through such
applications and improvements that the Company has become a major supplier to the electronics and
chemical process industries, including gases from air separation, specialty gases, and hydrogen.
Additionally, technology development for the equipment business is directed primarily to reducing
the capital and operating costs of its facilities and to commercializing new technologies in gas
production, liquefaction, and separation. There are also development activities for the medical
business supplying gases, equipment, and services to the homecare market.
In the chemicals segment, technology development is primarily concerned with new products and
applications to strengthen and extend the Company’s present positions in polymer and performance
materials. In addition, a major continuing effort supports the development of new and improved
process and manufacturing technology for chemical intermediates and polymers.
A corporate research group supports the research efforts of the Company’s various businesses.
This group includes the Company’s Corporate Science and Technology Center, which conducts research
in areas important to the long-term growth of the Company with focus on performance materials.
As of 1 November 2005, Air Products owned 1,056 United States patents and 2,376 foreign
patents. The Company is also licensed under certain patents owned by others. While the patents and
licenses are considered important, Air Products does not consider its business as a whole to be
materially dependent upon any particular patent or patent license, or group of patents or licenses.
Raw Materials and Energy
The Company manufactures hydrogen, carbon monoxide, synthesis gas, and carbon dioxide
principally from natural gas. Such products accounted for approximately 17 percent of the Company’s
consolidated sales in fiscal year 2005. The Company’s principal raw material purchases are chemical
intermediates produced by others from basic petrochemical feedstocks such as olefins and aromatic
hydrocarbons. These feedstocks are generally derived from various crude oil fractions or from
liquids extracted from natural gas. The Company purchases its chemical intermediates from many
sources and generally is not dependent on one supplier. However, with respect to vinyl acetate
monomer that supports the performance polymer business, the Company is heavily dependent on a
single supplier under a long-term contract that produces vinyl acetate monomer from several
facilities. The Company characterizes the availability of these chemical intermediates as generally
being readily available. The Company uses such raw materials in the production of emulsions,
amines, polyurethane intermediates, specialty additives, polyurethane additives, and epoxy
additives. Such products accounted for approximately 22 percent of the Company’s consolidated sales
in fiscal year 2005. Natural gas is an energy source at a number of the Company’s facilities. The
Company also purchases ammonia under long-term contracts as a feedstock for several of its
chemicals facilities. In 2005, the Company began purchasing methanol under a long-term supply
arrangement. Methanol, produced from natural gas, is a feedstock in methylamine production.
A long-term supplier of sulfuric acid, used in the production of dinitrotoluene (DNT), emerged
from Chapter 11 bankruptcy protection in 2003. To facilitate the supplier’s ability to emerge from
bankruptcy and to continue supplying product to the Company, the Company agreed to participate in
the supplier’s financing and has continued to provide additional financing. Total loans to the supplier at 30 September 2005 were $86 million. If
the supplier does not continue to operate, the sales and profitability of the chemicals segment
could be materially impacted on an annual basis because of the Company’s inability to supply all of
its customers’ base requirements. The Company does not expect a material loss related to this
supplier.
The Company’s industrial gas facilities use substantial amounts of electrical power.
Electricity is the largest cost input for the production of atmospheric gases. Any shortage of
electrical power or interruption of its supply or increase in its price that cannot be passed
through to customers for competitive reasons will adversely affect the liquid bulk gas business of
the Company.
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In addition, the Company purchases finished and semi-finished materials and chemical
intermediates from many suppliers. During fiscal year 2005, no significant difficulties were
encountered in obtaining adequate supplies of energy or raw materials.
Environmental Controls
The Company is subject to various environmental laws and regulations in the United States and
foreign countries where it has operations. Compliance with these laws and regulations results in
higher capital expenditures and costs. Additionally, from time to time, the Company is involved in
proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (the
federal Superfund law), similar state laws, and the Resource Conservation and Recovery Act (RCRA)
relating to the designation of certain sites for investigation and possible cleanup. Additional
information with respect to these proceedings is included under Item 3, Legal Proceedings, below.
The Company’s accounting policies on environmental expenditures are discussed in Note 1 to the
Consolidated Financial Statements included under Item 8 herein.
The amounts charged to earnings on an after-tax basis related to environmental matters totaled
$26 million in 2005, $32 million in 2004, and $30 million in 2003. These amounts represent an
estimate of expenses for compliance with environmental laws, as well as remedial activities, and
costs incurred to meet internal Company standards. Such costs are estimated to be $26 million in
2006 and $27 million in 2007.
Although precise amounts are difficult to define, the Company estimates that in fiscal year
2005 it spent approximately $8 million on capital projects to control pollution versus $12 million
in 2004. Capital expenditures to control pollution in future years are estimated at approximately
$7 million in 2006 and $7 million in 2007.
To the extent long-term contracts have been entered into for supply of product, such as for
the industrial gas on-site business and for certain chemical products, the cost of any
environmental compliance generally is contractually passed through to the customer.
It is the Company’s policy to accrue environmental investigatory and noncapital remediation
costs for identified sites when it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated. The potential exposure for such costs is estimated to range from
$8 million to a reasonably possible upper exposure of $17 million. The accrual on the balance sheet
for 30 September 2005 was $13 million and for 30 September 2004 was $14 million. Actual costs to
be incurred in future periods may vary from the estimates, given inherent uncertainties in
evaluating environmental exposures. Subject to the imprecision in estimating future environmental
costs, the Company does not expect that any sum it may have to pay in connection with environmental
matters in excess of the amounts recorded or disclosed above would have a materially adverse effect
on its financial condition or results of operations in any one year.
Competition
The Company’s businesses face strong competition from others, some of which are larger and
have greater resources than Air Products.
Air Products’ industrial gas business competes in the United States with three major sellers
and with several regional sellers. Competition in industrial gas markets is based primarily on
price, reliability of supply, and furnishing or developing applications for use of such gases by
customers, and in some cases the provisions of other services or products such as power and steam
generation. Similar competitive situations exist in European and Asian industrial gas markets in
which the Company competes against one or more larger entrenched competitors in most countries.
The division of the Company’s gas business that serves the electronics industry offers
electronic specialty gases, chemicals, services, and equipment. These products face competition
from competitors who vary from product to product, ranging from niche suppliers having only a
single product, to larger and more vertically integrated chemical companies with greater financial
resources than the Company. Competition in these products is principally on the basis of price,
quality, product performance, and reliability of product supply.
Competition in the institutional market of the global healthcare business is principally from
other large, established industrial gas companies using business models (long-term product supply
agreements) that are similar to those the companies utilize for other industrial gas supply
relationships. Competition in this market is principally based on regulatory compliance (FDA),
price, quality, service, and reliability of supply. Homecare is served by national and local
providers, and in the U.S. there are over 2,000 regional and local providers. The homecare market
is highly competitive. In the United
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States reimbursement levels are established by fee schedules
regulated by Medicare and Medicaid, or by the levels negotiated with insurance companies.
Accordingly, in the United States, homecare companies compete primarily on the basis of service.
Maintaining competitiveness requires efficient logistics, reimbursement, and accounts receivable
systems.
The number of the Company’s principal competitors in the chemicals business varies from
product to product, and it is not practical to identify such competitors because of the broad range
of the Company’s chemical products and the markets served, although the Company believes it has a
leading or strong market position in most of its chemical products. For amines the competition is
principally from other large chemical companies that also have the ability to provide competitive
pricing, reliability of supply, technical service assistance, and quality products and services.
The possibility of back integration by large customers is the major competitive factor for the sale
of polyurethane additives. In its other chemical products, the Company competes with a large number
of chemical companies, some of which are larger, possess greater financial resources, and are more
vertically integrated than the Company. Competition in these products is principally on the basis
of price, quality, product performance, reliability of product supply, and technical service
assistance.
The Company’s equipment business competes in all aspects with a great number of firms, some of
which have greater financial resources than Air Products. Competition is based primarily on
technological performance, service, technical know-how, price, and performance guarantees.
Insurance
The Company’s policy is to obtain public liability and property insurance coverage that is
currently available at what management determines to be a fair and reasonable price. The Company
maintains public liability and property insurance coverage at amounts that management believes are
sufficient to meet the Company’s anticipated needs in light of historical experience to cover
future litigation and claims. There is no assurance, however, that the Company will not incur
losses beyond the limits of, or outside the coverage of, its insurance.
Employees
On 30 September 2005, the Company (including majority-owned subsidiaries) had approximately
20,200 employees of whom 19,500 were full-time employees, and of whom approximately 9,200 were
located outside the United States. The Company has collective bargaining agreements with unions at
various locations that expire on various dates over the next three to four years.
The Company considers relations with its employees to be satisfactory and does not believe that the impact of any
expiring or expired collective bargaining agreements will result in a material adverse impact on
the Company.
Available Information
All periodic and current reports, registration statements, and other filings that the Company
is required to file with the Securities and Exchange Commission (“SEC”), including the Company’s
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act (the
“1934 Act Reports”), are available free of charge through the Company’s Internet website at www.airproducts.com. Such documents are available as soon as reasonably practicable
after electronic filing of the material with the SEC. All 1934 Act Reports filed during the period
covered by this Report were available on the Company’s website on the same day as filing.
The public may also read and copy any materials filed by the Company with the SEC at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC; the address of that site is
www.sec.gov.
7
Table of Contents
Executive Officers of the Company
The Company’s executive officers and their respective positions and ages on 15 November 2005
follow. Except where indicated, each of the executive officers listed below has been employed by
the Company in the position indicated during the past five fiscal years. Information with respect
to offices held is stated in fiscal years.
| Name | Age | Office | ||||
W. Douglas Brown (C) |
59 | Vice President, General Counsel, and Secretary (became Vice President, General Counsel, and Secretary in 1999) |
||||
Mark L. Bye (C) |
49 | Group Vice President–Gases and Equipment (became Group Vice President–Gases and Equipment in 2003; and President–Air Products Asia in 2001) |
||||
Paul E. Huck (C) |
55 | Vice President and Chief Financial Officer (became Vice President and Chief Financial Officer in 2004; Vice President and Corporate Controller in 2002; and Vice President–Project Management Office in 2000) |
||||
John P. Jones III (A)(B)(C) |
55 | Chairman, President, and Chief Executive Officer (became Chairman and Chief Executive Officer in 2000) |
||||
Arthur T. Katsaros (C) |
58 | Group Vice President–Development and Technology (became Group Vice President–Development and Technology in 2003; and Group Vice President–Engineered Systems and Development in 2001) |
||||
John F. McGlade (C) |
51 | Group Vice President–Chemicals (became Group Vice President–Chemicals in 2003; Vice President–Chemicals Group Business Divisions in 2003; and Vice President and General Manager, Performance Chemicals Division in 2001) |
||||
Lynn C. Minella (C) |
47 | Vice President–Human Resources (became Vice President–Human Resources in 2004; Vice President, Human Resources, Software Group, International Business Machines Corporation in 2003; and Vice President, Human Resources, Technology Group, International Business Machines Corporation in 2001) |
||||
| (A) | Member, Board of Directors | |
| (B) | Member, Executive Committee of the Board of Directors | |
| (C) | Member, Corporate Executive Committee |
8
Table of Contents
ITEM 2.
Properties.
The principal executive offices, which are owned by Air Products, are located at its
headquarters in Trexlertown, near Allentown, Pennsylvania. Additional administrative offices are
located in facilities it owns in Hersham, near London, England and Hattingen, Germany.
Administrative offices are also located in facilities leased in the Allentown and Philadelphia
areas in Pennsylvania; Mississauga, Ontario, Canada; Tokyo, Japan; Hong Kong, China; Singapore;
Brussels, Belgium; Paris, France; Barcelona, Spain; and Sao Paulo, Brazil. Management believes the
Company’s manufacturing facilities, described in more detail below, are adequate to support its
businesses. The following information with respect to properties is as of 30 September 2005.
Gases
In the United States and Canada, the gases segment has over 220 plant facilities in 35 states
and two provinces. The majority of these plants recover nitrogen, oxygen, and argon. The Company
continues to focus on the production of refinery hydrogen with 37 facilities that produce and/or
recover hydrogen and three major pipeline systems located along the Gulf Coast of Texas, along the
Mississippi River corridor, and in Los Angeles, California. Additional facilities produce
specialty gases, clean electronic parts, and produce electronic chemicals. Helium is recovered at
plants in Kansas and Texas. The properties on which these plants are located are owned by Air
Products at approximately one-fourth of the locations and leased by Air Products at the remaining
locations. In virtually all cases, however, the plant itself is owned and operated by Air Products.
In addition, the Company operates 16 sales offices located in seven states and two provinces, most
of which are located in leased facilities.
Air Products’ European gases segment has approximately 70 plant facilities, including
facilities that recover hydrogen, manufacture dissolved acetylene, recover carbon monoxide, and
produce electronic chemicals. As in the U.S., the majority of European plants recover nitrogen,
oxygen, and argon. The Company began operations in Switzerland in 2005 with the startup of hydrogen
production in Cressier. In addition, there are five specialty gas centers and over 100 sales
offices and/or cylinder distribution centers in Europe.
There are additional facilities located in Brazil and the Middle East.
In Asia, the gases segment continues to expand its production capacity, particularly in China
where three facilities were added in 2005. Over 130 production facilities supply a diverse
customer base in nine countries, including those in India and Thailand where the Company has just
less than 50 percent equity ownership. Production includes electronic specialty materials and
hydrogen, as well as oxygen, nitrogen, and argon. The property on which these plants are located is
owned by Air Products at approximately one-fifth of the locations and leased by Air Products at the
remaining locations. There are over 50 sales offices and distribution centers located throughout
the region, half of which are owned sites and the remainder leased. There are nine country specific
administration offices, with principal regional management offices located in Taipei, Hong Kong,
Shanghai, and Singapore.
Global healthcare has 182 facilities in the United States, Canada, and Argentina, and six
countries in Europe. In 2005, acquisitions in Florida, Tennessee, and Indiana added a total of 15
locations. The majority of the facilities for global healthcare are leased.
Chemicals
The chemicals segment manufactures amines and nitric acid at its Pace, Florida facility;
alkylamines at its St. Gabriel, Louisiana facility and its Camacari, Bahia, Brazil facility; vinyl
acetate/ethylene copolymer emulsions at its South Brunswick, New Jersey facility; dinitrotoluene at
its Geismar, Louisiana facility; vinyl acetate/ethylene and vinyl chloride/ethylene copolymer
emulsions at its Cologne, Germany facility; nitric acid, dinitrotoluene, and toluene diamine at its
Pasadena, Texas facility; vinyl acetate/ethylene copolymer emulsions, vinyl chloride/ethylene
copolymer emulsions, polyvinyl acetate emulsions and acetylenic chemicals at its Calvert City,
Kentucky facility; vinyl acetate/ethylene copolymer emulsions at its Ulsan, Korea facility;
specialty amines at its Wichita, Kansas facility; and epoxy additives at its facilities in
Manchester, England; Singapore; Japan; and Los Angeles, California. The chemicals segment
manufactures polyurethane additives and polyurethane specialty products
(AIRTHANE®/VERSATHANE®) at its Paulsboro, New Jersey facility that is leased
in part and owned in part. A joint venture in China was recently formed for the production of TEDA
polyurethane additives. The chemicals segment also manufactures polyvinyl acetate emulsions
and pressure sensitive adhesive emulsions at two smaller locations in Elkton, Maryland and
Piedmont, South Carolina. Substantially all of the chemicals segment’s plants and real estate are
owned.
9
Table of Contents
The chemicals segment has sales offices and laboratories in the United States, Europe, Brazil,
Mexico, Japan, Korea, Singapore, and China, and representative offices in Beijing, Shanghai, and
Hong Kong. The Company leases approximately 75 percent of the offices and owns the remainder.
Equipment
The equipment segment operates seven plants and two sales offices in the United States. The
Company manufactures a significant portion of its cryogenic air separation and natural gas
liquefaction equipment at its Wilkes-Barre, Pennsylvania site. Cryogenic transportation containers
for liquid helium are manufactured and reconstructed at facilities in Bethlehem and Allentown,
Pennsylvania and Liberal, Kansas. Additional facilities utilized by the equipment segment include
two plants and one office in Europe, offices in Japan and China, and plants in Korea and China. Air
Products owns approximately 50 percent of the facilities and real estate in this segment and leases
the remaining 50 percent.
ITEM 3. Legal Proceedings.
In the normal course of business Air Products and its subsidiaries are involved in various
legal proceedings, including competition, environmental, health, safety, product liability, and
insurance matters. Certain proceedings involve governmental authorities under the Comprehensive
Environmental Response, Compensation, and Liability Act (the federal Superfund law); the Resource
Conservation and Recovery Act (RCRA); and similar state environmental laws relating to the
designation of certain sites for investigation or remediation. Presently there are approximately 36
sites on which a final settlement has not been reached where the Company, along with others, has
been designated a Potentially Responsible Party by the Environmental Protection Agency or is
otherwise engaged in investigation or remediation. The Company does not expect that any sums it may
have to pay in connection with these matters would have a materially adverse effect on its
consolidated financial position, nor is there any material additional exposure expected in any one
year in excess of the amounts the Company currently has accrued. Additional information on the
Company’s environmental exposure is included under “Environmental Controls.”
The Company previously disclosed that 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. Honeywell was awarded
damages in the amount of $8.1 million, which amount was recorded against previously established
accruals. Honeywell filed an appeal of the court’s decision and the Company filed a cross appeal.
The parties ultimately settled the case and the Company recognized an expense for an additional amount not considered material to the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock, ticker symbol “APD,” is listed on the New York Stock Exchange.
Quarterly stock prices, as reported on the New York Stock Exchange composite tape of transactions,
and dividend information for the last two fiscal years appear below. Cash dividends on Air
Products’ common stock are paid quarterly. The Company’s objective is to pay dividends consistent
with the reinvestment of earnings necessary for long-term growth.
It is the Company’s expectation that comparable cash dividends will continue to be paid in the
future.
10
Table of Contents
Quarterly Stock Information
| 2005 | High | Low | Close | Dividend | ||||||||||||
First |
$ | 59.18 | $ | 51.85 | $ | 57.97 | $ | .29 | ||||||||
Second |
65.81 | 55.99 | 63.29 | .32 | ||||||||||||
Third |
64.06 | 55.53 | 60.30 | .32 | ||||||||||||
Fourth |
61.60 | 53.30 | 55.14 | .32 | ||||||||||||
| $ | 1.25 | |||||||||||||||
| 2004 | High | Low | Close | Dividend | ||||||||||||
First |
$ | 53.07 | $ | 44.12 | $ | 52.83 | $ | .23 | ||||||||
Second |
55.40 | 46.71 | 50.12 | .23 | ||||||||||||
Third |
53.20 | 47.49 | 52.45 | .29 | ||||||||||||
Fourth |
55.76 | 48.42 | 54.38 | .29 | ||||||||||||
| $ | 1.04 | |||||||||||||||
The Company has authority to issue 25,000,000 shares of preferred stock in series. The Board
of Directors is authorized to designate the series and to fix the relative voting, dividend,
conversion, liquidation, redemption and other rights, preferences, and limitations as between
series. When preferred stock is issued, holders of Common Stock are subject to the dividend and
liquidation preferences and other prior rights of the preferred stock. There currently is no
preferred stock outstanding. The Company’s Transfer Agent and Registrar is American Stock Transfer
and Trust Company, 59 Maiden Lane, Plaza Level, New York, New York 10038, telephone (800) 937-5449
(U.S. and Canada) or (718) 921-8200 (all other locations), Internet website www.amstock.com, and
e-mail address info@amstock.com.
As of 10 November 2005, there were 10,260 record holders of the Company’s Common Stock.
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 | Purchased as Part of | Units) that May Yet Be | ||||||||||||||
| of Shares (or | (b) Average Price Paid | Publicly Announced | Purchased Under the | |||||||||||||
| Period | Units) Purchased | per Share (or Unit) | Plans or Programs | Plans or Programs(1) | ||||||||||||
1-31 July 2005 |
1,719,754 | $ | 59.29 | 1,719,754 | $ | 4,006,947 | ||||||||||
1 August |
66,953 | $ | 59.85 | 66,953 | $ | 49 | ||||||||||
Total |
1,786,707 | $ | 59.31 | 1,786,707 | $ | 0 | ||||||||||
| (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 Company’s Board of Directors on 17 March 2005. The program was completed on 4 August 2005. |
11
Table of Contents
ITEM 6. Selected Financial Data.
The tabular information appearing under “Five-Year Summary of Selected Financial Data” on page
72 of the 2005 Financial Review Section of the Annual Report to Shareholders is incorporated herein
by reference.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The textual information appearing under “Management’s Discussion and Analysis” on pages 15
through 36 of the 2005 Financial Review Section of the Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
The textual information appearing under “Market Risks and Sensitivity Analysis” on pages 31
and 32 of the 2005 Financial Review Section of the Annual Report to Shareholders is incorporated
herein by reference.
ITEM 8. Financial Statements and Supplementary Data.
The consolidated financial statements and the related notes thereto, together with the report
thereon of KPMG LLP dated 22 November 2005, appearing on pages 40 through 72 of the 2005 Financial
Review Section of the Annual Report to Shareholders, are incorporated herein by reference.
Management’s Report on Internal Control over Financial Reporting, appearing on page 37 of the
2005 Financial Review Section of the Annual Report to Shareholders, is incorporated herein by
reference.
The Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, appearing on page 38
of the 2005 Financial Review Section of the Annual Report to Shareholders, is incorporated herein
by reference.
The
Report of Independent Registered Public Accounting Firm, KPMG LLP, appearing on page 39
of the 2005 Financial Review Section of the Annual Report to Shareholders, is incorporated herein
by reference.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
ITEM 9A. Controls and Procedures.
Under the supervision of the Chief Executive Officer and Chief Financial Officer, the
Company’s management conducted an evaluation of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as of 30 September 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. There have been no significant changes
in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of such evaluation.
Management’s Report on Internal Control over Financial Reporting is provided under Item 8. “Financial
Statements and Supplementary Data,” appearing above. The report of KPMG LLP, the Company’s independent
registered public accounting firm, regarding the Company’s internal control over financial
reporting, is provided under Item 8. “Financial Statements and Supplementary Data,” appearing above.
ITEM 9B. Other Information.
Not Applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The biographical information relating to the Company’s directors, appearing in the Proxy
Statement relating to the Company’s 2006 Annual Meeting of Shareholders under the section, “The
Board of Directors,” is incorporated herein by reference. Biographical information relating to the
Company’s executive officers is set forth in Item 1 of Part I of this Report.
12
Table of Contents
Information on Section 16(a) Beneficial Ownership Reporting Compliance, appearing in the Proxy
Statement relating to the Company’s 2006 Annual Meeting of Shareholders under the section, “Air
Products Stock Beneficially Owned by Officers and Directors as of
November 1, 2005,” is incorporated
herein by reference.
The Company’s Code of Conduct was updated in 2003 to comply with the requirements of
Sarbanes-Oxley and the New York Stock Exchange. The Code of Conduct was filed as Exhibit 14 to the
2003 Annual Report on Form 10-K. In 2005, the Code of Conduct was further updated to make it more
reader friendly, cover additional areas of compliance and internal policies, and expand its
application to employees and businesses world-wide. The existing Code of Conduct, as amended, is
filed as Exhibit 14 to this Annual Report on Form 10-K. The Code of Conduct can also be found at
the Company’s Internet website at www.airproducts.com/responsibility/governance/codeofconduct.htm.
ITEM 11. Executive Compensation.
The information under “Compensation of Executive Officers” which includes “Report of the
Management Development and Compensation Committee,” “Executive Compensation Tables,” “Severance and
Employment Arrangements,” “Change in Control Arrangements,” and “Information About Stock
Performance and Ownership,” appearing in the Proxy Statement relating to the Company’s 2006 Annual
Meeting of Shareholders, is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information set forth in the sections headed “Persons Owning More than 5% of Air Products
Stock as of September 30, 2005,” “Air Products Stock Beneficially Owned by Officers and Directors
as of November 1, 2005,” and “Equity Compensation Plan Information,” appearing in the Proxy
Statement relating to the Company’s 2006 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions.
Not applicable.
ITEM 14. Principal Accountant Fees and Services.
The information appearing in the Proxy Statement relating to the Company’s 2006 Annual Meeting
of Shareholders under the section “Fees of Independent Auditors,” is incorporated herein by
reference.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as a part of this Report to the extent below noted:
1. The 2005 Financial Review Section of the Company’s 2005 Annual Report to Shareholders.
Information contained therein is not deemed filed except as it is incorporated by reference into
this Report. The following financial information is incorporated herein by reference:
(Page references to 2005 Financial Review Section of the Annual Report)
Management’s Discussion and Analysis
|
15 | |||
Management’s Report on Internal Control Over Financial Reporting
|
37 | |||
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
|
38 | |||
Report of Independent Registered Public Accounting Firm
|
39 | |||
Consolidated Income Statements for the three years ended 30 September 2005
|
40 | |||
Consolidated Balance Sheets at 30 September 2005 and 2004
|
41 | |||
Consolidated Statements of Cash Flows for the three years ended 30 September 2005
|
42 | |||
Consolidated Statements of Shareholders’ Equity for the three years ended 30 September 2005
|
43 | |||
Notes to the Consolidated Financial Statements
|
44 | |||
Business Segment and Geographic Information
|
69 | |||
Five-Year Summary of Selected Financial Data
|
72 |
13
Table of Contents
2. The following additional information should be read in conjunction with the consolidated
financial statements in the Company’s 2005 Financial Review Section of the Annual Report to
Shareholders:
(Page references to this Report)
Report of Independent Registered Public Accounting Firm on Schedule
|
17 |
Consolidated Schedule for the years ended 30 September 2005, 2004, and 2003 as follows:
| Schedule | ||||||
| Number | ||||||
II
|
Valuation and Qualifying Accounts | 18 |
All other schedules are omitted because the required matter or conditions are not present or
because the information required by the Schedules is submitted as part of the consolidated
financial statements and notes thereto.
3. Exhibits.
Exhibits filed as a part of this Annual Report on Form 10-K are listed in the Index to
Exhibits located on page 19 of this Report.
14
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| AIR PRODUCTS AND CHEMICALS, INC. | |||||
| (Registrant) | |||||
| By: | /s/ Paul E. Huck | ||||
| Paul E. Huck | |||||
| Vice President and Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
| (Principal Accounting Officer) | |||||
| Date: 22 November 2005 | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature and Title | Date | |
/s/ John P. Jones III |
22 November 2005 | |
(John P. Jones III)
|
||
Director, Chairman, President, and |
||
Chief Executive Officer |
||
(Principal Executive Officer) |
||
* |
22 November 2005 | |
(Mario L. Baeza)
Director |
||
* |
22 November 2005 | |
(Michael J. Donahue)
|
||
Director |
||
* |
22 November 2005 | |
(William L. Davis)
|
||
Director |
||
* |
22 November 2005 | |
(Ursula F. Fairbairn)
|
||
Director |
15
Table of Contents
| Signature and Title | Date | |
* |
22 November 2005 | |
W. Douglas Ford
Director |
||
* |
22 November 2005 | |
(Edward E. Hagenlocker)
|
||
Director |
||
* |
22 November 2005 | |
(James F. Hardymon)
|
||
Director |
||
* |
22 November 2005 | |
(Margaret G. McGlynn)
|
||
Director |
||
* |
22 November 2005 | |
(Terrence Murray)
|
||
Director |
||
* |
22 November 2005 | |
(Charles H. Noski)
|
||
Director |
||
* |
22 November 2005 | |
(Lawrence S. Smith)
|
||
Director |
| * | W. Douglas Brown, Vice President, General Counsel, and Secretary, by signing his name hereto, does sign this document on behalf of the above noted individuals, pursuant to a power of attorney duly executed by such individuals, which is filed with the Securities and Exchange Commission herewith. |
| /s/ W. Douglas Brown | |||
| W. Douglas Brown | |||
| Attorney-in-Fact | |||
| Date: 22 November 2005 |
16
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
Under date of 22 November 2005, we reported on the consolidated balance sheets of Air Products
and Chemicals, Inc. and subsidiaries as of 30 September 2005 and 2004, and the related consolidated
statements of income, cash flows, and shareholders’ equity for each of the years in the three-year
period ended 30 September 2005, which are included in the Annual Report to Shareholders. Also,
under the date of 22 November 2005, we reported on the effectiveness of Air Products and Chemicals,
Inc.’s internal control over financial reporting as of 30 September 2005, and on management’s
assessment of the effective operation of internal control over financial reporting. In connection
with our audits, we also audited the related consolidated financial statement schedule referred to
in Item 15(a)(2) in this Form 10-K. This financial statement schedule is the responsibility of the
Company’s management. Our responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
22 November 2005
22 November 2005
17
Table of Contents
SCHEDULE II
CONSOLIDATED
CONSOLIDATED
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SCHEDULE II–VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended 30 September 2005, 2004, and 2003
SCHEDULE II–VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended 30 September 2005, 2004, and 2003
| Other Changes | ||||||||||||||||||||||||
| Additions | Increase(Decrease) | |||||||||||||||||||||||
| Balance at | Charged | Charged | Cumulative | Balance | ||||||||||||||||||||
| Beginning | to | to other | Translation | at End of | ||||||||||||||||||||
| Classification | of period | Expense | Accounts(1) | Adjustment | Other(2) | Period | ||||||||||||||||||
| (in millions of dollars) | ||||||||||||||||||||||||
Year Ended 30 September 2005 |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 30 | $ | 11 | $ | — | $ | — | $ | (6 | ) | $ | 35 | |||||||||||
Year Ended 30 September 2004 |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 22 | $ | 18 | $ | 2 | $ | 1 | $ | (13 | ) | $ | 30 | |||||||||||
Year Ended 30 September 2003 |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 12 | $ | 12 | $ | 4 | $ | 1 | $ | (7 | ) | $ | 22 | |||||||||||
| Notes: | ||
| [1] | Includes primarily collections on accounts previously written off. | |
| [2] | Primarily includes write-offs of uncollectible accounts. | |
18
Table of Contents
INDEX TO EXHIBITS
| Exhibit No. | Description | |
(3)
|
Articles of Incorporation and By-Laws. | |
3.1
|
By-Laws of the Company. (Filed as Exhibit 3.1 to the Company’s Form 8-K Report dated 18 September 1997.)* | |
3.2
|
Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.2 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1987.)* | |
3.3
|
Amendment to the Restated Certificate of Incorporation of the Company dated 25 January 1996. (Filed as Exhibit 3.3 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1996.)* | |
(4)
|
Instruments defining the rights of security holders, including indentures. Upon request of the Securities and Exchange Commission, the Company hereby undertakes to furnish copies of the instruments with respect to its long-term debt. | |
4.1
|
Rights Agreement, dated as of 19 March 1998, between the Company and First Chicago Trust Company of New York. (Filed as Exhibit 1 to the Company’s Form 8-A Registration Statement dated 19 March 1998, as amended by Form 8-A/A dated 16 July 1998.)* | |
4.2
|
Amended and Restated Credit Agreement dated as of 16 September 1999 among the Company, Additional Borrowers parties thereto, Lenders parties thereto, and The Chase Manhattan Bank (as amended). (Filed as Exhibit 4.2 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1999.)* | |
(10)
|
Material Contracts. | |
10.1
|
1990 Deferred Stock Plan of the Company, as amended and restated effective 1 October 1989. (Filed as Exhibit 10.1 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1989.)* | |
10.2
|
The Rules of the United Kingdom Savings-Related Share Option Scheme of the Company as adopted on 24 October 1997, as amended on 1 October 1999 and 5 November 1999. (Filed as Exhibit 10.2 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2002.)* | |
10.3
|
Amended and Restated Supplementary Savings Plan of the Company effective 1 April 1998, reflecting amendments through 30 September 2002. (Filed as Exhibit 10.3 to the Company’s 10-Q Report for the quarter ended 31 March 2003.)* | |
10.4
|
Amended and Restated Supplementary Pension Plan of the Company effective 1 May 2003. (Filed as Exhibit 10.2 to the Company’s 10-Q Report for the quarter ended 31 March 2003.)* | |
10.5
|
Stock Option Program for Directors of the Company, formerly known as the Stock Option Plan for Directors. Effective 23 January 2003, this Plan was combined with the Long-Term Incentive Plan and offered as a program thereunder. (Filed as Exhibit 10.5 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2004.)* | |
10.6
|
Letter dated 7 July 1997 concerning pension for an executive officer. (Filed as Exhibit 10.7(c) to the Company’s Form 10-K Report for the fiscal year ended 30 September 1998.)* | |
10.7
|
Air Products and Chemicals, Inc. Severance Plan effective 15 March 1990. (Filed as Exhibit 10.8(a) to the Company’s Form 10-K Report for the fiscal year ended 30 September 1992.)* | |
10.8
|
Air Products and Chemicals, Inc. Change of Control Severance Plan effective 15 March 1990. (Filed as Exhibit 10.8(b) to the Company’s Form 10-K Report for the fiscal year ended 30 September 1992.)* |
19
Table of Contents
| Exhibit No. | Description | |
10.9
|
Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. relating to the Defined Benefit Pension Plans dated as of 1 August 1999. (Filed as Exhibit 10.13 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1999.)* | |
10.9(a)
|
Amendment No. 1 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. relating to the Defined Benefit Pension Plan, adopted 1 January 2000. (Filed as Exhibit 10.13(a) to the Company’s Form 10-K Report for the fiscal year ended 30 September 2000.)* | |
10.10
|
Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. relating to the Supplementary Savings Plan dated as of 1 August 1999. (Filed as Exhibit 10.14 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1999.)* | |
10.10(a)
|
Amendment No. 1 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. relating to the Supplementary Savings Plan, adopted 1 January 2000. (Filed as Exhibit 10.14(a) to the Company’s Form 10-K Report for the fiscal year ended 30 September 2000.)* | |
10.11
|
Form of Severance Agreements that the Company has with each of its U.S. Executive Officers. (Filed as Exhibit 10.16 to the Company’s Form 10-K Report for the fiscal year ended 30 September 1999.)* | |
10.12
|
Amended and Restated Long Term Incentive Plan of the Company, effective 23 January 2003. (Filed as Exhibit 10.2 to the Company’s Form 10-Q Report for the quarter ended 31 March 2003.)* | |
10.13
|
Form of Award Agreement under the Long Term Incentive Plan of the Company, used for the FY2004 awards. (Filed as Exhibit 10.2 to the Company’s Form 10-Q Report for the quarter ended 31 December 2003.)* | |
10.14
|
Amended and Restated Annual Incentive Plan of the Company, effective 1 October 2001. (Filed as Exhibit 10.2 to the Company’s Form 10-Q Report for the quarter ended 31 March 2002.)* | |
10.15
|
Compensation Program for Directors of the Company, effective 1 October 2004. (Filed as Exhibit 10.2 to the Company’s Form 10-Q Report for the quarter ended 31 December 2004.)* | |
10.16
|
Deferred Compensation Program for Directors of the Company, formerly known as the Deferred Compensation Plan for Directors of the Company. Effective 23 January 2003, the Plan was combined with the Long-Term Incentive Plan and offered as a program thereunder. (Filed as Exhibit 10.16 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2004.)* | |
10.17
|
Stock Incentive Program of the Company effective 1 October 1996. (Filed as Exhibit 10.21 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2002.)* | |
10.18
|
Terms and Conditions of the Global Employee Stock Option Awards of the Company effective 1 October 1995, 1997, and 1999. (Filed as Exhibit 10.22 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2002.)* | |
10.19
|
Terms and Conditions of the Stock Incentive Awards of the Company effective 1 October 1999, 2000, 2001, and 2002. (Filed as Exhibit 10.19 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2004.)* | |
10.20
|
Air Products and Chemicals, Inc. Corporate Executive Committee Retention/Separation Program, effective July 17, 2003. (Filed as Exhibit 10.22 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2003.)* | |
10.21
|
Air Products and Chemicals, Inc. Retirement Savings and Stock Ownership Plan as amended and restated effective 1 October 1997 to reflect law and other changes effective through 30 September 2002. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 December 2003.)* | |
10.22
|
Form of Severance Agreement that the Company has with one U.S. Executive Officer, effective 20 November 2003. (Filed as Exhibit 10.25 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2003.)* |
20
Table of Contents
| Exhibit No. | Description | |
10.23
|
Form of Award Agreement under the Long Term Incentive Plan of the Company used for the FY2005 awards. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 December 2004.)* | |
10.24
|
Compensation Program for Directors of the Company, effective 1 October 2005. | |
10.25
|
Description of Performance Criteria under the Annual Incentive Plan of the Company. (Filed as Exhibit 10.3 to the Company’s Form 10-Q Report for the quarter ended 31 December 2004.)* | |
10.26
|
Amended and Restated Deferred Compensation Program for Directors, effective 1 October 2005. Effective as of 23 January 2003, this program is offered under the Long-Term Incentive Plan. | |
12
|
Computation of Ratios of Earnings to Fixed Charges. | |
13
|
2005 Financial Review Section of the Annual Report to Shareholders for the fiscal year ended 30 September 2005, which is furnished to the Commission for information only and not filed except as portions are expressly incorporated by reference in this Report. | |
14
|
Code of Ethics. | |
21
|
Subsidiaries of the registrant. | |
(23)
|
Consents of Experts and Counsel. | |
23.1
|
Consent of Independent Registered Public Accounting Firm. | |
24
|
Power of Attorney. | |
(31)
|
Rule 13a-14(a)/15d-14(a) Certifications. | |
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)
|
Section 1350 Certifications. | |
32.1
|
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. |
| * | Previously filed as indicated and incorporated herein by reference. Exhibits incorporated by reference are located in SEC File No. 1-4534. |
21
Exhibit
10.24
Compensation Program
for Nonemployee Directors
for Nonemployee Directors
| a. | Each director shall be paid an annual retainer of $50,000 for serving as a member of the Board of Directors and any Board Committee(s), which retainer shall be payable in quarterly installments at the end of each quarter. Fifty percent of this retainer will be paid by the Company in the form of a credit to the directors’ Air Products Stock Account and converted to deferred stock units under the Deferred Compensation Program for Directors. | |
| b. | Each director who serves as the Chairman of a Board Committee shall be paid an additional annual retainer of $10,000, which retainer shall be payable in quarterly installments. | |
| c. | Each director shall be paid a meeting fee of $1,500 per meeting attended.*/ | |
| d. | Deferred stock units with a targeted dollar value of $100,000 shall be credited to each director’s Air Products Stock Account under the Deferred Compensation Program for Directors (i) effective as of the date the director first serves on the Board, and (ii) annually, notwithstanding the date of first service, for directors continuing in office after the Annual Meeting of Shareholders, effective as of the day of the Annual Meeting. The number of units to be credited will be determined based on the Fair Market Value of a share of common stock of the Company as determined under the Program on the date credited, rounded up to the nearest whole share unit. |
| e. | Directors shall be reimbursed for out-of-pocket expenses incurred in attending regular and special meetings of the Board and Board Committees and any other business function of the Company at the request of the Chairman of the Board. Expenses will be reimbursed as submitted.**/ |
| */ | For purposes of administering these provisions, a director will be considered to have attended any meeting for which he or she was present in person or by secure telephone conference call for substantially all of the meeting, as determined by the Corporate Secretary. Members of the Audit Committee who participate with management and/or the independent auditors to review such things as quarterly earnings releases and registration statements as required by law or listing standard will also receive the meeting fee. Directors who meet with a constituent or other third party on behalf of the Company and at the request of the Chief Executive Officer will also receive the meeting fee. | |
| **/ | Directors are reimbursed at the rate of $.485 per mile or such rate as is published by the Internal Revenue Service for use of their personal cars in connection with Company business. Directors using personal aircraft or private carrier will be |
G-2
| reimbursed for such expenses at a rate equivalent to first-class air fare of scheduled carriers. |
G-3
AIR PRODUCTS AND CHEMICALS, INC.
NON-EMPLOYEE DIRECTORS
EXPENSE REPORT
NON-EMPLOYEE DIRECTORS
EXPENSE REPORT
EVENT(S) AND DATE(S)
|
||
COMMERCIAL AIRFARE (Attach Ticket) |
||
HOTEL ACCOMMODATIONS
|
||
MEALS
|
||
MILEAGE
|
||
CHAUFFEUR SERVICE
|
||
TELEPHONE TOLLS
|
||
MISCELLANEOUS (Please Specify) |
||
TOTAL
|
| Signature / Date | ||||
| Address |
Please submit this form with attached receipts to Diane L. Geist, Assistant Corporate Secretary
G-4
G-5
Exhibit 10.26
This document constitutes part of a prospectus covering securities
that have been registered under the Securities Act of 1933.
that have been registered under the Securities Act of 1933.
Deferred Compensation Program
for Directors
for Directors
TABLE OF CONTENTS
| Page | ||
Deferred Compensation Program for Directors |
1 | |
General |
1 | |
Effective Dates |
1 | |
Participants |
1 | |
Mandatory Deferrals |
1 | |
Elective Deferrals |
2 | |
Earnings on Accounts |
3 | |
Time and Manner of Making Elective Deferrals |
3 | |
Payment of Deferred Compensation |
4 | |
Election of Time of Payment |
4 | |
Changes in Election of Timing of Payment |
4 | |
Payment Following Termination of Service |
5 | |
Accelerated Payment |
5 | |
Payment on Death |
6 | |
Change in Control |
6 | |
Other Events |
6 | |
Miscellaneous Provisions |
6 | |
Withholding of Taxes |
6 | |
Rights as to Common Stock |
7 | |
Adjustments to Avoid Dilution |
7 | |
Participant’s Rights Unsecured |
7 | |
Nonassignability |
8 | |
Statement of Account |
8 | |
Administration |
8 | |
Business Days |
8 | |
Amendment and Termination |
8 | |
Notices |
8 | |
Construction; Governing Law |
9 | |
Election Form |
10 | |
Administrative Procedures Regarding Transfer of the Right to Payment
of Deferred Compensation |
13 | |
Tax Consequences to Participants |
17 |
Deferred Compensation Program
for Directors
for Directors
| 1. | General | |
| The Deferred Compensation Program for Directors (the “Program”) is provided to: |
| (a) | Provide compensation for directors in the form of Company equity securities to align the interests of directors with those of the Company’s shareholders; and | ||
| (b) | Provide directors the opportunity to defer compensation earned as a director. |
| The Program is provided under the Air Products and Chemicals, Inc. Long-Term Incentive Plan and is subject to the terms thereof. | ||
| 2. | Effective Dates | |
| The Air Products and Chemicals, Inc. Deferred Compensation Plan for Directors was adopted effective as of 1 January 1980 and was thereafter amended from time to time. Effective 23 January 2003, the Plan was combined with the Long-Term Incentive Plan and offered as a program thereunder. This amended and restated Program is effective as of 1 January 2005. | ||
| 3. | Participants | |
| Any director of the Company who is not an employee of the Company or of a subsidiary of the Company is eligible to participate in the Program. | ||
| 4. | Mandatory Deferrals | |
| There shall be established for each participant an Air Products Stock Account described under section 5(b) below to which shall be credited all compensation which is to be paid by the Company in the form of deferred stock units in accordance with the Compensation Program for Nonemployee Directors applicable for calendar year 1997 and later periods; and, for each participant who had not served as a director for at least six years as of 1 January 1997, the actuarial present value of his or her prorated accrued pension (the “Pension |
I-1
| Amount”) under the Pension Plan for Directors as determined in connection with the termination of the Plan (collectively, “Mandatory Deferrals”). | ||
| Dollar amounts to be so credited shall be converted into deferred stock units in the manner described under Section 5(b) below on the quarterly or other specified crediting date for 1997 and later compensation, and on 21 November 1996, as to the Pension Amount. | ||
| 5. | Elective Deferrals | |
| Participants may elect to defer receipt of all or a specified portion of the compensation (exclusive of expense reimbursements) otherwise payable to him or her in cash for serving on the Board of Directors of the Company, attending meetings or committee meetings thereof or performing other services in connection with the business of the Company and its subsidiaries. Such electively deferred compensation (“Elective Deferrals”) will be credited on the date the compensation is otherwise payable, to one or both of the following hypothetical investment accounts (“Accounts”) as directed by the participant: |
| (a) | An account deemed to earn interest at rates established on the first business day of each calendar quarter based upon the published average long-term yields of corporate bonds of “A” rated Industrial Companies appearing in Moody’s Bond Survey or an equivalent Bond Rating Service on such day (the “Interest Account”); and | ||
| (b) | An account (the “Air Products Stock Account”) deemed to be invested in Air Products and Chemicals, Inc. common stock, par value $1.00 (“common stock”). The Company shall credit the Air Products Stock Account with that number of units (including fractions) obtained by dividing the amount of such deferred compensation by the Fair Market Value of a share of common stock (i) on the second business day before the date credited to the Air Products Stock Account for retainer and meeting fees, and (ii) on the effective date specified in the Compensation Program for Non-employee Directors for crediting Directors with initial and annual deferred stock awards. For purposes of the Plan, Fair Market Value of a share of common stock on any date (the “valuation date”) shall be equal to the mean of the high and low sale prices on the New York Stock Exchange, as reported on the composite transaction tape, for such date, or, if no sales were quoted on such date, on the most recent preceding date on which sales were quoted. The units thus calculated are herein referred to as “deferred stock units.” |
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| 6. | Earnings on Accounts | |
| Each participant’s Accounts will be credited with interest on deferred compensation credited to the Interest Account, and with dividend equivalents on deferred compensation credited to the Air Products Stock Account, as provided below, from the date credited until 31 December of the year preceding payment, unless payment is made because of death or a Change in Control, in which event interest will be credited until the date of death or the date of termination of service as a director following the Change in Control, respectively. |
| (a) | Earnings on Interest Account. Interest shall be compounded quarterly. | ||
| (b) | Earnings on Air Products Stock Account. Earnings shall be credited quarterly in an amount equal to the dividends payable during the quarter just ended with respect to that number of shares of Air Products Stock equal to the number of deferred stock units credited to the Air Products Stock Account as of the end of the prior quarter. The amount so credited shall then be converted into deferred stock units in the manner described under Section 5(b) above using the quarterly crediting date as the valuation date for determining Fair Market Value. |
| 7. | Time and Manner of Making Elective Deferrals | |
| An election to defer compensation must be made by a director prior to the calendar year during which such compensation is earned; provided that an initial election by a new director to defer compensation for all future services may be up to 30 days after commencing service as a director to the Company. An election shall continue in effect until the end of the participant’s service to the Company as a director or until the participant modifies or revokes the election as described below, whichever shall occur first. | ||
| A participant may elect, modify, or revoke a prior election to defer compensation by completing Sections I and II of the Election Form attached hereto as Exhibit A (the “Election Form”) and returning it to the Corporate Secretary. Such Election Form shall specify: |
| (a) | The amount or percentage of compensation to be deferred beginning on a future date specified in the notice until such notice is revoked or modified as to future compensation; and | ||
| (b) | The percentage of the Elective Deferrals to be credited to the Interest Account and the percentage to be credited to the Air Products Stock Account. |
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| Any modification or revocation of a prior election described in Section 7(a) or 7(b) above shall relate only to future compensation, and shall not apply to any amounts previously credited to the participant’s account. Beginning 1 January 2006, a participant’s election to defer described in 7(a) may not be revoked or modified during the calendar year. Revocation or modification of a prior election to defer must be made for a calendar year no later than the close of the preceding calendar year. | ||
| 8. | Payment of Deferred Compensation | |
| No payment may be made from the participant’s Accounts in respect of Elective Deferrals or Mandatory Deferrals (together, “Deferred Compensation Amount”) except as provided below. |
| (a) | Election of Time of Payment. Within 30 days of commencing service as a director to the Company, a participant may make an election to receive distribution of his or her Deferred Compensation Amount in either a lump sum or in a specified number of consecutive annual installments (not to exceed ten), and may elect the date of payment in the case of a lump sum or the date payments commence in the case of installments. All such elections may be made by completing Section III of the Election Form and returning it to the Corporate Secretary. If a participant does not complete an Election Form specifying the timing of payment of his or her Deferred Compensation Amount within the first 30 days of service, such Deferred Compensation Amount will be paid as a lump sum in the first year after the year in which the director’s service as a director ends, and the director will be deemed, for purposes of the Program, to have so elected. | ||
| (b) | Changes in Election of Timing of Payment. A participant may change his or her election in regard to the timing of payment of his or her Deferred Compensation Amount by completing a new Election Form and returning it to the Corporate Secretary. Such a change in election of timing of payment will apply only to Deferred Compensation Amounts earned in future years, except as follows: |
| (i) | On or before 31 December 2005, a director may elect to change the timing of payment for all of his or her Deferred Compensation Amounts by completing an Election Form specifying the change and returning it to the Corporate Secretary’s Office. |
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| (ii) | On or after 1 January 2006, a director may change the timing of payment for previously accrued Deferred Compensation Amounts only as follows: |
| (x) | A completed Election Form reflecting the desired change must be received by the Corporate Secretary’s Office no later than one year prior to the first scheduled payment of such Deferred Compensation Amounts under his or her currently effective Election Form(s); | ||
| (y) | The change must delay the first payment by at least five years from the date the first scheduled payment otherwise would have been made; and | ||
| (z) | The change will become effective one year from the date the Election Form is received by the Company. |
| (c) | Payment Following Termination of Service. The value of each Deferred Compensation Amount credited to the Interest Account of a participant’s Plan account is payable in cash, and the value of each Deferred Compensation Amount credited to the Air Products Stock Account is payable by delivery of a share of common stock for each deferred stock unit credited to the participant’s Account, in either case in a lump sum or in annual installments, in accordance with the participant’s election. | ||
| All payments from a participant’s Accounts must be completed by the tenth year after the year in which service as a director terminates. All payments will be made in January of the applicable year or as soon thereafter as reasonably possible. If annual installments are to be paid, the amount of the first payment shall be a fraction of the value of the participant’s Accounts attributable to the particular Deferred Compensation Amount as of the 31 December preceding payment, the numerator of which is one and the denominator of which is the total number of such installments elected. The amount of each subsequent payment shall be a fraction of the value as of the 31 December preceding each subsequent payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid as to such Deferred Compensation Amount. The number of shares of common stock to be delivered in payment from the Air Products Stock Account shall be equal to the number of deferred stock units represented by the payment owed, calculated as aforesaid, rounded up to the next whole share of common stock. |
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| (d) | Accelerated Payment. Notwithstanding the deferral period and timing of payment determined in accordance with Sections 8(a) and (b) above, the participant’s Accounts shall be paid on an accelerated basis as follows under the circumstances described below: |
| (i) | Payment on Death. In the event of a participant’s death, the value of his or her Accounts (including interest and dividend equivalents) determined as of the date of death shall be paid in a single cash lump sum to the participant’s estate or designated beneficiary on the earlier of the 15 January or 15 July following such date or as soon thereafter as reasonably possible. The amount of any cash payment in respect of deferred stock units in the Air Products Stock Account shall be determined by multiplying the number of such units, including fractional units, by the Fair Market Value of a share of common stock as of the date of death. A participant may designate a beneficiary by completing Section IV of the Election Form and returning it to the Corporate Secretary’s Office. | ||
| (ii) | Change in Control. In the event of a “Change in Control” of the Company followed by a participant’s termination of service as a Director of the Company, the value of his or her Accounts (including interest and dividend equivalents), determined as of the date of termination of service as a Director following or in connection with the Change in Control, shall be immediately due and payable to the participant in a single cash lump sum. The amount of any cash payment in respect of deferred stock units in the Air Products Stock Account shall be determined by multiplying the number of such units, including fractional units, by the Fair Market Value of a share of common stock as of such date of termination of service. | ||
| For purposes of this paragraph, the term “Change in Control” shall mean the first to occur of a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, in each case within the meaning of Section 409A of the Internal Revenue Code and regulations thereunder. | |||
| (iii) | Other Events. Upon the occurrence of any other event or conditions which permit an acceleration of payments under regulations implementing Section 409A of the Internal Revenue Code, the Corporate Secretary’s Office will distribute the value of the participants’ accounts in accordance with such regulations. |
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| (e) | Miscellaneous Provisions. |
| (i) | Withholding of Taxes. The rights of a participant to payments under this Program shall be subject to the Company’s obligations at any time to withhold income or other taxes from such payments including, without limitation, by reducing the number of shares of common stock to be distributed in payment of deferred stock units by the number of shares equal in value to the amount of such taxes required to be withheld. | ||
| (ii) | Rights as to Common Stock. No participant with deferred compensation credited to the Air Products Stock Account shall have rights as a Company shareholder with respect thereto unless, and until the date as of which, certificates for shares of common stock are issued upon payment of such deferred compensation. No shares of common stock shall be issued and delivered hereunder unless and until all legal requirements applicable to the issuance, delivery or transfer of such shares have been complied with including, without limitation, compliance with the provisions of the Act and of the Securities Act of 1993, as amended, and the applicable requirements of the exchanges on which the Company’s common stock may, at the time, be listed. Distributions of shares of common stock in payment under this Program may be made either from shares of authorized but unissued common stock reserved for such purpose by the Board of Directors or from shares of authorized and issued common stock reacquired by the Company and held in its treasury, as from time to time determined by, or pursuant to delegations from, the Board of Directors. | ||
| (iii) | Adjustments to Avoid Dilution. In the event of any change in the common stock of the Company by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares, or a rights offering to purchase common stock at a price substantially below fair market value, or other similar corporate change, including without limitation in connection with a Change in Control of the Company, the value and attributes of each deferred stock unit shall be appropriately adjusted consistent with such change to the same extent as if such deferred stock units were issued and outstanding shares of common stock of the Company, so as to preserve, without increasing, the value of deferred compensation credited to each participant’s Air Products Stock Account. Such adjustments shall be made by the Board of Directors and shall be conclusive and binding for all purposes of the Program. |
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| 9. | Participant’s Rights Unsecured | |
| The right of any participant to the payment of deferred compensation and earnings thereon under the Program shall be an unsecured and unfunded claim against the general assets of the Company. | ||
| 10. | Nonassignability | |
| The right of a participant to the payment of deferred compensation and earnings thereon under the Program shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation, except by gift to the participant’s family member(s) or to trust(s) of which such family member(s) are beneficiaries and subject to the administrative procedures and conditions set forth in the “Administrative Procedures Regarding Transfers of the Right to Payment of Deferred Compensation” attached hereto as Exhibit B; to his or her designated beneficiary; or by will or the laws of descent and distribution. | ||
| 11. | Statement of Account | |
| Statements will be sent to participants by February as to the value of their Accounts as of the end of December of the previous year. | ||
| 12. | Administration | |
| The Administrator of this Program shall be the Corporate Secretary of the Company. The Administrator shall have authority to adopt rules and regulations for carrying out the Program and to interpret, construe, and implement the provisions thereof. | ||
| 13. | Business Days | |
| If any date specified herein falls on a Saturday, Sunday or legal holiday, such date shall be deemed to refer to the next business day thereafter. | ||
| 14. | Amendment and Termination | |
| This Program may at any time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification, or termination shall, without the consent of a participant, adversely affect such participant’s rights with respect to amounts theretofore accrued in his or her deferred compensation account, except as required by law. |
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| 15. | Notices | |
| All notices to the Company under this Program shall be in writing and shall be given as follows: |
Corporate Secretary
Air Products and Chemicals, Inc.
7201 Hamilton Boulevard
Allentown, PA 18195-1501
Air Products and Chemicals, Inc.
7201 Hamilton Boulevard
Allentown, PA 18195-1501
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| 16. | Construction; Governing Law | |
| This Program is intended to comply with Section 409A of the Internal Revenue Code and shall be construed, whenever possible, to be in conformity with such requirements and in accordance with the laws of the Commonwealth of Pennsylvania for all purposes without giving effect to principles of conflicts of laws. |
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EXHIBIT A
AIR PRODUCTS AND CHEMICALS, INC. (the “Company”)
DEFERRED COMPENSATION PROGRAM FOR DIRECTORS (the “Program”)
Election Form
(For deferrals effective after 31 December 2005)
AIR PRODUCTS AND CHEMICALS, INC. (the “Company”)
DEFERRED COMPENSATION PROGRAM FOR DIRECTORS (the “Program”)
Election Form
(For deferrals effective after 31 December 2005)
| To: | Corporate Secretary Air Products and Chemicals, Inc. |
| I. | Elective Deferred Compensation Amount | ||
| In accordance with the provisions of the Program, I hereby (check one): |
| o | Elect (or modify my prior election) to defer receipt of compensation otherwise payable to me in cash for services as a Director of the Company in the manner described below (fill in one): |
| $ |
(amount per quarter) | |||
| or | ||||
| (percentage per quarter) |
| o | Revoke my prior election to defer. |
| This election, modification, or revocation shall take effect beginning on to affect only compensation earned on and after such date. (Must be a date after the date this Election Form is received by the Company.) Revocation or modification of a prior election may be made only for a future calendar year and must be made no later than the close of the calendar year preceding the year for which it is effective. | |||
| II. | Investment Account for Elective Deferred Compensation Amount. | ||
| The Elective Deferred Compensation Amount is to be deemed invested in the following account(s) (enter a whole percentage from 1% to 100% in each blank, with the two percentages totaling 100%): |
| ______% in the Interest Account to be paid out in the form of cash. | |||
| ______% in the Air Products Stock Account to be distributed in the form of Air Products and Chemicals, Inc. Common Stock. Notes concerning compliance with the Federal Securities Law: | |||
| (1) | An election to invest or to cease investing, or to change the level of investing, in the Air Products Stock Account will only be effective if received by the Company during a 30-day window period during which there is no material non-public information. Such window periods generally occur during the 30-day periods starting on the second trading day after the day when quarterly or annual earnings releases have been issued with commentary, which usually occur in the third or fourth weeks of January, April, July, and October. The Corporate Secretary can advise you as to the precise timing of window periods. | ||
| (2) | Under current federal securities law, it is necessary to report to the Securities and Exchange Commission the number of units credited to the Air Products Stock Account at the end of each fiscal year, on a Form 5 Report for the year. | ||
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EXHIBIT A
AIR PRODUCTS AND CHEMICALS, INC.
DEFERRED COMPENSATION PROGRAM FOR DIRECTORS (the “Program”)
Election Form
AIR PRODUCTS AND CHEMICALS, INC.
DEFERRED COMPENSATION PROGRAM FOR DIRECTORS (the “Program”)
Election Form
(continued)
| III. | Timing of Payment of Deferred Compensation Amounts (Elective and Mandatory) | ||
| COMPLETE A OR B, BUT NOT BOTH, AND C. |
| A. | Lump Sum Election | ||
| Mandatory Deferred Compensation Amounts and the Elective Deferred Compensation Amount (if any) are to be paid to me in a lump sum (check one): |
| o | In the year my service as a Director ends. | ||
| o | In the ___ year after the year in which my service as a Director ends (not to exceed tenth). |
| B. | Installment Election | ||
| Mandatory Deferred Compensation Amounts and the Elective Deferred Compensation Amount (if any) are to be paid to me in ___ (up to 10) consecutive annual installments, the first of which is to be paid in (check one): |
| o | The year in which my service ends. | ||
| o | ___ year after the year in which my service ends (the last installment must be paid no later than 10 years after the year in which service ends). |
| C. | This election shall apply to: |
| ___ Future year Deferred Compensation Amounts only. | |||
| ___ All Deferred Compensation Amounts.* |
| * | I understand that, with respect to Deferred Compensation Amounts for the current and prior years, this election will become effective one year from the date received by the Corporate Secretary’s Office; unless payouts under a prior election are scheduled to commence before this effective date, in which case this election is void and the prior election will control. Any modification or revocation of a prior payment election must delay commencement of the payment by five years from the date the payment otherwise would have been made. |
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EXHIBIT A
AIR PRODUCTS AND CHEMICALS, INC.
DEFERRED COMPENSATION PROGRAM FOR DIRECTORS (the “Program”)
Election Form
AIR PRODUCTS AND CHEMICALS, INC.
DEFERRED COMPENSATION PROGRAM FOR DIRECTORS (the “Program”)
Election Form
(continued)
| IV. | Beneficiary Designation | ||
| If I die before receiving all the deferred payments due me under the Program, I understand the value of my Mandatory and Elective Deferred Compensation Amounts will be paid to my estate or designated beneficiary, in a single lump sum cash payment on the earlier of the January 15 or July 15 following the date of my death or as soon thereafter as reasonably possible. I wish to designate as my beneficiary. (A beneficiary may be designated by delivering this Election Form to the Corporate Secretary of the Company. Beneficiary designations that are not received by the Corporate Secretary’s Office prior to the participants’ death cannot be honored.) |
This Election is subject to the terms of Air Products and Chemicals, Inc. Deferred Compensation
Program for Directors, as amended from time to time.
Received on the day of on behalf of the Company. |
By
|
Date: | |||||||||
I-13
EXHIBIT B
ADMINISTRATIVE PROCEDURES REGARDING TRANSFER OF THE
RIGHT TO PAYMENT OF DEFERRED COMPENSATION
RIGHT TO PAYMENT OF DEFERRED COMPENSATION
The right to receive payment of deferred compensation and earnings thereon under the Program (a
“Payment Right”) is transferable by the director participant (the “director”) only in accordance
with these Procedures. Directors are encouraged to seek financial and tax planning advice prior to
transferring a Payment Right.
| 1. | Payment Rights may be transferred by directors only by gift and only to the director’s family members or to trusts of which such family members are beneficiaries. Family members include any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships. | ||
| 2. | Prior to making any transfer, the director and transferee must complete and sign the attached Election to Transfer Payment Rights form and return it to the Corporate Secretary’s Office. Transfers will not be effective until the form is received, acknowledged and accepted by the Secretary or an Assistant Corporate Secretary. | ||
| 3. | Following transfer, any written notice of designation of beneficiary previously filed by the director relating to the Payment Right is void and of no further force and effect; and the transferred Payment Right may not be subsequently transferred by the transferee except by will or the laws of descent and distribution. | ||
| 4. | Except as otherwise provided in these Procedures, the transfer of a Payment Right to the transferee also transfers the ancillary rights associated with the Payment Right under the terms of the Program (references herein to “Payment Right” to include both the Payment Right and such ancillary rights); and following transfer, the Payment Right will continue to be subject to the same terms and conditions as were applicable immediately prior to transfer under the Plan. | ||
| 5. | Certain U.S. Securities Laws Considerations for Active Directors |
| • | We strongly recommend that while engaged in service to the Company, directors discuss in advance with the Corporate Secretary or his or her designee the possible implications of transferring the director’s Payment Right (or altering the terms of any trust to which the Payment Right has |
I-14
| been transferred) to enable the Company to assist the director in complying with the securities laws, including preparing any required reports for filing with the Securities and Exchange Commission and the New York Stock Exchange. Transfer of the Payment Right must be reported as a gift transaction on the director’s Form 5 (or voluntarily on an earlier Form 4). |
I-15
Air Products and Chemicals, Inc.
(the “Company”)
(the “Company”)
ELECTION TO TRANSFER PAYMENT RIGHTS
Under The Deferred Compensation Program for Directors (the “Program”)
Under The Deferred Compensation Program for Directors (the “Program”)
Printed name of director or former director:
Social Security Number of director:
Address of director:
Telephone number of director:
Social Security Number of director:
Address of director:
Telephone number of director:
I, the director, hereby elect to make a transfer of my Payment Right as follows:
Printed name of transferee:
Social Security Number or
Tax Identification Number of transferee:
Address of transferee: & nbsp;
Telephone number of transferee:
Relationship of transferee to director:
If transferee is a trust, list names of trustee and beneficiary(s) and relationship of
beneficiary(s) to director:
&nbs p;
Dollar amount and/or number of deferred stock units accrued under the director’s Accounts as of the
end of the most recent calendar quarter:
Social Security Number or
Tax Identification Number of transferee:
Address of transferee: & nbsp;
Telephone number of transferee:
Relationship of transferee to director:
If transferee is a trust, list names of trustee and beneficiary(s) and relationship of
beneficiary(s) to director:
&nbs p;
Dollar amount and/or number of deferred stock units accrued under the director’s Accounts as of the
end of the most recent calendar quarter:
By signing below, I, the director, acknowledge receipt of a copy of the “Administrative Procedures
Regarding Transfers of Payment Rights” (the “Procedures”). I further acknowledge that upon payment
of my Accounts to the transferee, taxable income will be imputed to me, the director, and reported
to the appropriate tax authorities. I understand that I am responsible for any taxes payable as a
result of such payment.
Signature of director
|
Date |
I-16
By signing below, the transferee acknowledges receipt of a copy of the Procedures and agrees to
comply with and be subject to the terms and conditions of the Plan (as modified by the Procedures),
and agree not to further transfer the Payment Right.
Signature of transferee
|
Date |
Receipt of this executed Election form is hereby acknowledged and accepted, and the requested
transfer of stock option will be effective this day of , .
| AIR PRODUCTS AND CHEMICALS,INC. | ||
| By: | ||
| Name: | ||
| Title: |
I-17
TAX CONSEQUENCES TO PARTICIPANTS
The following is a general summary under current law of the U.S. tax consequences of
participation in the Program. The tax laws could change prior to your retirement or other
termination of your service as a director in a way that accelerates taxation of deferred amounts.
Legislation proposed by the Administration and others would impose or authorize the U.S. Treasury
to impose current taxation on deferred compensation arrangements deemed to be abusive.
Income Taxes
| 1. | Deferred amounts and earnings thereon including any appreciation in value of deferred stock units, are not subject to income tax until | ||
| distributed. | |||
| 2. | When distributed, the full amount of any cash distributed and the fair market value of any shares distributed will be taxable at the | ||
| income tax rates then in effect. | |||
| 3. | Depending on the laws in your state of residency, payments may be nontaxable retirement benefits for state and local income tax | ||
| purposes. | |||
| 4. | Deferred amounts remaining unpaid at your death constitute income in respect of a decedent and will be subject to income tax. Any | ||
| estate or inheritance tax attributable to the deferred amounts will be deductible by your estate or beneficiaries in computing the income tax. | |||
Estate Tax
Deferred amounts remaining unpaid at your death will be includable in your estate for federal
estate tax purposes. An unlimited marital deduction is allowed for property passing to your
spouse, which has the effect of removing deferred amounts from your federal taxable estate if you
predecease your spouse. Congress enacted legislation in 2001 that phases out the estate tax in
2002-2009. This legislation sunsets in 2011, however, potentially restoring the tax at its 2001
level.
Self-Employment Tax
Self-employment tax will apply to cash and deferred stock units, and earnings thereon including
appreciation, in the year payout is received. Self-employment tax does not apply to
nonresident aliens. Self-employment tax is imposed currently at a maximum rate of 15.3% on earned
income up to the Social Security Wage Base for the particular year, and 2.9% on earned income in
excess of the wage base. Wages received as an employee are taken into account first in determining
I-18
whether the Social Security Wage Base has been exceeded. Thus, the 15.3% Social Security element
of self-employment tax will apply only if you do not have wages or other earned income in excess of
the Wage Base. One-half of your self
employment tax liability can be deducted from your adjusted gross income for federal income tax
purposes.
Lump-Sum vs. Installment Payout
| 1. | Election of installment payments or a later year lump sum will allow you to defer income taxes on the cash or deferred stock units | ||
| and earnings and appreciation thereon, as compared to a lump sum payout soon after retirement. | |||
| 2. | Election of a lump-sum payment may reduce your self-employment tax if you do not expect to have other income up to or in excess | ||
| of the Social Security Wage Base following your retirement from the Board of Directors because the amount of a lump-sum payment in excess of the Social Security Wage Base will escape the Social Security portion of self-employment tax. | |||
I-19
Exhibit 12
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Unaudited)
| Twelve | ||||||||||||||||||||||||
| Months | ||||||||||||||||||||||||
| Ended | ||||||||||||||||||||||||
| Year Ended 30 September | 30 Sept | |||||||||||||||||||||||
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |||||||||||||||||||
Earnings: |
||||||||||||||||||||||||
Income from continuing operations |
$ | 124.2 | $ | 465.6 | $ | 525.4 | $ | 400.2 | $ | 604.1 | $ | 711.7 | ||||||||||||
Add (deduct): |
||||||||||||||||||||||||
Provision for income taxes |
(7.5 | ) | 196.2 | 247.5 | 154.0 | 232.5 | 269.4 | |||||||||||||||||
Fixed charges, excluding capitalized interest |
232.6 | 226.5 | 150.3 | 150.6 | 149.3 | 143.1 | ||||||||||||||||||
Capitalized interest amortized during the
period |
6.6 | 7.1 | 7.2 | 6.5 | 9.1 | 6.4 | ||||||||||||||||||
Undistributed earnings of
less-than-fifty-percent-owned affiliates |
(32.1 | ) | (34.3 | ) | (42.8 | ) | (2.6 | ) | (31.1 | ) | (30.1 | ) | ||||||||||||
Earnings, as adjusted |
$ | 323.8 | $ | 861.1 | $ | 887.6 | $ | 708.7 | $ | 963.9 | $ | 1,100.5 | ||||||||||||
Fixed Charges: |
||||||||||||||||||||||||
Interest on indebtedness, including capital lease
obligations |
$ | 210.3 | $ | 201.6 | $ | 126.4 | $ | 126.9 | $ | 124.4 | $ | 113.8 | ||||||||||||
Capitalized interest |
19.7 | 8.8 | 11.7 | 6.2 | 7.9 | 14.9 | ||||||||||||||||||
Amortization of debt discount premium and expense |
3.1 | 5.6 | 2.2 | 2.1 | 1.4 | 4.1 | ||||||||||||||||||
Portion of rents under operating leases
representative of the interest factor |
19.3 | 19.3 | 21.7 | 21.6 | 23.5 | 25.3 | ||||||||||||||||||
Fixed charges |
$ | 252.4 | $ | 235.3 | $ | 162.0 | $ | 156.8 | $ | 157.2 | $ | 158.1 | ||||||||||||
Ratio of Earnings to Fixed Charges (1): |
1.3 | 3.7 | 5.5 | 4.5 | 6.1 | 7.0 | ||||||||||||||||||
| (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). |
financials
contents
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13
Table of Contents
FINANCIAL TRENDS
| (A) | Operating income divided by five-quarter average of total assets less investments in equity affiliates. | |
| (B) | Assumes reinvestment of all dividends. |
14
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
|
(millions of dollars, except for share data) |
contents
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| 36 |
All comparisons in the discussion are to the corresponding prior year unless otherwise
stated. All amounts presented are in accordance with U.S. generally accepted accounting principles.
All amounts are presented in millions of dollars, except for share data, unless otherwise
indicated.
AIR PRODUCTS
Air Products and Chemicals, Inc. and its subsidiaries (the company) serve customers in
technology, energy, healthcare and industrial markets. The company offers a broad portfolio of
products, services and solutions, providing atmospheric gases, process and specialty gases,
performance materials and chemical intermediates. Geographically diverse, with operations in over
30 countries, the company has sales of $8.1 billion, assets of $10.4 billion and a worldwide
workforce of over 20,000 employees.
BUSINESS OVERVIEW
The company manages its operations and reports results by three business segments: Gases,
Chemicals and Equipment. In 2005, the company’s consolidated sales were composed of approximately
71% Gases, 24% Chemicals and 5% Equipment. A general description of each segment and the key
variables impacting the
segment follows. See Note 21 to the consolidated financial statements for
additional information on the products, services and markets for each of the business segments.
n Gases
The Gases segment involves three principal modes of supply: on-site/pipeline, liquid bulk and
packaged gas. About one-third of Gases sales come from the on-site and pipeline supply mode, which
generally has long-term energy cost pass-through type contracts, lending stability to Gases
results. Liquid bulk products make up about one-third of Gases sales and, while volume- sensitive,
generally have three- to five-year contracts that provide price stability. The remainder of sales
is made up of specialty chemicals and gases for the electronics industry, and specialty and
industrial cylinder gas supply for electronics, medical/ homecare and other industries.
Electricity is the largest cost input for the production of atmospheric gases. Natural gas is the
principal raw material for hydrogen, the vast majority of which is delivered through on-site and
pipeline supply arrangements. The company mitigates adverse energy price impacts in the Gases
segment through its energy cost pass-through structures.
n Chemicals
The Chemicals segment consists of Performance Materials and Chemical Intermediates. Performance
Materials accounted for about 60% of the segment’s sales. Performance polymers, the largest product
line in Performance Materials, uses vinyl acetate monomer (VAM) as its principal raw material. The
cost of VAM generally fluctuates with energy prices and industry supply and demand. Performance
polymers are sold in several markets, which are also served by competing products that are not
derived from VAM, limiting the ability to adjust prices immediately as the cost of VAM increases.
Margin fluctuation results from the timing of and ability to adjust prices in response to changes
in VAM costs. About 40% of the segment’s sales come from Chemical Intermediates, which include
polyurethane intermediates and amines. Approximately 60% of Chemical Intermediates are supplied
under long-term contracts under which costs are passed through to customers. Methanol, produced
from natural gas, is a feedstock in methylamine production. In 2005, the company began purchasing
methanol under a long-term supply arrangement that improved methylamines margins.
15
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
n Equipment
The Equipment segment designs and manufactures cryogenic and gas processing equipment for air
separation, gas processing, natural gas liquefaction (LNG) and hydrogen purification. The segment
also builds cryogenic transportation containers for liquid helium. Equipment is sold worldwide to
companies involved in oil and gas recovery and processing, chemical and petrochemical
manufacturing, power generation and steel and primary metals processing. This business is cyclical,
primarily impacted by capital spending for expansion of LNG and general manufacturing capacity.
2005 IN SUMMARY
The company achieved significant improvements in sales, earnings and return on capital in 2005
despite facing the challenges of higher raw material costs, pricing pressures and natural disasters
in the U.S. Gulf Coast region. The Gases business demonstrated improvements in both sales and
operating income behind solid volume growth across most of its product lines. Electronics specialty
materials continued to experience pricing pressure. The Chemicals segment was successful in passing
higher raw material costs through to its customers, resulting in improved margins. Equipment sales
and operating income increased from higher LNG heat exchanger activity and the Equipment segment
attained a new record in sales backlog at year-end.
As part of its ongoing portfolio management activities, the company continued to execute its growth
strategies, including the acquisition of five small U.S. homecare companies. At the end of 2005,
the company had a majority of its business on its new SAP system, driving continued productivity
improvement. The company remained focused on capital discipline, loading its existing asset base,
and improving its return on capital. The fourth quarter of 2005 was the seventh consecutive quarter
that return on capital improved.
Sales of $8,144 were up 10% from the prior year, due to higher Gases volumes, higher raw material
and energy costs contractually passed through to customers, and improved Chemicals pricing. Sales
benefited from the acquisition of additional U.S. homecare companies and currency, primarily due to
the U.S. dollar weakening against the Euro and the Pound Sterling. Strong performance in Equipment,
particularly in LNG, also contributed to sales growth.
Operating income was $1,003, compared to
$880 in the prior year. Operating income benefited from higher volumes, favorable currency effects,
acquisitions and productivity gains. Partially offsetting these favorable variances were lower
electronics specialty material pricing, generally higher operating costs and higher implementation
costs for productivity initiatives.
Net income was $712, compared to $604 in the prior year, while diluted earnings per share of $3.08
increased from $2.64. A summary table of changes in earnings per share is presented below.
For additional information on the opportunities, challenges and risks on which management is
focused, refer to the 2006 Outlook discussions provided throughout the Management’s Discussion and
Analysis which follows.
n Changes in Diluted Earnings per Share
| Increase | ||||||||||||
| 2005 | 2004 | (Decrease) | ||||||||||
Diluted
Earnings per Share |
$ | 3.08 | $ | 2.64 | $ | .44 | ||||||
Operating
Income (after-tax) |
||||||||||||
| Acquisitions | .04 | |||||||||||
Divestitures |
(.01 | ) | ||||||||||
Currency |
.09 | |||||||||||
Underlying business |
||||||||||||
Volume |
.51 | |||||||||||
Price/raw materials |
(.10 | ) | ||||||||||
Costs |
(.14 | ) | ||||||||||
Operating
Income |
.39 | |||||||||||
Other
(after-tax) |
||||||||||||
| Interest expense | .04 | |||||||||||
Equity affiliates |
.04 | |||||||||||
Average shares outstanding |
(.03 | ) | ||||||||||
Other |
.05 | |||||||||||
Total Change in Diluted
Earnings per Share |
$ | .44 | ||||||||||
2006 OUTLOOK
The company is forecasting earnings per share growth again in 2006. As we enter 2006, we
expect domestic manufacturing growth between 2% and 3% for the year. Across our Electronics
business and in line with external forecasts, we anticipate silicon growth next year of
approximately 5%. Flat-panel display growth is expected to continue at strong double-digit levels.
For natural gas, we expect the 2006 price to be significantly higher than the 2005 average cost.
Foreign currencies are expected to be relatively stable. Two risks to this forecast are raw
material and energy price volatility and lower economic growth. In 2006, both Gases and Chemicals
operating income should benefit from operating leverage on our existing assets and our increased
productivity efforts. Gases operating income is also expected to increase from new investments
across Energy and Process Industries (EPI), Electronics and Healthcare. Equipment profits in 2006
should be significantly higher as the order backlog has reached record levels.
16
Table of Contents
While the company met its 2005 goal of earning a return in excess of its cost of capital in
the Chemicals segment, the company faces challenges in some of its Chemicals businesses. Overall,
the company is forecasting Chemicals profits to be slightly below 2005, principally due to the
termination of one major contract and a customer shutdown in the polyurethane intermediates
business. The company continues to explore various strategies to enhance the value of this
segment.
The company also is determined to significantly improve its productivity. The company expects
increased benefits across its supply chains and support functions as a result of its productivity
initiatives.
RESULTS OF OPERATIONS
n Consolidated Results
| 2005 | 2004 | 2003 | ||||||||||
Sales |
$ | 8,143.5 | $ | 7,411.4 | $ | 6,297.3 | ||||||
Cost of sales |
6,011.3 | 5,463.6 | 4,613.1 | |||||||||
Selling and administrative |
1,028.2 | 969.4 | 842.6 | |||||||||
Research and development |
132.7 | 126.7 | 121.1 | |||||||||
Other (income) expense, net |
(31.2 | ) | (27.9 | ) | (26.5 | ) | ||||||
Global cost reduction plans, net |
— | — | 152.5 | |||||||||
Operating Income |
1,002.5 | 879.6 | 594.5 | |||||||||
Equity
affiliates’ income |
105.4 | 92.8 | 94.4 | |||||||||
Interest expense |
110.2 | 121.0 | 123.5 | |||||||||
Effective tax rate |
27.0 | % | 27.3 | % | 26.9 | % | ||||||
Net Income |
711.7 | 604.1 | 397.3 | |||||||||
Basic
Earnings per Share |
$ | 3.15 | $ | 2.70 | $ | 1.81 | ||||||
Diluted
Earnings per Share |
$ | 3.08 | $ | 2.64 | $ | 1.78 | ||||||
n Discussion of Consolidated Results
Sales
| % Change from Prior Year | ||||||||
| 2005 | 2004 | |||||||
Acquisitions |
1 | % | 5 | % | ||||
Divestitures |
(1 | )% | (1 | )% | ||||
Currency |
1 | % | 4 | % | ||||
Natural gas/raw material cost pass-through |
3 | % | 1 | % | ||||
Underlying business |
||||||||
Volume |
5 | % | 9 | % | ||||
Price/mix |
1 | % | — | |||||
Total Consolidated Sales Change |
10 | % | 18 | % | ||||
2005 vs. 2004
Sales
Sales of $8,143.5 increased 10%, or $732.1. Underlying base business growth of 6% resulted
primarily from improved volumes across the Gases business, as further discussed in
the Segment Analysis which follows. Equipment sales increased from higher LNG sales, also contributing to the
underlying base business sales growth. The acquisition of five small U.S. homecare companies
increased sales by 1%. Divestitures of the company’s European methylamines and derivatives (EM&D)
business and its Mexican polymers business accounted for a 1% decrease. Sales increased 1% 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 a 3% increase in sales.
Operating Income
Operating income of $1,002.5 increased 14%, or $122.9. Favorable operating income variances
resulted from higher volumes for $161, favorable currency effects for $29 and acquisitions for $13.
Overall volume growth, as discussed in the Segment Analysis which follows, was driven by strong
volumes across the Gases segment and higher LNG activity in the Equipment segment. Operating income
declined $56 from lower Gases segment pricing net of variable costs, primarily from lower
electronics specialty material pricing and higher power and fuel expenses.
Operating income was also negatively affected by the impacts of three hurricanes that struck the
U.S. Gulf Coast during 2005. As a result of the hurricanes, the company sustained property damage
and lost sales; customer and supplier interruption; and higher feedstock, product sourcing and
distribution costs. The impact of the hurricanes was approximately $20. This amount only reflects
expected insurance recoveries for certain property damage costs and does not reflect any insurance
recovery for business interruption.
Equity Affiliates’ Income
Income from equity affiliates of $105.4 increased $12.6, or 14%. Gases equity affiliates’ income
increased $13.3, with higher income reported by the Latin American, European and Asian affiliates.
2004 vs. 2003
Sales
Sales of $7,411.4 increased 18%, or $1,114.1. Underlying base business growth of 9% resulted
primarily from improved volumes in the Gases and Chemicals businesses, as further discussed in
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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
the Segment Analysis which follows. Equipment sales increased from higher air separation plant
sales, also contributing to the underlying base business sales growth. Acquisitions, including
Ashland Electronic Chemicals, U.S. homecare companies and Sanwa Chemical Industry Co., accounted
for 5% of the increase. Favorable currency effects, driven primarily by the weakening of the U.S.
dollar against the Euro, accounted for an additional 4% of the sales growth.
Operating Income
Operating income of $879.6 increased from $594.5 in 2003, which included a net expense of $152.5
for global cost reduction plans, as discussed in Note 3 to the consolidated financial statements.
Favorable operating income variances resulted from higher volumes for $222, favorable currency
effects for $49 and acquisitions for $25. Operating income decreased by $31 from higher raw
material costs not contractually passed through to customers or recovered via price increases
within the Chemicals segment. Operating income declined $119 from higher costs, including higher
pension and incentive compensation expense and higher operating costs.
Equity Affiliates’ Income
Income from equity affiliates of $92.8 decreased $1.6. Results in 2004, including favorable
currency effects and higher income from the Gases Asian and Latin American affiliates, partially
offset the impact of $23 in favorable adjustments recorded in 2003 related to prior period
divestitures.
n Selling and Administrative Expense (S&A)
| % Change from Prior Year | ||||||||
| 2005 | 2004 | |||||||
Acquisitions |
3 | % | 6 | % | ||||
Divestitures |
— | (1 | )% | |||||
Currency |
1 | % | 4 | % | ||||
Other costs |
2 | % | 6 | % | ||||
Total S&A Change |
6 | % | 15 | % | ||||
2005 vs. 2004
S&A expense of $1,028.2 increased 6%, or $58.8. S&A as a percent of sales declined to 12.6% from
13.1% 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 Pound Sterling, increased S&A by
1%. Underlying costs increased 2% due to cost inflation partially offset by productivity
initiatives.
2004 vs. 2003
S&A expense of $969.4 increased 15%, or $126.8. S&A as a percent of sales declined to 13.1% from
13.4% in 2003. Acquisitions, including Ashland Electronic Chemicals and the U.S. homecare
companies, increased S&A by 6%. Currency effects, driven by the weakening of the U.S. dollar
against the Euro and the Pound Sterling, increased S&A by 4%. Underlying costs increased 6%,
primarily due to inflation, higher pension and incentive compensation expenses, and increased
spending due to higher volumes in the business, partially offset by cost reduction and productivity
efforts.
2006 Outlook
S&A will increase in 2006 as a result of acquisitions, primarily the full-year impact
of U.S. homecare acquisitions made during 2005 and planned U.S. homecare acquisitions for 2006. The
homecare business has a significantly higher level of S&A, as a percent of sales, than the average
mix of the company’s other businesses. In addition, the company expects increases in S&A due to
inflation, higher incentive compensation expense resulting from increased earnings, and higher
pension costs. Partially offsetting these impacts, the company expects to realize cost savings from
productivity initiatives and savings in the businesses where SAP was implemented in 2005 and
earlier.
n Research and Development (R&D)
2005 vs. 2004
R&D increased 5%, or $6.0, due to cost inflation and increased spending on projects in growth
platform areas. R&D spending declined slightly as a percent of sales to 1.6% from 1.7% in 2004.
2004 vs. 2003
R&D increased 5%, or $5.6, due to cost inflation and increased pension expense. R&D spending
declined as a percent of sales from 1.9% to 1.7% in 2004, as project portfolio management focused
R&D spending on key technologies and eliminated
lower-value programs.
2006 Outlook
R&D investment will increase for the company’s key growth platforms and the requirements of
emerging businesses. R&D spending will also be higher in 2006 due to inflation, higher incentive
compensation expense resulting from increased earnings, and higher pension costs.
18
Table of Contents
n Other (Income) Expense, Net
Items recorded to other income arise from transactions and events not directly related to the
principal income earning activities of the company. Note 20 to the consolidated financial
statements displays the details of other (income) expense.
2005 vs. 2004
Other income of $31.2 increased $3.3 primarily due to higher interest income from both lease
receivables and a higher average invested cash balance, partially offset by miscellaneous expenses,
none of which were individually material. Results in 2004 and 2005 included the unfavorable impact
of legal matters, including the Honeywell litigation discussed in Note 19.
2004 vs. 2003
Other income of $27.9 increased $1.4. Results in 2004 included higher favorable impacts from
insurance settlements and the sale of assets and investments. Results in 2004 were unfavorably
impacted by higher costs associated with legal matters, including the Honeywell litigation, and
higher intangible asset amortization expense.
n Global Cost Reduction Plan
2003 Plan
In 2003, the company recorded an expense of $152.7 for a global cost reduction plan (2003 Plan).
This expense included $56.8 for severance and pension-related benefits and $95.9 for asset
disposals and facility closures in the Gases and Chemicals segments. The results for 2003 also
included the reversal of the balance of the 2002 global cost reduction plan accrual of $.2.
During the third quarter of 2003, the company completed a capacity utilization analysis in several
businesses in the Gases segment. To reduce capacity and costs, several facilities ceased operation
as of 30 June 2003. An expense of $37.6 was recognized for the closure of these facilities, net of
expected recovery from disposal. A decision was made to terminate several incomplete capacity
expansion projects. An expense of $13.0 was recognized for the cost of terminating these projects,
net of expected recovery from disposal and redeployment. An expense of $3.6 was also recognized for
the planned sale of two real estate properties and the termination of several leases for small
facilities. These expenses were principally in the North American merchant and tonnage businesses,
with a modest amount in the Electronics business.
The rationalization of excess capacity in certain products resulted in a decision to exit certain
Chemical Intermediates operations.
Late in the quarter ended 30 June 2003, the company decided to pursue the sale of its EM&D
business. Expected proceeds from the sale were determined, and a loss was recognized for the
difference between the carrying value of the assets and the expected net proceeds from the sale.
Additional expenses for the closure of the methanol and ammonia plants in Pensacola, Florida, which
made products for internal consumption, were also recognized. The total expense for these actions
was $41.7.
In addition to the capacity reduction initiatives, the company implemented cost reduction and
productivity-related efforts. The divestitures, the capacity reductions and the cost control
initiatives resulted in the elimination of approximately 460 positions from the company.
Approximately 30% of the position reductions related to capacity rationalization and divestitures.
An additional 40% related to ongoing productivity efforts and balancing engineering resources with
project activity, and the remaining 30% related to a reduction in the number of management
positions. The 2003 Plan was completed as expected in June 2004, with the exception of the planned
sale of the EM&D business. In April 2004, the company announced the proposed sale of this business.
After a long regulatory process, the sale of the EM&D business was completed in December 2004.
Cost savings from the 2003 Plan realized in 2003 were approximately $3. Cost savings of
approximately $38 and $59 were realized in 2004 and 2005, respectively. As a result of actions
taken in the 2003 and prior years’ global cost reduction plans, operating income in 2004 and 2005
included $36 and $21, respectively, of incremental benefits over those realized in the prior year.
n Interest Expense
| 2005 | 2004 | 2003 | ||||||||||
Interest incurred |
$ | 122.2 | $ | 126.5 | $ | 127.7 | ||||||
Less: interest capitalized |
12.0 | 5.5 | 4.2 | |||||||||
Interest
Expense |
$ | 110.2 | $ | 121.0 | $ | 123.5 | ||||||
2005 vs. 2004
Interest incurred decreased $4.3. The decrease resulted from lower average interest rates and a
lower average debt balance excluding currency effects, partially offset by the impact of a weaker
U.S. dollar on the translation of foreign currency interest. Capitalized interest was higher by
$6.5 due to higher levels of construction in progress for plant and equipment built by the company,
particularly from projects within EPI, Electronics and Asia Gases.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
2004 vs. 2003
Interest incurred decreased $1.2. The decrease resulted from lower average interest rates and a
lower average debt balance excluding currency effects, partially offset by the impact of a weaker
U.S. dollar on the translation of foreign currency interest.
2006 Outlook
The company expects interest incurred to be essentially flat relative to 2005. A higher average
debt balance is expected to be offset by a lower debt portfolio average interest rate and a
stronger U.S. dollar in 2006. The 2006 estimate is based on the current estimate of earnings and
spending and excludes the possible effects of any stock repurchase program, any change in dividend
policy or any future acquisitions other than the ongoing homecare acquisitions.
n Effective Tax Rate
The effective tax rate equals the income tax provision divided by income before taxes less minority
interest.
2005 vs. 2004
The effective tax rate was 27.0%, down slightly from 27.3% in 2004. Income tax expense in 2005
included a charge related to the company’s annual reconciliation and analysis of its deferred tax
assets and liabilities that was offset by higher foreign tax credits due to the American Jobs
Creation Act of 2004, higher export tax benefits and a favorable income mix.
2004 vs. 2003
The effective tax rate was 27.3% compared to 26.9%. In 2004, there were increased credits and
adjustments from the company’s ongoing tax planning process, including such items as improved
utilization of foreign tax credits, foreign tax holidays, and certain donations that were eligible
for tax deductions. However, the effective tax rate was lower in 2003 due to the relatively low
level of book taxable income as a result of the 2003 global cost reduction plan expense.
2006 Outlook
The company expects the effective tax rate in 2006 to remain approximately equal to the 2005 rate
of 27.0%.
n Net Income
2005 vs. 2004
Net income was $711.7 compared to $604.1 in 2004. Diluted earnings per share was $3.08 compared to
$2.64 in 2004. A summary table of changes in earnings per share is presented on page 16.
2004 vs. 2003
Net income was $604.1 compared to $397.3 in 2003, which included an after-tax net expense of $96.5
for global cost reduction plans. Diluted earnings per share was $2.64 compared to $1.78 in 2003,
which included a $.43 impact from global cost reduction plans.
n Segment Analysis
The company manages its operations and reports results by three business operating segments: Gases,
Chemicals and Equipment. Refer to the Business Overview discussion on page 15 for a description of
the business segments.
n Gases
| 2005 | 2004 | 2003 | ||||||||||
Sales |
$ | 5,824.9 | $ | 5,221.8 | $ | 4,438.3 | ||||||
Operating income |
841.7 | 800.5 | 574.8 | |||||||||
Equity
affiliates’ income |
91.5 | 78.2 | 68.3 | |||||||||
Gases Sales
| % Change from Prior Year | ||||||||
| 2005 | 2004 | |||||||
Acquisitions |
1 | % | 6 | % | ||||
Divestitures |
— | (1 | )% | |||||
Currency |
2 | % | 4 | % | ||||
Natural gas/raw material cost pass-through |
2 | % | 1 | % | ||||
Underlying
business |
||||||||
Volume |
7 | % | 8 | % | ||||
Price/mix |
— | — | ||||||
Total
Gases Sales Change |
12 | % | 18 | % | ||||
2005 vs. 2004
The Gases business had another year of strong volume growth across most of its product lines in
2005, resulting in higher sales and operating income as discussed in more detail below. While
volumes for electronics specialty materials were higher in 2005, pricing dropped due to increasing
market pressure.
Gases Sales
Sales of $5,824.9 increased 12%, or $603.1. The acquisition of five 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 cost contractually passed through to customers accounted for an additional 2% of the
sales increase.
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Underlying base business sales growth increased sales by 7%, driven by higher volumes in
Electronics, EPI, and Asia and North America base gases.
| • | Electronic specialty materials volumes increased, as electronics markets continued to improve, including strong growth in the silicon and flat-panel display markets. | |
| • | On-site and pipeline volumes in EPI were up 3%, led by stronger HYCO (hydrogen and carbon monoxide) volumes. Volumes in 2005 benefited from the full year impact of new plant capacity, but were negatively impacted by the effects of Hurricanes Katrina and Rita in the fourth quarter. Hydrogen growth continues to be led by the ongoing trend for refiners to meet lower sulfur specifications. | |
| • | Liquid bulk volumes in North America improved 5%. Liquid oxygen (LOX) and liquid nitrogen (LIN) volumes increased along with the improving economy. Liquid hydrogen volumes improved from increased demand by the government sector. Helium volumes improved from increased magnetic resonance imaging (MRI) activity. | |
| • | Liquid bulk volumes in Europe declined 1%. Underlying base business decreased due to lost business, including reduced demand at existing accounts and the conversion of certain liquid customers to on-site supply. This decrease was partially offset by growth from the signing of new customer accounts. | |
| • | LOX/LIN volumes in Asia were up 22%, driven mainly by solid demand growth across the region, particularly in Korea and Taiwan. Volumes also benefited from added capacity in China. | |
| Overall, the impact of pricing decreased sales slightly, with lower average selling prices of electronic specialty materials partially offset by higher liquid bulk pricing in Europe and North America. | ||
| • | The average selling price for electronic specialty materials declined as pricing pressure continued. | |
| • | On average, prices for LOX/LIN in North America remained flat. | |
| • | LOX/LIN pricing in Europe increased 3%, due to pricing programs and favorable customer mix. | |
Gases Operating Income
Operating income of $841.7 increased $41.2. Favorable operating income variances resulted from
higher volumes for $131, favorable currency effects for $24 and acquisitions for $13. Operating
income declined $72 from higher costs, including costs to implement productivity initiatives and
the impacts of Hurricanes Katrina and Rita. Operating income also declined $56 from lower pricing
net of variable costs, primarily from lower electronics specialty material pricing and higher power
and fuel expenses.
Gases Equity Affiliates’ Income
Gases equity affiliates’ income of $91.5 increased by $13.3, with higher income reported by
the Latin American, European and Asian affiliates.
2004 vs. 2003
The Gases business demonstrated improvements in both sales and operating income, driven by strong
volume growth as discussed in more detail below. Strong growth continued in the global healthcare
business as the company continued to execute its growth strategy through acquisitions. Spending on
acquisitions in 2004 included $75.1 for six small U.S. homecare businesses.
Gases Sales
Sales of $5,221.8 increased 18%, or $783.5. Acquisitions, including U.S. homecare companies
and Ashland Electronic Chemicals, accounted for 6% of the increase. Favorable currency effects,
driven primarily by the weakening of the U.S. dollar against the Euro and the Pound Sterling,
accounted for an additional 4% sales increase.
Underlying base business sales growth of 8% resulted from improved volumes across the Gases
segment, including Electronics, EPI, and the merchant and tonnage businesses.
| • | Electronic specialty materials volumes increased, as electronics markets continued to improve, including stronger growth in the silicon and flat-panel display markets. | |
| • | On-site and pipeline volumes in EPI were up 11%, led by stronger hydrogen, oxygen and nitrogen volumes. Hydrogen growth versus 2003 tracked the ongoing trend for refiners to meet lower sulfur specifications. Volumes benefited from production at a new facility in Lake Charles, Louisiana, which came onstream in the third quarter of 2004. | |
| • | Liquid bulk volumes in North America increased 1%. LOX/LIN volumes improved along with general U.S. manufacturing growth. Partially offsetting this increase, liquid hydrogen volumes declined from weakness in the government and chemical and process industries sectors. | |
| • | Liquid bulk volumes in Europe declined 2%, with the conversion of several liquid customers to on-site supply and lost business. | |
| • | Packaged gas volumes in Europe increased 3%, reflecting continued positive manufacturing growth and also benefiting from continued success with new product introductions. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS
| • | Asian liquid bulk volumes were up 13%, driven by demand growth across the region. | |
| Overall, the impact of pricing decreased sales slightly, with anticipated lower average selling prices of electronic specialty materials offsetting higher liquid bulk prices in North America and Europe and higher packaged gas prices in Europe. | ||
| • | Pricing for electronic specialty materials decreased due to a decline in average selling price and customer conversions from cylinder to bulk supply. | |
| • | On average, prices for LOX/LIN in North America remained flat. | |
| • | LOX/LIN pricing in Europe increased 4%, influenced by continued pricing actions as well as the customer mix effect from the conversion of liquid customers to on-site supply. | |
Gases Operating Income
Operating income of $800.5 increased $225.7. Operating income in 2003 included a net expense
of $92 for global cost reduction plans. Favorable operating income variances resulted from higher
volumes for $163, favorable currency effects for $35 and acquisitions for $22. Operating income
declined $67 from higher costs, including higher pension and incentive compensation expense.
Gases Equity Affiliates’ Income
Gases equity affiliates’ income of $78.2 increased $9.9. 2004 results, including favorable currency
effects and higher income from the Asian and Latin American affiliates, more than offset the impact
of favorable adjustments of $8 recorded in 2003 associated with two divested cogeneration plant
investments.
2006 Outlook
Gases sales are expected to increase based upon volume growth driven by higher manufacturing
activity, higher natural gas costs contractually passed through to customers and the impact of U.S.
homecare acquisitions. Increased volumes are expected for Electronics during the year based on
estimates of higher wafer production and demand from the flat-panel display market. Hydrogen
volumes are expected to continue to grow as regulatory drivers for clean fuels continue and six new
plants to serve such demand are brought onstream during the year. Based on changing demographics
and other trends in the healthcare industry, the company’s healthcare business is expected to grow
organically as well as through acquisitions. Other industrial end markets are expected to more
closely track the general state of the manufacturing economies of the world. The company’s current
outlook for U.S. manufacturing growth is 2% to 3% in 2006, and volume
growth assumptions for the U.S. liquid bulk gases business are tied to this range. Liquid bulk
volumes outside the U.S. are also tied to manufacturing growth. The company expects that
manufacturing growth in the European region will be below the U.S., while growth in Asia will
exceed the U.S. Pricing in the liquid bulk business globally is expected to remain relatively firm.
Pricing in electronics specialty materials is expected to continue to decline in 2006.
n Chemicals
| 2005 | 2004 | 2003 | ||||||||||
Sales |
$ | 1,917.6 | $ | 1,828.9 | $ | 1,591.2 | ||||||
Operating income |
156.8 | 116.0 | 67.1 | |||||||||
Equity
affiliates’ income |
13.9 | 14.6 | 10.8 | |||||||||
Chemicals Sales
| % Change from Prior Year | ||||||||
| 2005 | 2004 | |||||||
Acquisitions |
— | 1 | % | |||||
Divestitures |
(4 | )% | — | |||||
Currency |
1 | % | 3 | % | ||||
Natural gas/raw material cost pass-through |
4 | % | 3 | % | ||||
Underlying business |
||||||||
Volume |
(1 | )% | 7 | % | ||||
Price/mix |
5 | % | 1 | % | ||||
Total
Chemicals Sales Change |
5 | % | 15 | % | ||||
2005 vs. 2004
Chemicals sales and operating income increased through improved pricing strategies of the company.
The business experienced higher raw material and energy costs throughout 2005; however, the company
implemented price increases across most of its products to effectively recover a majority of these
higher costs.
Chemicals Sales
Sales of $1,917.6 increased 5%, or $88.7. Sales decreased 4% from the impact of divestitures,
which included the company’s 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 4% of the sales increase.
Underlying base business sales increased 4%. Pricing accounted for 5% of the sales increase, due
principally to price increases in the emulsions and amines businesses to recover higher raw
material costs. Volumes decreased 1%, primarily due to the price increases implemented by the
company.
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| • | In Performance Materials, base business volumes were flat, as improvements in epoxy and polyurethane additives were 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 continued to focus on raising prices across this business to recover sharp increases in raw material costs. | |
| • | In Chemical Intermediates, base business volumes declined by 4%, as lower volumes in higher amines were only partially offset by improvements in polyurethane intermediates (PUI). PUI volumes improved compared to 2004, which reflected the unfavorable impact from customer outages. In 2005, PUI volumes increased due to new or expanded supply relationships with several customers, but were negatively impacted by the termination of one major contract and a customer shutdown. Volumes in higher amines were lower due to the company’s efforts to raise prices to offset higher raw material costs, raw material shortages in the first quarter and the impact of a poor growing season in South America. |
Chemicals Operating Income
Operating income of $156.8 increased $40.8. Operating income increased $17 as the business
improved its recovery of higher raw material costs and benefited from a long-term supply agreement
to purchase methanol for domestic methylamines. Another favorable variance was lower costs of $16,
including improved productivity and cost performance. Currency, driven primarily by the weakening
of the U.S. dollar against the Euro, increased operating income by $4. A major customer terminated
its contract to purchase toluene diamine during the fourth quarter of 2005. As a result, the
company recognized additional operating income of $16 for the present value of the contractual
termination payments required under the supply contract. The company decided to exit the fertilizer
business at the completion of its current contractual commitments, which is December 2005. A charge
of $8 was recognized in the fourth quarter, principally for the acceleration of depreciation due to
the shortened useful lives of plant and equipment.
Chemicals Equity Affiliates’ Income
Chemicals equity affiliates’ income was $13.9 compared to $14.6 in 2004. Chemicals equity
affiliates’ income consists primarily of a global polymer joint venture.
2004 vs. 2003
Chemicals sales increased, driven by strong volumes across most businesses. Higher raw material
costs not contractually passed through to customers had a negative impact on Chemicals segment
results during 2004. The company implemented price increases across a number of products,
including performance polymers and several amines product lines. While the company began to pass
these cost increases through to customers, the Chemicals segment did not yet reach acceptable
profit levels. A long-term supply arrangement to purchase methanol for domestic methylamines
production and reduce raw material cost volatility was expected to start in the second half of
2004. However, the start of this supply arrangement was delayed, and the company did not receive
product until the first quarter of 2005.
Chemicals Sales
Sales of $1,828.9 increased 15%, or $237.7. Underlying base business sales increased 7% from
higher volumes across most of the company’s Chemical Intermediates and Performance Materials
businesses. Base business Performance Materials volumes increased 7%, with improvements in most
businesses and regions, reflecting the improved economic environment. In Chemical Intermediates,
base business volumes increased 7%. Higher amines volumes increased from a better herbicide market.
Methylamines and polyurethane volumes increased from new contractual volumes. Sales increased 3%
from favorable currency effects, driven primarily by the weakening of the U.S. dollar against the
Euro. Sales increased 3% from higher raw material costs contractually passed through to customers.
Chemicals Operating Income
Operating income of $116.0 increased $48.9. Operating income in 2003 included an expense of
$58.1 for the 2003 global cost reduction plan. Other favorable operating income variances resulted
from favorable currency effects for $13 and higher volumes for $52. Operating income declined $31
from higher raw material costs not contractually passed through to customers or recovered via price
increases. Additionally, operating income decreased $51 from higher costs, including higher
manufacturing costs and higher pension and incentive compensation expense.
Chemicals Equity Affiliates’ Income
Chemicals equity affiliates’ income was $14.6 compared to $10.8 in 2003. Chemicals equity
affiliates’ income consists primarily of a global polymer joint venture.
2006 Outlook
In Performance Materials, the company anticipates higher volumes driven by economic growth and the
increased sale of new products across the portfolio. In Chemical Intermediates, amines volumes are
expected to expand in 2006 in line with the assumed U.S. manufacturing growth range of 2% to 3% and
a normal agricul-
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MANAGEMENT’S DISCUSSION AND ANALYSIS
tural cycle. Polyurethane intermediates volumes will decline due to the termination of one
major contract and a customer shutdown.
The company faces challenges in its Chemicals business.
While some businesses are delivering returns at or above their cost of capital, other businesses
are not generating sufficient returns. Higher raw material costs in these businesses are reducing
margins. In emulsions and higher amines, the company has been aggressively raising prices, and
margins need to continue to improve. In polyurethane intermediates, the termination of one major
contract and a customer shutdown will significantly reduce the profitability of this product line.
Overall, the company expects Chemicals profits to be slightly below 2005. The company continues to
explore various strategies to enhance the value of this segment.
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 supplier’s ability to emerge from
bankruptcy and to continue supplying product to the company, the company agreed to participate in
the supplier’s financing and has continued to provide additional financing. Total loans to the
supplier at 30 September 2005 were $86.0. If the supplier does not continue to operate, the sales
and profitability of the Chemicals segment could be materially impacted because of the company’s
inability to supply all of its customers’ base requirements. The company does not expect a material
loss related to this supplier.
n Equipment
| 2005 | 2004 | 2003 | ||||||||||
Sales |
$ | 401.0 | $ | 360.7 | $ | 267.8 | ||||||
Operating income |
44.9 | 10.8 | 4.2 | |||||||||
2005 vs. 2004
Both 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 weakening of
the U.S. dollar against the Pound Sterling.
The sales backlog for the Equipment segment at 30 September 2005 was $652 compared to $297 at 30
September 2004. The business received orders for seven new LNG heat exchangers in 2005. It is
expected that approximately $408 of the backlog will be completed during 2006.
2004 vs. 2003
Sales of $360.7 increased $92.9, primarily from higher air separation plant sales. Currency effects
improved sales by 1%, due primarily to the weakening of the U.S. dollar against the Pound Sterling.
Operating income of $10.8 increased $6.6 from 2003, which included a $2.4 net expense for global
cost reduction plan charges. Operating income increased from air separation plant sales and
profitability across other product lines.
The sales backlog for the Equipment segment at 30
September 2004 was $297 compared to $259 at 30 September 2003.
2006 Outlook
The company’s outlook for the Equipment segment is for significantly higher operating income in
2006. This forecast is based on an improved order backlog, having received orders for a total of
seven LNG main cryogenic heat exchangers in 2005.
n All Other
All other comprises corporate expenses and income not allocated to the segments, primarily
corporate research and development expense.
| 2005 | 2004 | 2003 | ||||||||||
Operating loss |
$ | (40.9 | ) | $ | (47.7 | ) | $ | (51.6 | ) | |||
Equity
affiliates’ income |
— | — | 15.1 | |||||||||
2005 vs. 2004
The operating loss of $40.9 decreased $6.8. No individual items created a material variance in the
comparison to the prior year.
2004 vs. 2003
The operating loss of $47.7 decreased $3.9. No individual items created a material variance in the
comparison to the prior year.
Equity affiliates’ income of $15.1 in 2003 represented favorable
adjustments to customary post-sale liabilities for a divested business not associated with any of
the company’s current segments.
PENSION BENEFITS
The company and certain of its subsidiaries sponsor defined benefit plans that cover a
substantial portion of its worldwide employees. The U.S. Salaried Pension Plan and the U.K. Pension
Plan were closed to new participants in 2005 and were replaced with defined contribution plans as
discussed in Note 18. Assets under the company’s defined benefit plans consist primarily of equity
and fixed-income securities. The amounts recognized in the consolidated financial statements for
pension benefits under the
24
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defined benefit plans are determined on an actuarial basis utilizing numerous assumptions.
For 2005, the fair market value of pension plan assets for the company’s defined benefit plans as
of the measurement date increased to $1,777.0 from $1,510.9 in 2004. The accumulated benefit
obligation for these plans as of the measurement date was $2,244.1 and $1,961.5 in 2005 and 2004,
respectively.
Approximately 66% of the total company defined benefit pension plan assets were held in the U.S.
plans at the end of 2005, while the assets of the U.K. pension plans represented 26%. The actual
allocation of total plan assets at the end of 2005 was 69% in equity securities, 26% in debt
securities, 4% in real estate and 1% in other investments. This allocation was in line with the
targeted allocations.
n Pension Funding
Pension funding includes both contributions to funded plans and benefit payments under unfunded
plans. With respect to funded plans, the company’s funding policy is that contributions, combined
with appreciation and earnings, will be sufficient to pay benefits without creating unnecessary
surpluses. In addition, the company makes contributions to satisfy all legal funding requirements
while managing its capacity to benefit from tax deductions attributable to plan contributions.
External actuarial firms analyze the liabilities and demographics of each plan, which helps guide
the level of contributions. During 2005 and 2004, the company contributed $132.8 and $277.0,
respectively, to the defined benefit pension plans, the majority of which was voluntary.
2006 Outlook
Cash contributions for defined benefit plans are estimated to be approximately $155 in 2006. This
amount is significantly higher than the minimum required contribution. Actual future contributions
will depend on future funding legislation, discount rates, investment performance, plan design and
various other factors. Refer to the Contractual Obligations discussion on page 30 for a projection
of future contributions.
n Significant Assumptions
The company accounts for pension benefits using the accrual method, consistent with the
requirements of SFAS No. 87, “Employers’ Accounting for Pensions.” Actuarial models are used in
calculating the pension expense and liability related to the various defined benefit plans. These
models have an underlying assumption that the employees render service over their service lives on
a relatively consistent basis; therefore, the expense of benefits earned should follow a similar
pattern.
Several assumptions and statistical variables are used in the models to calculate the expense
and liability related to the plans. The company, in consultation with its actuaries, determines
assumptions about the discount rate, the expected rate of return on plan assets and the rate of
compensation increase. Note 18 to the consolidated financial statements includes disclosure of
these rates on a weighted average basis, encompassing both the domestic and international plans.
The actuarial models also use assumptions on demographic factors such as retirement, mortality and
turnover rates. The company believes the actuarial assumptions are reasonable. However, these
actuarial assumptions could vary materially from actual results due to economic events and
different rates of retirement, mortality and turnover.
One of the critical assumptions used in the actuarial models is the discount rate. This rate is
determined at the annual measurement date for each of the various plans and is therefore subject to
change each year. The rate reflects the prevailing market rate for high-quality fixed-income debt
instruments with maturities corresponding to the expected duration of the benefit obligations on
the measurement date. The rate is used to discount the future cash flows of benefit obligations
back to the measurement date. A lower discount rate increases the present value of the benefit
obligations and results in higher pension expense. A 50 basis point decrease in the discount rate
increases pension expense by approximately $23 per year.
The expected rate of return on plan assets represents the average rate of return to be earned by
plan assets over the period that the benefits included in the benefit obligation are to be paid.
Lower returns on the plan assets result in higher pension expense. The company applies historic
market return trends to current market conditions for each asset category to develop this rate of
return. The weighted average actual compound rate of return earned on plan assets for the last ten
years was 9.4%. For the last 20 years the actual rate was 11.3%. A 50 basis point decrease in the
estimated rate of return on plan assets increases pension expense by approximately $8 per year.
The expected rate of compensation increase is another key assumption. The company determines this
rate based on review of the underlying long-term salary increase trend characteristic of labor
markets, historical experience, as well as comparison to peer companies. A 50 basis point increase
in the expected rate of compensation increases pension expense by approximately $15 per year.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
n Pension Expense
| 2005 | 2004 | 2003 | ||||||||||
Pension Expense |
$ | 116.7 | $ | 130.1 | $ | 96.4 | ||||||
Special terminations, settlements
and curtailments (included above) |
5.1 | 12.5 | 12.7 | |||||||||
Weighted average discount rate |
5.9 | % | 5.8 | % | 6.5 | % | ||||||
Weighted average expected rate of
return on plan assets |
8.8 | % | 8.4 | % | 9.1 | % | ||||||
2005 vs. 2004
Modest increases in the discount rate and expected return on plan assets contributed to the decline
in pension expense for defined benefit plans. The company made significant contributions to the
pension plans in 2005 and 2004, which favorably impacted pension expense.
2004 vs. 2003
The variance in pension expense was principally attributable to a lower discount rate and expected
rate of return on plan assets. The expected return on plan assets is determined by applying the
expected long-term rate of return to the market-related value of plan assets. The market-related
value is a calculated value that amortizes the difference between the actual and expected returns
on equity securities ratably over a five-year period. The amortization of these differences reduced
the market-related value of assets for 2004 and resulted in higher pension expense as compared to
2003.
2006 Outlook
Pension expense for defined benefit plans is estimated to be approximately $155 for 2006. This
represents an increase of $38 from 2005. The increase is primarily attributable to a 60 basis point
drop in the weighted average discount rate from 5.9% to 5.3%. Pension expense in both 2005 and 2006
was computed based on a global weighted average long-term rate of return on plan assets assumption
of 8.8%.
n Additional Minimum Liability
The additional minimum liability is equal to the accumulated benefit obligation less the fair value
of pension plan assets in excess of the accrued pension cost. A $14.3 after-tax charge was recorded
to comprehensive income within shareholders’ equity due to the recognition of an additional minimum
liability in 2005. The 2005 increase in the additional minimum liability resulted principally from
the decline in the discount rate substantially offset by improved asset positions. Comprehensive
income within shareholders’ equity increased $59.4 (after-tax) due to a reduction of the additional
minimum liability in 2004, resulting principally from improved plan asset positions.
n Recognition of Actuarial Gains and Losses
At the end of 2005 and 2004, unrecognized actuarial losses for the defined benefit plans were $928.5 and $815.1, respectively.
These losses principally reflect the steady decline in the discount rate over the years. SFAS No.
87 requires the amortization of unrecognized actuarial gains/losses in excess of certain thresholds
into pension expense over the average remaining service lives of the employees, to the extent that
they are not offset by future gains/losses. In 2006, pension expense will include approximately $68
of amortization relating to the 2005 unrecognized actuarial loss. Future increases in the discount
rate and higher than expected returns on plan assets would reduce the unrecognized actuarial losses
and resulting amortization in years beyond 2006.
n Plan Modifications
On 5 October 2004, the company announced changes to the U.S. Retirement Savings and Stock Ownership
Plan (renamed the “Retirement Savings Plan”) to provide a greater portion of retirement benefits in
a defined contribution program to eligible salaried employees. Effective 1 January 2005, this new
program provides a company core contribution based on service as well as an enhanced company
matching contribution. Eligible U.S. salaried employees hired on or after 1 November 2004 will earn
benefits only under the defined contribution program starting 1 January 2005. Eligible U.S.
salaried employees as of 31 October 2004 were given the opportunity to make a one-time election to
choose the defined benefit plan or the new defined contribution plan for future service starting 1
January 2005. Benefits for service through 31 December 2004, including those applicable to current
employees electing the defined contribution program, will be determined under the defined benefit
pension plan formula. Additionally, the company modified the early retirement provision related to
future service of the defined benefit pension plan. In the near term, the retirement program
changes are not anticipated to have a material impact on retirement program cost levels or funding.
Over the long run, however, the new defined contribution plan is expected to reduce the volatility
of both expense and contributions.
The U.K. defined benefit plan was closed to all new hires effective 1 January 2005. Eligible U.K.
employees hired on or after 1 January 2005 will receive retirement benefits exclusively under a new
defined contribution plan.
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SHARE-BASED COMPENSATION
During 2005, the company applied Accounting Principles Board (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 Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which requires companies to expense the
grant-date fair value of employee stock options for interim periods beginning after 15 June 2005.
However, in April 2005, the Securities and Exchange Commission amended the compliance date to
fiscal years beginning after 15 June 2005. The company adopted this Statement on 1 October 2005.
The estimated impact to diluted earnings per share is approximately $.13 in 2006.
As per the disclosure in Note 1 to the consolidated financial statements, if the company had
recognized compensation expense for its employee stock options in accordance with SFAS No. 123,
“Accounting for Stock-Based Compensation,” net income would have been reduced by $29.2, $30.6 and
$37.9 in 2005, 2004 and 2003, respectively.
In the preparation of the SFAS No. 123 pro forma disclosures, stock option expense was recognized
over the stated three-year graded vesting period. Upon the adoption of SFAS No. 123R, the company
will accelerate the recognition of expense for retiree eligible individuals who meet the
requirements for immediate vesting of awards upon their retirement. This change will be applied to
awards granted on or after the adoption of SFAS No. 123R (i.e., 1 October 2005). The impact of this
change to accelerate expense for retiree eligible individuals for all share-based compensation
programs is approximately $10, or $.03 per diluted earnings per share, principally related to the
stock option program.
ENVIRONMENTAL MATTERS
The company is subject to various environmental laws and regulations in the United States of
America and foreign countries where it has operations. Compliance with these laws and regulations
results in higher capital expenditures and costs. Additionally, from time to time, the company is
involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability
Act (the federal Superfund law), similar state laws and the
Resource Conservation and Recovery Act (RCRA) relating to the designation of certain sites for
investigation and possible cleanup. The company’s accounting policies for environmental
expenditures are discussed in Note 1 to the consolidated financial statements.
The amounts charged to earnings on an after-tax basis related to environmental matters totaled
$26.1, $31.8 and $29.6 in 2005, 2004 and 2003, respectively. These amounts represent an estimate of
expenses for compliance with environmental laws, as well as remedial activities, and costs incurred
to meet internal company standards. Such costs are estimated to be $26 and $27 in 2006 and 2007,
respectively.
Although precise amounts are difficult to define, the company estimates that in 2005 it spent
approximately $8 on capital projects to control pollution versus $12 in 2004. Capital expenditures
to control pollution in future years are estimated at $7 in 2006 and $7 in 2007.
It is the company’s policy to accrue environmental investigatory, external legal costs and
noncapital remediation costs for identified sites when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. The potential exposure for such costs
is estimated to range from $8 to a reasonably possible upper exposure of $17. The balance sheet at
30 September 2005 and 2004 included an accrual of $13.3 and $14.3, respectively.
Actual costs to be incurred at identified sites in future periods may vary from the estimates,
given inherent uncertainties in evaluating environmental exposures. Subject to the imprecision in
estimating future environmental costs, the company does not expect that any sum it may have to pay
in connection with environmental matters in excess of the amounts recorded or disclosed above would
have a materially adverse effect on its financial condition or results of operations in any one
year.
LIQUIDITY AND CAPITAL RESOURCES
The company maintained a solid financial position throughout 2005. Strong cash flow from
operations supplemented with proceeds from financing activities provided funding for the company’s
capital spending and share repurchase program. The company is currently rated A/A2 (long-term) and
A-1/P-1 (short-term), respectively, by Standard & Poor’s and Moody’s.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
n Cash Flows
The company’s cash flows from operating, investing and financing activities, as reflected in the
Consolidated Statements of Cash Flows, are summarized in the following table:
| 2005 | 2004 | 2003 | ||||||||||
Cash provided by (used for): |
||||||||||||
Operating activities |
$ | 1,375.8 | $ | 1,085.9 | $ | 1,036.0 | ||||||
Investing activities |
(973.4 | ) | (762.7 | ) | (1,046.6 | ) | ||||||
Financing activities |
(492.7 | ) | (256.8 | ) | (182.7 | ) | ||||||
Effect of exchange rate
changes on cash |
(.2 | ) | 3.7 | 15.8 | ||||||||
(Decrease) increase in cash
and cash items |
$ | (90.5 | ) | $ | 70.1 | $ | (177.5 | ) | ||||
n Operating Activities
2005 vs. 2004
Net cash provided by operating activities increased $289.9, or 27%. Before working capital changes,
the contribution of net income adjusted for noncash items to cash provided by operating activities
increased $136.8. Net income improved by $107.6. The use of cash for working capital in 2005
decreased by $153.1. There was a $192.2 decrease in the use of cash for trade receivables due to
the company’s focus on collection activities. This was partially offset by an increase of $86.1 in
the use of cash for accounts payable and accrued liabilities, due mainly to the timing of payments.
2004 vs. 2003
Net cash provided by operating activities increased $49.9, or 5%. Before working capital changes,
the contribution of net income adjusted for noncash items to cash provided by operating activities
increased $209.4. Net income improved by $206.8. The primary noncash adjustment favorably
contributing to the change in cash provided by operating activities was depreciation and
amortization expense. Depreciation and amortization expense increased $60.1, principally due to
acquisitions and currency effects from a weaker U.S. dollar. These favorable impacts were partially
offset by a decrease in the impairment of long-lived assets due to the 2003 global cost reduction
plan and lower dividend payments from equity affiliates. The increase in trade receivables of
$165.0 was primarily due to increased sales volumes.
n Investing Activities
2005 vs. 2004
In 2005, cash used for investing activities increased by $210.7, due mainly to additions in plant
and equipment. Acquisitions in 2005, totaling $97.2, primarily included five small U.S. homecare
businesses. 2004 acquisitions of $84.6 primarily included six small U.S. homecare businesses.
2004 vs. 2003
In 2004, cash used for investing activities decreased by $283.9, due to lower acquisitions,
partially offset by higher additions to plant and equipment and lower proceeds from the sale of
assets and investments. Acquisitions in 2004, totaling $84.6, principally included six small U.S.
homecare businesses. Acquisitions in 2003, totaling $529.6, included Ashland’s Electronic Chemicals
business for $293.2 in August 2003, American Homecare Supply (AHS) for $165.8 in October 2002,
additional small homecare businesses, and Sanwa. Proceeds from the sale of assets and investments
declined $55.9. The company sold its Canadian packaged gas business in 2003 for proceeds of $41.2.
Capital Expenditures
Capital expenditures in 2005 totaled $1,042.8, compared to $815.5 in 2004. The increase is
primarily attributable to higher spending for plant and equipment. As in 2004, additions to plant
and equipment in 2005 were largely in support of the worldwide Gases business. Major additions to
plant and equipment included spending on EPI North American hydrogen tonnage plants and Asian
facilities within the Gases electronics and liquid bulk businesses. Additions to plant and
equipment also included support capital of a routine ongoing nature, including expenditures for
distribution equipment and facility improvements.
Capital expenditures are detailed in the
following table:
| 2005 | 2004 | 2003 | ||||||||||
Additions to plant and
equipment |
$ | 929.5 | $ | 705.5 | $ | 612.9 | ||||||
Acquisitions, less cash acquired |
97.2 | 84.6 | 529.6 | |||||||||
Investments in and advances
to unconsolidated affiliates |
10.5 | 18.8 | 6.1 | |||||||||
Long-term debt assumed in
acquisitions |
.6 | — | 5.2 | |||||||||
Capital leases |
5.0 | 6.6 | 17.1 | |||||||||
| $ | 1,042.8 | $ | 815.5 | $ | 1,170.9 | |||||||
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2006 Outlook
Capital expenditures for new plant and equipment in 2006 are expected to be between $1,200 and
$1,300. The increase in expenditures in 2006 is driven primarily by the anticipated $297 purchase
of certain cryogenic vessel equipment that is currently leased. The company expects to spend
between $75 and $100 on homecare acquisitions. It is anticipated that capital expenditures will be
funded with cash from operations. In addition, the company intends to continue to evaluate other
acquisition opportunities and investments in affiliated entities, but due to uncertainties, no
provision is included in the capital expenditure estimate above.
n Financing Activities
2005 vs. 2004
Cash used for financing activities increased $235.9 in 2005. The increase was due to the purchase
of 8.3 million of the company’s outstanding shares for $500.0 and higher dividend payments of
$57.3, partially offset by a net increase for company borrowings of $329.9. Additional long-term
debt proceeds of $224.4 were more than offset by higher payments on long-term debt of $298.6. In
2005, there was a net increase in commercial paper and shortterm borrowings of $269.3 versus a
reduction of these borrowings in 2004 of $134.8.
2004 vs. 2003
Cash used for financing activities increased $74.1 in 2004. The increase was due to higher debt
repayments of $236.8 and dividends to shareholders of $30.3,
partially offset by higher long-term
debt proceeds of $123.5 and an increase in cash proceeds from stock option exercises of $69.5.
Long-term borrowings consisted mainly of a $125.0 seven-year, fixed-rate borrowing with a coupon
rate of 4.125% and an additional $98.7 of 4.25% Eurobonds maturing 10 April 2012.
Financing and Capital Structure
Capital needs in 2005 were satisfied with cash from operations. At the end of 2005, total debt
outstanding was $2.5 billion compared to $2.4 billion, as long- and short-term debt proceeds
exceeded repayments by $146.0. Total debt at 30 September 2005 and 2004, expressed as a percentage
of the sum of total debt, shareholders’ equity and minority interest, was 34.5% and 34.2%,
respectively.
Long-term debt financings in 2005 totaled $510.7. 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. Additionally,
floating-rate U.S. Industrial Revenue Bonds of $94.0 with terms of
thirty-five years were issued.
There was $250.5 of commercial paper outstanding at 30 September 2005. Substantial credit
facilities are maintained to provide backup funding for commercial paper and to ensure availability
of adequate sources of liquidity. As of 30 September 2005, there were no borrowings outstanding
under the company’s $700 multicurrency committed revolving credit facility, maturing in December
2008.
Additional commitments of $37.3 are maintained by the company’s foreign subsidiaries, of which $7.2
was borrowed and outstanding at 30 September 2005.
On 17 March 2005, the Board of Directors authorized a $500.0 share repurchase program. During 2005,
the company purchased 8.3 million of its outstanding shares at a cost of $500.0.
On 9 November
2005, the company issued Euro 300.0 ($353.0) of 3.75% Eurobonds maturing 8 November 2013. A portion
of these Eurobonds was exchanged for Euro 146.5 ($172.4) of the company’s 6.5% Eurobonds due July
2007 pursuant to an exchange offer announced by the company on 20 October 2005.
Dividends
On 17 March 2005, the Board of Directors increased the quarterly cash dividend 10%, from 29 cents
per share to 32 cents per share. Dividends are declared by the Board of Directors and are usually
paid during the sixth week after the close of the fiscal quarter.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
The following table summarizes these contractual obligations of the company as of 30 September
2005.
| Payments Due by Period | ||||||||||||||||||||||||||||
| Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | ||||||||||||||||||||||
Long-term debt obligations |
||||||||||||||||||||||||||||
Debt maturities |
$ | 2,163 | $ | 126 | $ | 497 | $ | 117 | $ | 15 | $ | 82 | $ | 1,326 | ||||||||||||||
Contractual interest |
722 | 97 | 87 | 61 | 57 | 55 | 365 | |||||||||||||||||||||
Capital leases |
31 | 12 | 7 | 3 | 1 | 1 | 7 | |||||||||||||||||||||
Operating leases |
234 | 61 | 36 | 27 | 21 | 15 | 74 | |||||||||||||||||||||
Pension obligations |
471 | 155 | 155 | 50 | 55 | 56 | — | |||||||||||||||||||||
Unconditional purchase obligations |
1,357 | 356 | 105 | 88 | 80 | 75 | 653 | |||||||||||||||||||||
Total Contractual Obligations |
$ | 4,978 | $ | 807 | $ | 887 | $ | 346 | $ | 229 | $ | 284 | $ | 2,425 | ||||||||||||||
n Long-Term Debt Obligations
The long-term debt obligations include the maturity payments of long-term debt, including the
current portion, and the related contractual interest obligations. Refer to Note 12 to the
consolidated financial statements for additional information on long-term debt.
Contractual
interest is the interest the company is contracted to pay on the long-term debt obligations without
taking into account the interest impact of interest rate swaps related to any of this debt, which
at current interest rates would reduce contractual interest. The company had $484 of long-term debt
subject to variable interest rates at 30 September 2005,
excluding fixed-rate debt that has been
swapped to variable-rate debt. The rate assumed for the variable interest component of the
contractual interest obligation was the rate in effect at 30 September 2005. Variable interest
rates are primarily determined by inter-bank offer rates and by U.S. short-term, tax-exempt
interest rates.
n Leases
Refer to Note 13 to the consolidated financial statements for additional information on capital and
operating leases.
n
Pension Obligations
The company and certain of its subsidiaries sponsor defined benefit plans that cover a substantial
portion of its worldwide employees. The company closed its major defined benefit plans to new
participants in 2005. The company’s funding policy is that contributions, combined with
appreciation and earnings, will be sufficient to pay benefits without creating unnecessary
surpluses. In addition, the company makes contributions to satisfy all legal funding requirements
while managing its capacity to benefit from
tax deductions attributable to plan contributions. The amounts in the table represent the current
estimated cash payments to be made by the company. These payments are significantly higher than the
minimum required contributions.
The total accrued liability for pension benefits is impacted by interest rates, plan demographics,
actual return on plan assets, continuation or modification of benefits, and other factors. Such
factors can significantly impact the amount of the liability and related contributions.
n Unconditional Purchase Obligations
Most of the company’s long-term unconditional purchase obligations relate to feedstock supply for
numerous HyCO (hydrogen, carbon monoxide and syngas) facilities. The price of feedstock supply is
principally related to the price of natural gas. However, long-term take-or-pay sales contracts to
HyCO customers are generally matched to the term of the feedstock supply obligations and provide
recovery of price increases in the feedstock supply. Due to the matching of most feedstock supply
obligations to customer sales contracts, the company does not believe these purchase obligations
would have a material effect on its financial condition or results of operations.
Natural gas supply purchase obligations that are not feedstock supply contracts to HyCO facilities
are principally short-term commitments at market prices.
The above unconditional purchase obligations also include the fixed demand charge for electric
power under numerous supply contracts. A fixed demand charge is generally included in electric
power supply agreement pricing and is generally reset at least
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annually; therefore, the fixed obligation is principally included in 2006. A portion of the
power supply requirement relates to long-term take-or-pay sales contracts to industrial gas
customers, which provide for recovery of power costs.
Purchase commitments to spend approximately $130 for additional plant and equipment are included in
the unconditional purchase obligations. Total capital expenditures for plant and equipment in 2006
are expected to be in the $1,200 to $1,300 range, including $297 for the purchase of certain
cryogenic vessel equipment currently under an operating lease.
The company also purchases materials, energy, capital equipment, supplies and services as part of
the ordinary course of business under arrangements which are not unconditional purchase
obligations. The majority of such purchases are for raw materials and energy, which are obtained
under requirements-type contracts at market prices. In total, purchases by the company approach $4
billion annually, including the unconditional purchase obligations in the table.
n Deferred Income Tax Liability
Noncurrent deferred income tax liabilities as of 30 September 2005 were $834.5. Refer to Note 17 to
the consolidated financial statements. Deferred tax liabilities are calculated based on temporary
differences between the financial reporting and tax bases of assets and liabilities using enacted
tax rates. This amount is not included in the Contractual Obligations table because this
presentation would not be meaningful. These liabilities do not have any connection with the amount
of cash taxes to be paid in any future periods and do not relate to liquidity needs.
OFF-BALANCE SHEET ARRANGEMENTS
The company has entered into certain guarantee agreements and an arrangement involving the
sale and leaseback of U.S. cryogenic vessel equipment. The company’s guarantee agreements are
discussed in Note 19 to the consolidated financial statements. Information on the sale and
leaseback of U.S. cryogenic vessel equipment is also contained in Note 13 to the consolidated
financial statements. The company has not entered into any agreements under which it has an
obligation arising out of a variable interest entity. The company does not have any derivative
instruments indexed to its own stock. The company’s 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 company’s 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
arm’s length with clearly independent parties.
MARKET RISKS AND SENSITIVITY ANALYSIS
The company’s earnings, cash flows and financial position are exposed to market risks relating
to fluctuations in interest rates and foreign currency exchange rates. It is the policy of the
company to minimize its cash flow exposure to adverse changes in currency and exchange rates and to
manage the financial risks inherent in funding with debt capital.
The company mitigates adverse energy price impacts through its cost pass-through structures, as
well as price increases. The company has entered into a limited number of commodity swap contracts
in order to reduce the cash flow exposure to changes in the price of natural gas relative to
certain oil-based feedstocks.
The company addresses these financial exposures through a controlled program of risk management
that includes the use of derivative financial instruments. Counterparties to all derivative
contracts are major financial institutions, thereby minimizing the risk of credit loss. All
instruments are entered into for other than trading purposes. The utilization of these instruments
is described more fully in Note 6 to the consolidated financial statements. The major accounting
policies for these instruments are described in Note 1 to the consolidated financial statements.
The company’s derivative and other financial instruments consist of long-term debt (including
current portion), interest rate swaps, cross currency interest rate swaps, foreign exchange-forward
contracts, foreign exchange-option contracts and commodity swaps. The net market value of these
financial instruments combined is referred to below as the net financial instrument position. The
net financial instrument position does not include other investments of $97.9 at 30 September 2005
and $79.3 at 30 September 2004 as disclosed in Note 6 to the consolidated financial statements.
These amounts primarily represent an investment in a publicly traded foreign company accounted for
by the cost method. The company assessed the materiality of the market risk exposure on these other
investments and determined this exposure to be immaterial.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
At 30 September 2005 and 2004, the net financial instrument position was a liability of
$2,265.6 and $2,531.4, respectively. The decrease in the net financial instrument position was due
primarily to a reduction in long-term debt as repayments have exceeded new issues, 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.
The analysis below presents the sensitivity of the market value of the company’s financial
instruments to selected changes in market rates and prices. The range of changes chosen reflects
the company’s view of changes which are reasonably possible over a one-year period. Market values
are the present value of projected future cash flows based on the market rates and prices chosen.
The market values for interest rate risk and foreign currency risk are calculated by the company
using a third-party software model that utilizes standard pricing models to determine the present
value of the instruments based on market conditions (interest rates, spot and forward exchange
rates, and implied volatilities) as of the valuation date. The market values for commodity price
risk are calculated by the financial institutions with whom the commodity swap contracts have been
executed.
n Interest Rate Risk
The company’s debt portfolio, including swap agreements, as of 30 September 2005, primarily
comprised debt denominated in U.S. dollars (42%) and Euros (41%), including the effect of currency
swaps. This debt portfolio is composed of 48% fixed-rate debt and 52% variable-rate debt. Changes
in interest rates have different impacts on the fixed- and variable-rate portions of the company’s
debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the
net financial instrument position but has no impact on interest incurred or cash flows. A change in
interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash
flows but does not impact the net financial instrument position.
The sensitivity analysis related to the fixed portion of the company’s debt portfolio assumes an
instantaneous 100 basis point move in interest rates from the levels at 30 September 2005 and 2004,
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 $58 and $40 in the net liability
position of financial instruments at 30 September 2005 and 2004, respectively. A 100 basis point
decrease in market interest rates would result in an increase of $63 and $43 in the net liability
position of financial instruments at 30 September 2005 and 2004, respectively.
Based on the variable-rate debt included in the company’s debt portfolio, including the interest
rate swap agreements, as of 30 September 2005 and 2004, a 100 basis point increase in interest
rates would result in an additional $13 and $10 in interest incurred per year at 30 September 2005
and 2004, respectively. A 100 basis point decline would lower interest incurred by $13 and $10 per
year at 30 September 2005 and 2004, respectively.
n Foreign Currency Exchange Rate Risk
The sensitivity analysis assumes an instantaneous 10% change in the foreign currency exchange rates
from their levels at 30 September 2005 and 2004, 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 $169 and $199 in the net liability position of financial
instruments at 30 September 2005 and 2004, respectively. A 10% weakening of the functional currency
of an entity versus all other currencies would result in an increase of $162 and $197 in the net
liability position of financial instruments at 30 September 2005 and 2004, respectively.
The primary currencies for which the company has exchange rate exposure are the U.S. dollar versus
the Euro, the U.S. dollar versus the U.K. Pound Sterling and the Euro versus the U.K. Pound
Sterling. Foreign currency debt, cross currency interest rate swaps and foreign exchange-forward
contracts are used in countries where the company does business, thereby reducing its net asset
exposure. Foreign exchange-forward contracts also are used to hedge the company’s firm and highly
anticipated foreign currency cash flows, along with foreign exchange-option contracts. Thus, there
is either an asset or cash flow exposure related to all of the financial instruments in the above
sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite
direction and materially equal (or more favorable in the case of purchased foreign exchange-option
contracts) to the impact on the instruments in the analysis.
n Commodity Price Risk
The sensitivity analysis assumes an instantaneous 50% change in the price of natural gas and
oil-based feedstocks from their levels at 30 September 2005, with all other variables held
constant. A 50% increase in these prices would result in an increase of $4 in the net liability
position of financial instruments at 30 September 2005. A 50% decline in these prices would result
in a decrease of $4 in the net liability position of financial instruments at 30 September 2005.
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INFLATION
The financial statements are presented in accordance with U.S.
generally accepted accounting principles and do not fully reflect
the impact of prior years’ inflation. While the U.S. inflation rate
has been modest for several years, the company operates in many
countries with both inflation and currency issues. The ability to
pass on inflationary cost increases is an uncertainty due to general
economic conditions and competitive situations. It is estimated
that the cost of replacing the company’s plant and equipment
today is greater than its historical cost. Accordingly, depreciation
expense would be greater if the expense were stated on a current
cost basis.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Management’s Discussion and Analysis of the company’s financial
condition and results of operations is based on the consolidated
financial statements and accompanying notes that have been
prepared in accordance with U.S. generally accepted accounting
principles. 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.
Note 1 to the consolidated financial statements describes the
company’s major accounting policies. Judgments and estimates
of uncertainties are required in applying the company’s accounting
policies in many areas. The following are areas requiring significant
judgments and estimates: depreciable lives of plant and
equipment, cash flow and valuation assumptions in performing
impairment tests of long-lived assets and estimated costs to be
incurred for environmental liabilities, income taxes and pension
benefits.
Application of the critical accounting policies discussed below
requires management’s significant judgments, often as the result
of the need to make estimates of matters that are inherently
uncertain. If actual results were to differ materially from the estimates
made, the reported results could be materially affected.
The company’s senior management has reviewed critical accounting
policies and estimates and the Management’s Discussion and
Analysis with its audit committee.
Information concerning the company’s implementation and impact
of new accounting standards issued by the Financial Accounting
Standards Board (FASB) is discussed in Note 2. Otherwise, the
company did not adopt an accounting policy in the past three
years that had a material impact on the company’s financial condition,
change in financial condition or results of operations.
n Depreciable Lives of Plant and Equipment
Plant and equipment is recorded at cost and depreciated using the
straight-line method, which deducts equal amounts of the cost of
each asset from earnings every year over its estimated economic
useful life. Net plant and equipment at 30 September 2005 totaled
$5,868.8, representing 56% of total assets. Depreciation expense
during 2005 totaled $711.3, representing 10% of total costs and
expenses. Given the significance of plant and equipment and
associated depreciation to the company’s financial statements, the
determination of an asset’s economic useful life is considered to
be a critical accounting estimate. The estimate is critical for the
company’s Gases and Chemicals segments, both capital-intensive
businesses in which the company owns and operates plant and
equipment.
Economic useful life is the duration of time an asset is expected
to be productively employed by the company, which may be less
than its physical life. Management’s assumptions on the following
factors, among others, affect the determination of estimated
economic useful life: wear and tear, obsolescence, technical
standards, contract life, changes in market demand and raw material
availability. The company makes estimates and assumptions
regarding its competitive position in various end markets and geographic
locations.
The estimated economic useful life of an asset is monitored to
determine its appropriateness, especially in light of changed
business circumstances. For example, changes in technological
advances, changes in the estimated future demand for products,
or excessive wear and tear may result in a shorter estimated
useful life than originally anticipated. In these cases, the company
would depreciate the remaining net book value over the new estimated
remaining life, thereby increasing depreciation expense per
year on a prospective basis. Likewise, if the estimated useful life
is increased, the adjustment to the useful life decreases depreciation
expense per year on a prospective basis. Over the past three
years, changes in economic useful life assumptions have not had a
material impact on the company’s reported results.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The company has numerous long-term customer supply contracts,
particularly in the gases on-site business. These contracts principally
have initial contract terms of 15 to 20 years. Depreciable
lives of the production assets related to long-term contracts are
matched to the contract lives. Extensions to the contract term of
supply frequently occur prior to the expiration of the initial term.
As contract terms are extended, the depreciable life of the remaining
net book value of the production assets is adjusted to match
the new contract term.
The depreciable lives of merchant gas production facilities are
principally 15 years. Major chemical production facilities are
also generally depreciated over 15 years. The terms of customer
contracts associated with products produced at these types of
facilities typically have a much shorter term. Management has
determined a 15-year life to be appropriate based on historical
experience combined with its judgment on future assumptions
such as technological advances, potential for obsolescence, competitors’
actions, etc. Management monitors its assumptions and
may potentially need to adjust depreciable life as circumstances
change. A decrease in the depreciable life for all merchant chemical
and gas facilities of one year would increase annual depreciation
expense by approximately $20. An increase in the depreciable
life for all merchant chemical and gas facilities of one year would
decrease annual depreciation expense by approximately $15.
n Impairment of Long-Lived Assets
Plant and Equipment
Net plant and equipment at 30 September 2005 totaled $5,868.8.
Plant and equipment held for use is grouped for impairment testing
at the lowest level for which there are identifiable cash flows.
Impairment testing of the asset group occurs whenever events or
changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. The company assesses recoverability
by comparing the carrying amount of the asset group to
the estimated undiscounted future cash flows expected to be
generated by the assets. If an asset group is considered impaired,
the impairment loss to be recognized would be measured as the
amount by which the asset group’s carrying amount exceeds its
fair value. Assets to be disposed of by sale are reported at the
lower of carrying amount or fair value less cost to sell.
The estimate of plant and equipment fair value is based on estimated
discounted future cash flows expected to be generated by
the asset group. The assumptions underlying cash flow projections
represent management’s best estimates at the time of the impairment
review. Factors that management must estimate include:
industry and market conditions, sales volume and prices, costs to
produce, inflation, etc. Changes in key assumptions or actual conditions
which differ from estimates could result in an impairment
charge. The company uses reasonable and supportable assumptions
when performing impairment reviews and cannot predict the
occurrence of future events and circumstances that could result
in impairment charges. Over the past three years, there have been
no impairments of asset groups held for use. As part of the actions
taken in the company’s 2003 global cost reduction plan, recognized
impairments of assets to be sold or abandoned were $90.1
in 2003. Refer to the Global Cost Reduction Plan discussion on
page 19.
Goodwill
The purchase method of accounting for business combinations
requires the company to make use of estimates and judgments to
allocate the purchase price paid for acquisitions to the fair value
of the net tangible and identifiable intangible assets. Goodwill
represents the excess of the aggregate purchase price over the
fair value of net assets of an acquired entity. Goodwill, including
goodwill associated with equity affiliates, was $986.1 as of
30 September 2005. The majority of the company’s goodwill is
assigned to reporting units within the Gases segment. Disclosures
related to goodwill are included in Note 10 to the consolidated
financial statements.
The company performs an impairment test annually in the fourth
quarter of the fiscal year. In addition, goodwill would be tested
more frequently if changes in circumstances or the occurrence
of events indicated potential impairment exists. The impairment
test requires the company to compare the fair value of business
reporting units to carrying value including assigned goodwill. The
results of the impairment tests have indicated fair value amounts
exceeded carrying amounts by a substantial margin.
The company primarily uses the present value of future cash flows
to determine fair value. The company’s valuation model assumes
a five-year growth period for the business and an estimated exit
trading multiple. Management judgment is required in the estimation
of future operating results and to determine the appropriate
exit multiple. The exit multiple is determined from comparable
industry transactions. Future operating results and exit multiples
could reasonably differ from the estimates. However, given the
substantial margin by which fair value exceeded carrying amounts
in the latest goodwill impairment review, the company does not
anticipate a material impact on the financial statements from differences
in these assumptions.
34
Table of Contents
Equity Investments
Investments in and advances to equity affiliates totaled $663.7 at
30 September 2005. The majority of the company’s investments
are nonpublicly traded ventures with other companies in the industrial
gas or chemicals business. Summarized financial information
of equity affiliates is included in Note 8 to the consolidated financial
statements. Equity investments are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the investment may not be recoverable.
In the event that a decline in fair value of an investment occurs,
and the decline in value is considered to be other than temporary,
an impairment loss would be recognized. Management’s estimate
of fair value of an investment is based on estimated discounted
future cash flows expected to be generated by the investee.
Changes in key assumptions about the financial condition of an
investee or actual conditions which differ from estimates could
result in an impairment charge. Over the past three years, there
have been no material impairment charges associated with an
equity investment.
n Environmental Liabilities
Accruals for environmental loss contingencies are recorded when
it is probable that a liability has been incurred and the amount
can reasonably be estimated. The company estimates the exposure
for environmental contingencies to range from $8 to a reasonably
possible upper exposure of $17. The balance sheet at
30 September 2005 included an accrual of $13.3, primarily as
part of other noncurrent liabilities. Management views the measurement
of environmental loss contingency accruals as a critical
accounting estimate because of the considerable uncertainty
surrounding estimation and the need to forecast into the distant
future.
In the normal course of business, the company is involved in legal
proceedings under the federal Superfund law, similar state environmental
laws and RCRA relating to the designation of certain
sites for investigation or remediation. Presently, there are approximately
36 sites on which a final settlement has not been reached
where the company, along with others, has been designated a
potentially responsible party by the Environmental Protection
Agency or is otherwise engaged in investigation or remediation.
In addition, the company is also involved in cleanup activities at
certain of its manufacturing sites. Sites for which the company
monitors environmental exposure are related to operations within
the Gases and Chemicals segments, as well as discontinued
businesses.
Measurement of environmental accruals is based on the evaluation
of currently available information with respect to each individual
site and considers factors such as existing technology, presently
enacted laws and regulations, and prior experience in remediation
of contaminated sites. An environmental accrual related to cleanup
of a contaminated site might include, for example, a provision for
one or more of the following types of costs: site investigation and
testing costs, cleanup costs, costs related to soil and water contamination
resulting from tank ruptures, postremediation monitoring
costs and outside legal fees. Environmental accruals include
costs related to other potentially responsible parties to the extent
that the company has reason to believe such parties will not fully
pay their proportionate share. The accruals also do not take into
account any claims for recoveries from insurance and are not
discounted.
As assessments and remediation progress at individual sites,
the amount of the projected cost is reviewed periodically, and
the accrual is adjusted to reflect additional technical and legal
information that becomes available. Management has a well-established
process in place to identify and monitor the company’s
environmental exposures. An environmental accrual analysis is
prepared and maintained that lists all environmental loss contingencies,
even where an accrual has not been established. This
analysis assists in monitoring the company’s overall environmental
exposure and serves as a tool to facilitate ongoing communication
among the company’s technical experts, environmental managers,
environmental lawyers and financial management to ensure that
required accruals are recorded and potential exposures disclosed.
Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given the inherent uncertainties in evaluating
environmental exposures. Using reasonably possible alternative
assumptions of the exposure level could result in an increase
to the environmental accrual. Due to the inherent uncertainties
related to environmental exposures, a significant increase to the
reasonably possible upper exposure level could occur if a new site
was designated, the scope of remediation was increased or a significant
increase in the company’s proportionate share occurred.
n Income Taxes
The company accounts for income taxes under the liability method.
Under this method, deferred tax liabilities and assets are recognized
for the tax effects of temporary differences between the
financial reporting and tax bases of liabilities and assets measured
using the enacted tax rate. At 30 September 2005, accrued
income taxes and deferred tax liabilities amounted to $118.2 and
35
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MANAGEMENT’S DISCUSSION AND ANALYSIS
$834.5, respectively. Income tax expense was $263.3 for the year
ended 30 September 2005. Management judgment is required
in determining income tax expense and the related balance
sheet amounts. Judgments are required concerning the ultimate
outcome of tax contingencies and the realization of deferred tax
assets.
Actual income taxes paid may vary from estimates depending
upon changes in income tax laws, actual results of operations, and
the final audit of tax returns by taxing authorities. Tax assessments
may arise several years after tax returns have been filed. The company
believes that its recorded tax liabilities adequately provide for
the probable outcome of these assessments.
Deferred tax assets are recorded for operating losses and tax
credit carryforwards. However, when there are not sufficient
sources of future taxable income to realize the benefit of the
operating loss or tax credit carryforwards, these deferred tax
assets are reduced by a valuation allowance. A valuation allowance
is recognized if, based on the weight of available evidence,
it is considered more likely than not that some portion or all of
the deferred tax asset will not be realized. The factors used to
assess the likelihood of realization include forecasted future taxable
income and available tax planning strategies that could be
implemented to realize or renew net deferred tax assets in order
to avoid the potential loss of future tax benefits. The effect of a
change in the valuation allowance is reported in the current period
tax expense.
A 1% point increase (decrease) in the company’s effective tax
rate would have decreased (increased) net income by approximately
$10.
n Pension Benefits
The company sponsors defined benefit pension plans in various
forms for employees who meet eligibility requirements. Several
assumptions and statistical variables are used in actuarial models
to calculate the pension expense and liability related to the various
plans. Assumptions about the discount rate, the expected
rate of return on plan assets and the future rate of compensation
increases are determined by the company. The actuarial models
also use assumptions on demographic factors such as retirement,
mortality and turnover. Management considers the accounting for
pension benefits critical because of the significance and number
of assumptions used. Depending on the assumptions selected,
pension expense could vary significantly and could have a material
effect on reported earnings. The assumptions used can also materially
affect the measurement of benefit obligations. For a detailed
discussion of the company’s pension benefits, see Pension
Benefits on page 24 and Note 18 to the consolidated financial
statements.
NEW ACCOUNTING STANDARDS
See Note 2 to the consolidated financial statements for information
concerning the company’s implementation and impact of new
accounting standards.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are
based on current expectations at the time the document was originally
prepared regarding important risk factors. Management does
not anticipate publicly updating any of its expectations except as
part of the quarterly earnings announcement process.
Actual results may differ materially from those forward-looking
statements expressed. In addition to important risk factors and
uncertainties referred to in the Management’s Discussion and
Analysis, 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 company’s goods and services; 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
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 recovery of insurance proceeds; 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.
36
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Air Products’ management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our
internal control over financial reporting, which is defined in the
following sentences, is a process designed to provide reasonable
assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles and
includes those policies and procedures that:
| (i) | pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; |
||
| (ii) | provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and | ||
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of inherent limitations, internal control over financial
reporting can only provide reasonable assurance and may not
prevent or detect misstatements. Further, because of changes
in conditions, the effectiveness of our internal control over financial
reporting may vary over time. Our processes contain self-monitoring
mechanisms, and actions are taken to correct deficincies
as they are identified.
Management has evaluated the effectiveness of its
internal control over financial reporting based on the framework
in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management
concluded that, as of 30 September 2005, the Company’s internal
control over financial reporting
was effective.
KPMG LLP, an independent registered public accounting firm,
has issued an audit report on our management’s assessment
of internal control over financial reporting, which appears on
page 38 herein.
|
 |
|||||
John P. Jones III
|
Paul E. Huck | |||||
Chairman, President and
|
Vice President and | |||||
Chief Executive Officer
|
Chief Financial Officer | |||||
22 November 2005 |
37
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the
Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
We have audited management’s assessment, included in the
accompanying Report of Management, that Air Products and
Chemicals, Inc. maintained effective internal control over financial
reporting as of 30 September 2005, based on criteria
established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Air Products and Chemicals, Inc.’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
an opinion on management’s assessment and an opinion on
the effectiveness of the company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing
and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management’s assessment that Air Products and
Chemicals, Inc. maintained effective internal control over financial
reporting as of 30 September 2005 is fairly stated, in all material
respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our
opinion, Air Products and Chemicals, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of 30 September 2005, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Air Products and Chemicals,
Inc. and subsidiaries as of 30 September 2005 and 2004, and
the related consolidated statements of income, cash flows, and
shareholders’ equity for each of the years in the three-year period
ended 30 September 2005, and our report dated 22 November,
2005 expressed an unqualified opinion on those consolidated
financial statements.
|
||
KPMG LLP |
||
Philadelphia, Pennsylvania |
||
22 November 2005 |
38
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets
of Air Products and Chemicals, Inc. and subsidiaries as of
30 September 2005 and 2004, and the related consolidated statements
of income, cash flows, and shareholders’ equity for each
of the years in the three-year period ended 30 September 2005.
These consolidated financial statements are the responsibility of
the company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Air Products and Chemicals, Inc. and subsidiaries as of
30 September 2005 and 2004, and the results of their operations
and their cash flows for each of the years in the three-year period
ended 30 September 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Air Products and Chemicals, Inc.’s internal control
over financial reporting as of 30 September 2005, based on criteria
established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated 22 November, 2005
expressed an unqualified opinion on management’s assessment
of, and the effective operation of, internal control over financial
reporting.
|
|
||
KPMG LLP |
||
Philadelphia, Pennsylvania |
||
22 November 2005 |
39
Table of Contents
THE CONSOLIDATED FINANCIAL STATEMENTS
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
| Year ended 30 September (millions of dollars, except for share data) | 2005 | 2004 | 2003 | |||||||||
Sales |
$ | 8,143.5 | $ | 7,411.4 | $ | 6,297.3 | ||||||
Costs and Expenses |
||||||||||||
Cost of sales |
6,011.3 | 5,463.6 | 4,613.1 | |||||||||
Selling and administrative |
1,028.2 | 969.4 | 842.6 | |||||||||
Research and development |
132.7 | 126.7 | 121.1 | |||||||||
Other (income) expense, net |
(31.2 | ) | (27.9 | ) | (26.5 | ) | ||||||
Global cost reduction plans, net |
— | — | 152.5 | |||||||||
Operating Income |
1,002.5 | 879.6 | 594.5 | |||||||||
Equity affiliates’ income |
105.4 | 92.8 | 94.4 | |||||||||
Interest expense |
110.2 | 121.0 | 123.5 | |||||||||
Income Before Taxes and Minority Interest |
997.7 | 851.4 | 565.4 | |||||||||
Income tax provision |
263.3 | 226.6 | 147.2 | |||||||||
Minority interest in earnings of subsidiary companies |
22.7 | 20.7 | 18.0 | |||||||||
Income Before Cumulative Effect of Accounting Change |
711.7 | 604.1 | 400.2 | |||||||||
Cumulative effect of accounting change |
— | — | (2.9 | ) | ||||||||
Net Income |
$ | 711.7 | $ | 604.1 | $ | 397.3 | ||||||
Weighted Average of Common Shares Outstanding (in millions) |
225.7 | 223.8 | 219.7 | |||||||||
Weighted Average of Common Shares Outstanding Assuming Dilution (in millions) |
231.4 | 228.9 | 223.6 | |||||||||
Basic Earnings per Common Share |
||||||||||||
Income before cumulative effect of accounting change |
$ | 3.15 | $ | 2.70 | $ | 1.82 | ||||||
Cumulative effect of accounting change |
— | — | (.01 | ) | ||||||||
Net Income |
$ | 3.15 | $ | 2.70 | $ | 1.81 | ||||||
Diluted Earnings per Common Share |
||||||||||||
Income before cumulative effect of accounting change |
$ | 3.08 | $ | 2.64 | $ | 1.79 | ||||||
Cumulative effect of accounting change |
— | — | (.01 | ) | ||||||||
Net Income |
$ | 3.08 | $ | 2.64 | $ | 1.78 | ||||||
The accompanying notes are an integral part of these statements.
40
Table of Contents
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| 30 September (millions of dollars, except for share data) | 2005 | 2004 | ||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash items |
$ | 55.8 | $ | 146.3 | ||||
Trade receivables, less allowances for doubtful accounts of $34.9 in 2005 and $29.6 in 2004 |
1,506.6 | 1,454.7 | ||||||
Inventories |
494.8 | 505.9 | ||||||
Contracts in progress, less progress billings |
82.4 | 71.3 | ||||||
Other receivables and current assets |
275.1 | 238.7 | ||||||
Total Current Assets |
2,414.7 | 2,416.9 | ||||||
Investment in Net Assets of and Advances to Equity Affiliates |
663.7 | 629.8 | ||||||
Plant and Equipment, at cost |
12,913.3 | 12,201.5 | ||||||
Less accumulated depreciation |
7,044.5 | 6,499.3 | ||||||
Plant and Equipment, net |
5,868.8 | 5,702.2 | ||||||
Goodwill |
920.0 | 830.5 | ||||||
Intangible Assets, net |
98.7 | 101.4 | ||||||
Other Noncurrent Assets |
442.9 | 359.6 | ||||||
Total Assets |
$ | 10,408.8 | $ | 10,040.4 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Current Liabilities |
||||||||
Payables and accrued liabilities |
$ | 1,378.0 | $ | 1,319.6 | ||||
Accrued income taxes |
118.2 | 105.9 | ||||||
Short-term borrowings |
309.6 | 35.4 | ||||||
Current portion of long-term debt |
137.4 | 244.7 | ||||||
Total Current Liabilities |
1,943.2 | 1,705.6 | ||||||
Long-Term Debt |
2,052.9 | 2,113.6 | ||||||
Deferred Income and Other Noncurrent Liabilities |
821.6 | 820.3 | ||||||
Deferred Income Taxes |
834.5 | 788.0 | ||||||
Total Liabilities |
5,652.2 | 5,427.5 | ||||||
Minority Interest in Subsidiary Companies |
181.1 | 168.9 | ||||||
Commitments and Contingencies—See Note 19 |
||||||||
Shareholders’ Equity |
||||||||
Common stock (par value $1 per share; issued 2005 and 2004—249,455,584 shares) |
249.4 | 249.4 | ||||||
Capital in excess of par value |
603.6 | 551.8 | ||||||
Retained earnings |
5,317.2 | 4,887.1 | ||||||
Accumulated other comprehensive income (loss) |
(433.2 | ) | (440.7 | ) | ||||
Treasury stock, at cost (2005—27,557,351; 2004—22,153,707 shares) |
(1,161.5 | ) | (764.8 | ) | ||||
Shares in trust (2004—1,527,101 shares) |
— | (38.8 | ) | |||||
Total Shareholders’ Equity |
4,575.5 | 4,444.0 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 10,408.8 | $ | 10,040.4 | ||||
The accompanying notes are an integral part of these statements.
41
Table of Contents
THE CONSOLIDATED FINANCIAL STATEMENTS
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended 30 September (millions of dollars) | 2005 | 2004 | 2003 | |||||||||
Operating Activities |
||||||||||||
Net income |
$ | 711.7 | $ | 604.1 | $ | 397.3 | ||||||
Adjustments to reconcile income to cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
728.3 | 714.9 | 654.8 | |||||||||
Impairment of long-lived assets |
— | 3.9 | 91.7 | |||||||||
Deferred income taxes |
69.0 | 86.2 | 26.8 | |||||||||
Undistributed earnings of unconsolidated affiliates |
(39.7 | ) | (44.6 | ) | (6.8 | ) | ||||||
Gain on sale of assets and investments |
(8.3 | ) | (5.3 | ) | (8.4 | ) | ||||||
Other |
55.4 | 20.4 | 14.8 | |||||||||
Subtotal |
1,516.4 | 1,379.6 | 1,170.2 | |||||||||
Working capital changes, excluding effects of acquisitions and divestitures: |
||||||||||||
Trade receivables |
(60.8 | ) | (253.0 | ) | (88.0 | ) | ||||||
Inventories and contracts in progress |
(10.3 | ) | (27.9 | ) | (53.2 | ) | ||||||
Payables and accrued liabilities |
(80.8 | ) | 5.3 | (9.6 | ) | |||||||
Other |
11.3 | (18.1 | ) | 16.6 | ||||||||
Cash Provided by Operating Activities |
1,375.8 | 1,085.9 | 1,036.0 | |||||||||
Investing Activities |
||||||||||||
Additions to plant and equipment |
(929.5 | ) | (705.5 | ) | (612.9 | ) | ||||||
Acquisitions, less cash acquired |
(97.2 | ) | (84.6 | ) | (529.6 | ) | ||||||
Investment in and advances to unconsolidated affiliates |
(10.5 | ) | (18.8 | ) | (6.1 | ) | ||||||
Proceeds from sale of assets and investments |
59.8 | 46.2 | 102.1 | |||||||||
Other |
4.0 | — | (.1 | ) | ||||||||
Cash Used for Investing Activities |
(973.4 | ) | (762.7 | ) | (1,046.6 | ) | ||||||
Financing Activities |
||||||||||||
Long-term debt proceeds |
510.7 | 286.3 | 162.8 | |||||||||
Payments on long-term debt |
(634.0 | ) | (335.4 | ) | (271.0 | ) | ||||||
Net increase (decrease) in commercial paper and short-term borrowings |
269.3 | (134.8 | ) | 37.6 | ||||||||
Dividends paid to shareholders |
(276.2 | ) | (218.9 | ) | (188.6 | ) | ||||||
Purchase of treasury stock |
(500.0 | ) | — | — | ||||||||
Proceeds from stock option exercises |
137.5 | 146.0 | 76.5 | |||||||||
Cash Used for Financing Activities |
(492.7 | ) | (256.8 | ) | (182.7 | ) | ||||||
Effect of Exchange Rate Changes on Cash |
(.2 | ) | 3.7 | 15.8 | ||||||||
(Decrease) Increase in Cash and Cash Items |
(90.5 | ) | 70.1 | (177.5 | ) | |||||||
Cash and Cash Items—Beginning of Year |
146.3 | 76.2 | 253.7 | |||||||||
Cash and Cash Items—End of Year |
$ | 55.8 | $ | 146.3 | $ | 76.2 | ||||||
Cash paid during the year for: |
||||||||||||
Interest (net of amounts capitalized) |
$ | 117.6 | $ | 122.9 | $ | 123.6 | ||||||
Taxes (net of refunds) |
135.2 | 107.8 | 79.1 | |||||||||
The accompanying notes are an integral part of these statements.
42
Table of Contents
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Number of | Accumulated | |||||||||||||||||||||||||||||||
| Common | Capital in | Other | ||||||||||||||||||||||||||||||
| Shares | Common | Excess of | Retained | Comprehensive | Treasury | Shares in | ||||||||||||||||||||||||||
| (millions of dollars, except for share data) | Outstanding | Stock | Par Value | Earnings | Income (Loss) | Stock | Trust | Total | ||||||||||||||||||||||||
Balance 30 September 2002 |
218,535,123 | $ | 249.4 | $ | 437.1 | $ | 4,312.8 | $ | (566.9 | ) | $ | (767.8 | ) | $ | (204.2 | ) | $ | 3,460.4 | ||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||||||
Net income |
397.3 | 397.3 | ||||||||||||||||||||||||||||||
Net loss on derivatives,
net of income tax benefit of $(2.5) |
(5.1 | ) | (5.1 | ) | ||||||||||||||||||||||||||||
Translation adjustments, net of
income tax of $60.3 |
146.8 | 146.8 | ||||||||||||||||||||||||||||||
Net change in unrealized holding
gains, net of income tax of $3.1 |
5.1 | 5.1 | ||||||||||||||||||||||||||||||
Change in minimum pension liability,
net of income tax benefit of $(71.4) |
(147.1 | ) | (147.1 | ) | ||||||||||||||||||||||||||||
Comprehensive Income |
397.0 | |||||||||||||||||||||||||||||||
Issuance of treasury shares and shares in
trust for stock options and award plans |
2,888,356 | 34.6 | 1.7 | 60.1 | 96.4 | |||||||||||||||||||||||||||
Tax benefit of stock option and award plans |
22.2 | 22.2 | ||||||||||||||||||||||||||||||
Cash dividends ($.88 per share) |
(193.5 | ) | (193.5 | ) | ||||||||||||||||||||||||||||
Balance 30 September 2003 |
221,423,479 | $ | 249.4 | $ | 493.9 | $ | 4,516.6 | $ | (567.2 | ) | $ | (766.1 | ) | $ | (144.1 | ) | $ | 3,782.5 | ||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||||||
Net income |
604.1 | 604.1 | ||||||||||||||||||||||||||||||
Net loss on derivatives,
net of income tax benefit of $(.4) |
(.6 | ) | (.6 | ) | ||||||||||||||||||||||||||||
Translation adjustments, net of
income tax of $30.1 |
60.0 | 60.0 | ||||||||||||||||||||||||||||||
Net change in unrealized holding
gains, net of income tax of $4.6 |
7.7 | 7.7 | ||||||||||||||||||||||||||||||
Change in minimum pension liability,
net of income tax of $29.9 |
59.4 | 59.4 | ||||||||||||||||||||||||||||||
Comprehensive Income |
730.6 | |||||||||||||||||||||||||||||||
Issuance of treasury shares and shares in
trust for stock options and award plans |
4,351,297 | 32.5 | 1.3 | 105.3 | 139.1 | |||||||||||||||||||||||||||
Tax benefit of stock option and award plans |
25.4 | 25.4 | ||||||||||||||||||||||||||||||
Cash dividends ($1.04 per share) |
(233.6 | ) | (233.6 | ) | ||||||||||||||||||||||||||||
Balance 30 September 2004 |
225,774,776 | $ | 249.4 | $ | 551.8 | $ | 4,887.1 | $ | (440.7 | ) | $ | (764.8 | ) | $ | (38.8 | ) | $ | 4,444.0 | ||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||||||
Net income |
711.7 | 711.7 | ||||||||||||||||||||||||||||||
Net loss on derivatives,
net of income tax benefit of $(2.7) |
(3.6 | ) | (3.6 | ) | ||||||||||||||||||||||||||||
Translation adjustments, net of
income tax of $6.8 |
12.2 | 12.2 | ||||||||||||||||||||||||||||||
Net change in unrealized holding
gains, net of income tax of $7.2 |
13.2 | 13.2 | ||||||||||||||||||||||||||||||
Change in minimum pension liability,
net of income tax benefit of $(10.1) |
(14.3 | ) | (14.3 | ) | ||||||||||||||||||||||||||||
Comprehensive Income |
719.2 | |||||||||||||||||||||||||||||||
Purchase of treasury shares |
(8,334,507 | ) | (500.0 | ) | (500.0 | ) | ||||||||||||||||||||||||||
Issuance of treasury shares and shares in
trust for stock options and award plans |
4,457,964 | 6.5 | 103.3 | 38.8 | 148.6 | |||||||||||||||||||||||||||
Tax benefit of stock option and award plans |
45.3 | 45.3 | ||||||||||||||||||||||||||||||
Cash dividends ($1.25 per share) |
(281.6 | ) | (281.6 | ) | ||||||||||||||||||||||||||||
Balance 30 September 2005 |
221,898,233 | $ | 249.4 | $ | 603.6 | $ | 5,317.2 | $ | (433.2 | ) | $ | (1,161.5 | ) | $ | — | $ | 4,575.5 | |||||||||||||||
The accompanying notes are an integral part of these statements.
43
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| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | (millions of dollars, except for share data) |
contents
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1. MAJOR ACCOUNTING POLICIES
§ Consolidation Principles
The consolidated financial statements include the accounts of
Air Products and Chemicals, Inc. and its majority-owned
subsidiary companies (the company). The company consolidates
all entities that it controls. Intercompany transactions and
balances are eliminated in consolidation.
Financial Accounting Standards Board Interpretation No. 46R
(FIN No. 46R) addresses the consolidation of variable interest
entities to which the usual condition of consolidating an
entity based on control does not apply. An entity that will
absorb the majority of a variable interest entity’s expected
losses or expected residual returns, as defined in FIN No.
46R, is considered a primary beneficiary of that entity. The
primary beneficiary is required to consolidate the variable
interest entity. The company has determined it is not a
primary beneficiary in a variable interest entity.
§ Estimates and Assumptions
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles 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.
§ Revenue Recognition
Revenue from Gases and Chemicals sales is recognized as risk
and title to the product transfers to the customer (which
generally occurs at the time shipment is made), the sales
price is fixed or determinable, and collectibility is
reasonably assured. Sales returns and allowances are not a
business practice in the industry.
Revenues from equipment sale contracts are recorded primarily
using the percentage-of-completion method. Under this method,
revenues from the sale of major equipment, such as natural
gas liquefaction (LNG) heat exchangers and large air
separation units, are recognized based on labor hours
incurred to date compared with total estimated labor hours.
Changes to total estimated labor hours and anticipated
losses, if any, are recognized in the period determined.
Amounts billed for shipping and handling fees are classified
as sales in the consolidated income statements. Costs
incurred for shipping and handling are classified as cost of
sales.
§ Depreciation
Depreciation is recorded using the straight-line method, which
deducts equal amounts of the cost of each asset from earnings
every year over its expected useful life. The estimated useful
lives primarily range from 15 to 30 years (principally 30
years) for buildings and principally from 15 to 20 years for
gas generating and chemical facilities, machinery and
equipment.
§ Global Cost Reduction Plans
The company has a substantive ongoing severance arrangement.
The benefits given as part of the 2003 global cost reduction
plan (discussed in Note 3) were consistent with termination
benefits in previous, similar restructuring plans. Because
the company’s plan met the definition of an ongoing benefit
arrangement, it was accounted for per Statement of Financial
Accounting Standards
44
Table of Contents
(SFAS) No. 112, “Employers’ Accounting for Postemployment
Benefits.” To recognize a liability under SFAS No. 112, the
expense must be probable and estimable. These criteria were
met when management, with the appropriate level and authority,
had approved and committed to its plan of action for
termination; the plan identified the employees to be
terminated and their related benefits; and the plan was to be
completed within one year. During periods of operations where
terminations are made on an as-needed basis, absent a detailed
committed plan, terminations are accounted for on an
individual basis and a liability is recognized when probable
and estimable.
As part of the 2003 global cost reduction plan, write-downs of
long-lived assets were accounted for under the provisions of
SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Two types of assets were impacted: assets
to be disposed of by sale and assets no longer in use to be
abandoned. Assets to be disposed of by sale were measured at
the lower of carrying amount or estimated net proceeds from
the sale. The recognition criteria of SFAS No. 144 were met as
management, with the appropriate level and authority, had
approved and committed to a plan; the assets were available
for immediate sale; management began an active program to
locate a buyer; the sales were evaluated as being probable
within one year; and it was unlikely that any changes to the
plan would be made. The assets to be abandoned were no longer
in use and were written down, net of expected recovery from
disposal.
§ Financial Instruments
The company addresses certain financial exposures through a
controlled program of risk management that includes the use of
derivative financial instruments. The types of derivative
financial instruments permitted for such risk management
programs are specified in policies set by management. The
company currently enters into foreign exchange contracts,
including forward, option combination and purchased option
contracts, to reduce the effects of fluctuating foreign
currency exchange rates. The company currently enters into
interest rate swap contracts to reduce interest rate risks and
to modify the interest rate characteristics of its outstanding
debt. The company is also currently party to cross currency
interest rate swap agreements. The company has entered into a
limited number of commodity swap contracts in order to reduce
the cash flow exposure to changes in the price of natural gas
relative to certain oil-based feedstocks. Major financial
institutions are counterparties to these contracts. The
company
has established counterparty credit guidelines and only enters
into transactions with financial institutions of investment
grade or better. Management believes the risk of incurring
losses related to credit risk is remote, and any losses would
be immaterial to the consolidated financial results, financial
condition or liquidity.
The company recognizes derivatives on the balance sheet at
fair value. On the date the derivative instrument is entered
into, the company generally designates the derivative as
either (1) a hedge of the fair value of a recognized asset or
liability or of an un- recognized firm commitment (fair value
hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge), or (3) a
hedge of a net investment in a foreign operation.
Changes in the fair value of a derivative that is designated
as and meets all the required criteria for a fair value hedge,
along with the gain or loss on the hedged asset or liability
that is attributable to the hedged risk, are recorded in
current period earnings.
Changes in the fair value of a derivative that is designated
as and meets all the required criteria for a cash flow hedge
are recorded in accumulated other comprehensive income and
reclassified into earnings as the underlying hedged item
affects earnings.
Changes in the fair value of a derivative or foreign currency
debt that is designated as and meets all the required criteria
for a hedge of a net investment are recorded as translation
adjustments in accumulated other comprehensive income.
Changes in the fair value of a derivative that is not
designated as a hedge are recorded immediately in earnings.
The company formally documents the relationships between
hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various
hedge transactions. This process includes relating derivatives
that are designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The
company also formally assesses, both at the inception of the
hedge and on an ongoing basis, whether each derivative is
highly effective in offsetting changes in fair values or cash
flows of the hedged item. If it is determined that a
derivative is not highly effective as a hedge, or if a
derivative ceases to be a highly effective hedge, the company
will discontinue hedge accounting with respect to that
derivative prospectively.
45
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
§ Foreign Currency
The value of the U.S. dollar rises and falls day-to-day on
foreign currency exchanges. Since the company does business in
many foreign countries, these fluctuations affect the
company’s financial position and results of operations.
For most foreign operations, local currencies are considered
the functional currency. Generally, foreign subsidiaries
translate their assets and liabilities into U.S. dollars at
current exchange rates—that is, the rates in effect at the end
of the fiscal period. The gains or losses that result from
this process are shown in accumulated other comprehensive
income in the shareholders’ equity section of the balance
sheet.
The revenue and expense accounts of foreign subsidiaries are
translated into U.S. dollars at the average exchange rates
that prevailed during the period. Therefore, the U.S. dollar
value of these items on the income statement fluctuates from
period to period, depending on the value of the dollar against
foreign currencies. Some transactions are made in currencies
different from an entity’s functional currency. Gains and
losses from these foreign currency transactions are generally
included in income as they occur.
§ Environmental Expenditures
Accruals for investigatory, external legal costs and
noncapital remediation costs are recorded when it is probable
that a liability has been incurred and the amount of loss can
be reasonably estimated. Remediation costs are capitalized if
the costs improve the company’s property as compared with the
condition of the property when originally constructed or
acquired, or if the costs prevent environmental contamination
from future operations. Costs to operate and maintain the
capitalized facilities are expensed as incurred.
The measurement of environmental liabilities is based on an
evaluation of currently available facts with respect to each
individual site and considers factors such as existing
technology, presently enacted laws and regulations and prior
experience in remediation of contaminated sites. These
liabilities include costs related to other potentially
responsible parties to the extent that the company has reason
to believe such parties will not fully pay their proportionate
share. They also do not take into account any claims for
recoveries from insurance and are not discounted.
As assessments and remediation progress at individual sites,
these liabilities are reviewed periodically and adjusted to
reflect additional technical and legal information that
becomes available. Actual costs to be incurred at identified
sites in future periods may vary from the estimates, given
inherent uncertainties in evaluating environmental exposures.
The accruals for environmental liabilities are reflected in
the balance sheet, primarily as part of other noncurrent
liabilities.
§ Litigation
In the normal course of business, the company is occasionally
involved in legal proceedings. The company accrues a liability
for such matters when it is probable that a liability has been
incurred and the amount can be reasonably estimated. When only
a range of possible loss can be established, the most probable
amount in the range is accrued. If no amount within this range
is a better estimate than any other amount within the range,
the minimum amount in the range is accrued. The accrual for a
litigation loss contingency might include, for example,
estimates of potential damages, outside legal fees and other
directly related costs expected to be incurred.
§ Stock-Based Compensation
The company has various stock-based compensation plans as
described in Note 15. 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. The following table
illustrates the effect on net income and earnings per share as
if the company had applied the fair value recognition
provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” to its stock option plans.
| 2005 | 2004 | 2003 | ||||||||||
Net Income, as Reported |
$ | 711.7 | $ | 604.1 | $ | 397.3 | ||||||
Deduct stock option employee
compensation expense determined
under fair value-based method,
net of related tax effects |
(29.2 | ) | (30.6 | ) | (37.9 | ) | ||||||
Pro Forma Net Income |
$ | 682.5 | $ | 573.5 | $ | 359.4 | ||||||
Basic Earnings per Share |
||||||||||||
As reported |
$ | 3.15 | $ | 2.70 | $ | 1.81 | ||||||
Pro forma |
3.02 | 2.56 | 1.64 | |||||||||
Diluted Earnings per Share |
||||||||||||
As reported |
$ | 3.08 | $ | 2.64 | $ | 1.78 | ||||||
Pro forma |
2.95 | 2.51 | 1.61 | |||||||||
46
Table of Contents
For disclosure purposes, the fair value of each stock
option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following
weighted average assumptions:
| 2005 | 2004 | 2003 | ||||||||||
Dividend yield |
2.1 | % | 2.0 | % | 2.0 | % | ||||||
Expected volatility |
30.4 | % | 30.6 | % | 30.6 | % | ||||||
Risk-free interest rate |
4.2 | % | 4.0 | % | 3.6 | % | ||||||
Expected life (years) |
8.0 | 7.9 | 7.9 | |||||||||
Weighted average fair value
per option |
$ | 17.98 | $ | 15.01 | $ | 13.71 | ||||||
The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In
addition, option-pricing models require the input of
subjective assumptions, including the expected stock price
volatility.
§ Income Taxes
The company accounts for income taxes under the liability
method. Under this method, deferred tax liabilities and assets
are recognized for the tax effects of temporary differences
between the financial reporting and tax bases of assets and
liabilities using enacted tax rates. A principal temporary
difference results from the excess of tax depreciation over
book depreciation because accelerated methods of depreciation
and shorter useful lives are used for income tax purposes. The
cumulative impact of a change in tax rates or regulations is
included in income tax expense in the period that includes the
enactment date.
§ Cash and Cash Items
Cash and cash items include cash, time deposits and
certificates of deposit acquired with an original maturity of
three months or less.
§ Allowances for Doubtful Accounts
The allowances for doubtful accounts represent estimated
uncollectible receivables associated with potential customer
defaults on contractual obligations, usually due to customers’
potential insolvency. The allowances include amounts for
certain customers where a risk of default has been
specifically identified. In addition, the allowances include a
provision for customer defaults on a general formula basis
when it is determined the risk of some default is probable and
estimable but cannot yet be associated with specific
customers. The assessment of the likelihood of customer
defaults is based on various factors, including the length of
time the receivables are past due, historical experience and
existing economic conditions. Provisions to the allowance for
doubtful accounts recorded as expense were $11.3, $18.3 and
$11.6 in 2005, 2004 and 2003, respectively.
§ Inventories
Inventories are stated at the lower of cost or market. The
company writes down its inventories for estimated obsolescence
or unmarketable inventory based upon assumptions about future
demand and market conditions.
The cost of chemical inventories and some gas and equipment
inventories in the United States is determined using the
last-in, first-out (LIFO) method. The cost of other
inventories is principally determined using the first-in,
first-out (FIFO) method.
§ Equity Investments
The equity method of accounting is used when the company has a
20% to 50% interest in other companies and exercises
significant influence. Under the equity method, original
investments are recorded at cost and adjusted by the company’s
share of undistributed earnings or losses of these companies.
Equity investments are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount
of the investment may not be recoverable.
§ Plant and Equipment
Plant and equipment is stated at cost less accumulated
depreciation. Construction costs, labor and applicable
overhead related to installations are capitalized.
Expenditures for additions and improvements that extend the
lives or increase the capacity of plant assets are
capitalized. The costs of maintenance and repairs of plant and
equipment are charged to expense as incurred.
Fully depreciated assets are retained in the gross plant and
equipment and accumulated depreciation accounts until they are
removed from service. In the case of disposals, assets and
related depreciation are removed from the accounts, and the
net amounts, less proceeds from disposal, are included in
income.
§ Capitalized Interest
As the company builds new plant and equipment, it includes in
the cost of these assets a portion of the interest payments it
makes during the year. The amount of capitalized interest was
$12.0, $5.5 and $4.2 in 2005, 2004 and 2003, respectively.
47
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
§ Asset Retirement Obligations
The fair value of a liability for an asset retirement
obligation is recognized in the period in which it is
incurred. The liability is measured at discounted fair value
and is adjusted to its present value in subsequent periods as
accretion expense is recorded. The corresponding asset
retirement costs are capitalized as part of the carrying
amount of the related long-lived asset and depreciated over
the asset’s useful life. The company’s asset retirement
obligations are primarily associated with Gases on-site
long-term supply contracts under which the company has built a
facility on land leased from the customer and is obligated to
remove the facility at the end of the contract term. The
company’s asset retirement obligations are not material to the
company’s financial statements.
§ Computer Software
The company capitalizes costs incurred to purchase or develop
software for internal use. Capitalized costs include purchased
computer software packages, payments to vendors/consultants
for development and implementation or modification to a
purchased package to meet company requirements, payroll and
related costs for employees directly involved in development,
and interest incurred while software is being developed.
Capitalized computer software costs are included in the
balance sheet classification plant and equipment and
depreciated over the estimated useful life of the software,
generally a period of three to ten years. The company’s SAP
system is being depreciated over a ten-year life.
§ Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events
or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The company assesses
recoverability by comparing the carrying amount of the asset
to estimated undiscounted future cash flows expected to be
generated by the asset. If an asset is considered impaired,
the impairment loss to be recognized is measured as the amount
by which the asset’s carrying amount exceeds its fair value.
Long-lived assets to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell.
§ Goodwill
Acquisitions are accounted for using the purchase method. The
purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair market
values. Any excess purchase price over the fair market value
of the net assets
acquired, including identified intangibles, is recorded as
goodwill. Preliminary purchase price allocations are made at
the date of acquisition and finalized when information needed
to affirm underlying estimates is obtained and/or within a
maximum allocation period of one year.
Goodwill is subject to impairment testing at least annually.
In addition, goodwill is tested more frequently if a change
in circumstances or the occurrence of events indicated that
potential impairment exists. Refer to Note 10 for
disclosures related to goodwill.
§ Intangible Assets
Intangible assets with determinable lives primarily consist
of customer relationships, noncompete covenants and purchased
patents and technology. There are no acquired intangible
assets with indefinite lives. The cost of intangible assets
with determinable lives is amortized on a straight-line basis
over the estimated period of economic benefit. No residual
value is estimated for these intangible assets.
Customer relationships are generally amortized over periods of
four to twenty years. Noncompete covenants are generally
amortized over periods of three to five years based on
contractual terms. Purchased patents and technology and other
intangibles are amortized based on contractual terms, ranging
generally from five to twenty years. Amortizable lives are
adjusted whenever there is a change in the estimated period of
economic benefit.
§ Retirement Benefits
The cost of retiree benefits is recognized over the
employees’ service period. The company’s defined benefit
pension plans are accounted for in accordance with SFAS No.
87, “Employers’ Accounting for Pensions.” Nonpension
postretirement benefits are accounted for in accordance with
SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions.” These Statements require the
use of actuarial methods and assumptions in the valuation of
benefit obligations and the determination of expense.
Differences between actual and expected results or changes in
the value of obligations and plan assets are not recognized
as they occur but, rather, systematically and gradually over
subsequent periods. Refer to Note 18 for disclosures related
to the company’s pension and other postretirement benefits.
48
Table of Contents
2. NEW ACCOUNTING STANDARDS
§ Standards Issued 2005
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 adopted this Statement as of 1 October 2005.
Adoption of SFAS No. 151 will not have a material effect on
the company’s consolidated financial statements because its
inventory accounting policies are consistent with the
requirements of this Statement.
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 entity’s
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 has not had a material impact on the company’s
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 adopted this Statement on 1 October
2005. The pro forma impact
of expensing stock options in 2005 would have been a reduction
of diluted earnings per share of $.13 based on the disclosures
required by SFAS No. 123. The estimated impact of adopting
SFAS No. 123R in 2006 is expected to reduce diluted earnings
per share by approximately $.13.
In the preparation of the SFAS No. 123 pro forma disclosures
included in Note 1, stock option expense was recognized over
the stated three-year graded vesting period. Upon the adoption
of SFAS No. 123R, the company will accelerate the recognition
of expense for retiree eligible individuals who meet the
requirements for immediate vesting of awards upon their
retirement. This change will be applied to awards granted on
or after the adoption of SFAS No. 123R (i.e., 1 October 2005).
The impact of this change to accelerate expense for retiree
eligible individuals for all share-based compensation programs
is approximately $10, or $.03 diluted earnings per share,
principally related to the stock option program.
In December 2004, the FASB issued an 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 No. 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 No. 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
adopted this Statement as of 1 October 2005.
§ Standards Adopted 2004
In December 2003, the FASB published a revision to
Interpretation No. 46, “Consolidation of Variable Interest
Entities,” to clarify some of the provisions of Interpretation
No. 46. The revision to Interpretation No. 46 did not have an
impact on the company’s financial statements.
In December 2003, the FASB also issued a revised SFAS No. 132,
“Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” which added disclosure requirements
for defined benefit plans. The company has included the annual
required disclosures in Note 18 to the consolidated financial
statements.
In May 2004, the FASB issued FSP No. FAS 106-2, “Accounting
and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(Act).” This FSP provides guidance on the accounting for the
effects of the Act for employers that sponsor postretirement
health care plans that provide prescription drug benefits. The
impact of the Act on the company’s postretirement medical
benefits is not material.
§ Standards Adopted 2003
The company adopted SFAS No. 143, “Accounting for Asset
Retirement Obligations,” on 1 October 2002 and accounts for
these obligations as discussed in Note 1. At 1 October 2002,
the company recognized transition amounts for existing asset
retirement obligation liabilities, associated capitalizable
costs and accumulated depreciation. An after-tax transition
charge of $2.9 was recorded as the cumulative effect of an
accounting change. The ongoing expense on an annual basis
resulting from the initial adoption of SFAS No. 143 is
approximately $1.
In August 2001, the FASB issued SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” This
Statement establishes a single accounting model for long-lived
assets to be disposed of by sale. The Statement retains most
of the requirements in SFAS No. 121 related to the recognition
of impairment of long-lived assets to be held and used.
Additionally, SFAS No. 144 broadens the definition of
businesses that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on
such operations. The company adopted this Statement as of 1
October 2002, with no material effect on the company’s
financial statements.
In June 2002, the FASB issued SFAS No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities.” This
Statement addresses the accounting for costs associated with
disposal activities covered by SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” and with
exit (restructuring) activities previously covered by Emerging
Issues Task Force (EITF) Issue No. 94-3, “Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity.” This Statement nullifies
EITF Issue No. 94-3 in its entirety and requires that a
liability for all costs be recognized when the liability is
incurred. Generally, the ability to accrue for termination
benefits at the communication date of a plan in the form of a
one-time benefit arrangement is limited. The cost of the
termination benefits would be recognized over the future
service period of the employees. This Statement does not
change the accounting for termination benefits under ongoing
benefit arrangements such as those included in the company’s
global cost reduction plan discussed in Note 3. The company
adopted SFAS No. 146 as of 1 October 2002. The adoption of
this Statement did not have an impact on the company’s
financial statements.
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In
November 2002, the FASB published Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others.” The Interpretation expands on the disclosure
requirements to be made in interim and annual financial
statements. The company has included the required disclosures
in Note 19. The Interpretation also requires that a liability
measured at fair value be recognized for guarantees, even if
the probability of payment on the guarantee is remote. The
recognition provisions applied on a prospective basis for
guarantees issued or modified after 31 December 2002. This
Interpretation did not have a material impact on the company’s
financial statements.
In November 2002, the EITF reached a consensus on Issue No.
00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables.” This Issue addresses the appropriate accounting
by vendors for arrangements that will result in the delivery
of multiple products, services and/or rights to assets that
could occur over a period of time. The application of EITF
Issue No. 00-21 did not have a material effect on the
company’s financial statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting
for Stock-Based Compensation—Transition and Disclosure.” SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and frequent disclosures in financial
statements. The company has included the disclosures
prescribed by SFAS No. 148 in Note 1.
In January 2003, the FASB published Interpretation No. 46,
“Consolidation of Variable Interest Entities.” This
Interpretation clarifies the application of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements,”
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The Interpretation establishes standards
under which a variable interest entity should be consolidated
by the primary beneficiary. This Interpretation did not have
an impact on the company’s financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities.” In May 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” The adoption
of these Statements did not have a material effect on the
company’s financial statements.
In May 2003, the FASB ratified the EITF consensus on Issue
No. 01-08, “Determining Whether an Arrangement Contains a
Lease.” The EITF consensus applied prospectively to new or
modified arrangements beginning after 30 June 2003. The Issue
addresses how to determine whether an arrangement contains a
lease that is within the scope of SFAS No. 13, “Accounting for
Leases.” Under the EITF consensus, certain contracts within
the company’s Gases segment associated with on-site tonnage
facilities servicing one customer may potentially be
considered leases. In cases where operating-lease treatment is
necessary, there is no change to the company’s financial
results. In cases where capital-lease treatment is necessary,
the timing of revenue and expense recognition is impacted.
Revenue is recognized immediately for the sale of equipment
component of a contract (as compared to the current method of
revenue recognition over the life of the arrangement). A
portion of revenues formerly reported as sales are reflected
as interest income resulting from the lease receivable. The
application of this EITF consensus has not had a material
effect on the financial statements. The impact of the EITF
consensus on the company’s financial statements beyond 2005 is
dependent upon the contracts executed and potential changes in
business practices and contractual arrangements.
3. GLOBAL COST REDUCTION PLAN
§ 2003 Plan
In 2003, the company recorded an expense of $152.7 for a
global cost reduction plan (2003 Plan). This expense included
$56.8 for severance and pension-related benefits and $95.9 for
asset disposals and facility closures in the Gases and
Chemicals segments. The results for 2003 also included the
reversal of the balance of the 2002 global cost reduction plan
accrual of $.2.
During the third quarter of 2003, the company completed a
capacity utilization analysis in several businesses in the
Gases segment. To reduce capacity and costs, several
facilities ceased operation as of 30 June 2003. An expense of
$37.6 was recognized for the closure of these facilities, net
of expected recovery from disposal. A decision was made to
terminate several incomplete capacity expansion projects. An
expense of $13.0 was recognized for the cost of terminating
these projects, net of expected recovery from disposal and
redeployment. An expense of $3.6 was also recognized for the
planned sale of two real estate properties and the termination
of several leases for small facilities. These expenses were
principally in the North American merchant and tonnage
businesses, with a modest amount in the Electronics business.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The rationalization of excess capacity in certain
products resulted in a decision to exit certain Chemical
Intermediates operations. Late in the quarter ended 30 June
2003, the company decided to pursue the sale of its European
methylamines and derivatives (EM&D) business. Expected
proceeds from the sale were determined, and a loss was
recognized for the difference between the carrying value of
the assets and the expected net proceeds from the sale.
Additional expenses for the closure of the methanol and
ammonia plants in Pensacola, Florida, which made products for
internal consumption, were also recognized. The total expense
for these actions was $41.7.
In addition to the capacity reduction initiatives, the company
implemented cost reduction and productivity-related efforts.
The divestitures, the capacity reductions and the cost control
initiatives resulted in the elimination of approximately 460
positions from the company. Approximately 30% of the position
reductions related to capacity rationalization and
divestitures. An additional 40% related to ongoing
productivity efforts and balancing engineering resources with
project activity, and the remaining 30% related to a reduction
in the number of management positions. The 2003 Plan was
completed as expected in June 2004 with the exception of the
planned sale of the EM&D business. In April 2004, the company
announced the proposed sale of this business. After a long
regulatory process, the sale of the EM&D business was
completed in December 2004.
The following table presents the detail of expenses by segment
for the global cost reduction plan recorded in 2003:
| Severance | Pension | Other(A) | Total | |||||||||||||
Gases |
$ | 27.1 | $ | 10.9 | $ | 54.2 | $ | 92.2 | ||||||||
Chemicals |
14.4 | 2.0 | 41.7 | 58.1 | ||||||||||||
Equipment |
2.2 | .2 | — | 2.4 | ||||||||||||
Provision for 2003 Plan |
$ | 43.7 | $ | 13.1 | $ | 95.9 | $ | 152.7 | ||||||||
Reversal of 2002 Plan |
(.2 | ) | — | — | (.2 | ) | ||||||||||
Net Expense in 2003 |
$ | 43.5 | $ | 13.1 | $ | 95.9 | $ | 152.5 | ||||||||
(A) Asset impairments and related expenses are included in the other category.
§ Plan Accrual
The following table summarizes changes to the carrying amount
of the accrual for global cost reduction plans:
| Severance | Pension | Other(A) | Total | |||||||||||||
Balance as of
30 September 2002 |
$ | 6.8 | $ | — | $ | — | $ | 6.8 | ||||||||
Provision |
43.7 | 13.1 | 95.9 | 152.7 | ||||||||||||
Noncash expenses |
— | (13.1 | ) | (90.1 | ) | (103.2 | ) | |||||||||
Cash expenditures |
(11.7 | ) | — | (1.7 | ) | (13.4 | ) | |||||||||
Reverse 2002 Plan balance |
(.2 | ) | — | — | (.2 | ) | ||||||||||
30 September 2003 |
$ | 38.6 | $ | — | $ | 4.1 | $ | 42.7 | ||||||||
Transfers |
.9 | — | (.9 | ) | — | |||||||||||
Cash expenditures |
(34.2 | ) | — | (3.2 | ) | (37.4 | ) | |||||||||
30 September 2004 |
$ | 5.3 | $ | — | $ | — | $ | 5.3 | ||||||||
Cash expenditures |
(5.3 | ) | — | — | (5.3 | ) | ||||||||||
30 September 2005 |
$ | — | $ | — | $ | — | $ | — | ||||||||
(A) Asset impairments and related expenses are included in the other
category.
4. ACQUISITIONS
§ Acquisitions in 2005
U.S. Homecare Businesses
During 2005, acquisitions included $89.6 for acquiring five
U.S. homecare businesses and contingent consideration
associated with prior year homecare acquisitions. Goodwill
recognized in these transactions amounted to $75.5, of which
$23.9 is deductible for tax purposes. Identified intangibles
included in these transactions amounted to $11.4. The 2005
acquisitions contributed $41.9 to sales in 2005.
§ Acquisitions in 2004
U.S. Homecare Businesses
During 2004, the company acquired six small U.S. homecare
businesses for $75.1. Goodwill recognized in these
transactions amounted to $61.1, of which $25.3 is deductible
for tax purposes. Identified intangibles included in these
transactions amounted to $9.2. These acquisitions contributed
$46.0 to sales in 2004.
§ Acquisitions in 2003
Ashland’s Electronic Chemicals Business
On 29 August 2003, the company acquired the Electronic
Chemicals business of Ashland Specialty Chemical Company, a
division of Ashland Inc., in a cash transaction valued at
$293.2. Goodwill recognized in this transaction amounted to
$100.6, of which $21.3 is deductible for tax purposes.
Identified intan-
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gibles included in this transaction amounted to $27.1.
Ashland’s Electronic Chemicals business is a leading global
supplier of ultrapure specialty chemicals and services used by
the electronics industry to make semiconductor devices. With
annual revenues of approximately $200, the Electronic
Chemicals business of Ashland has a global network of sales
and marketing offices in North America, Europe and Asia.
American Homecare Supply, LLC (AHS)
In October 2002, the company acquired AHS, a homecare market
leader throughout the northeastern United States, for $165.8.
Subsequently, AHS acquired additional small homecare
businesses for $52.3 and was renamed Air Products Healthcare.
Goodwill recognized in these transactions amounted to $153.8,
of which $102.1 is deductible for tax purposes. Identified
intangibles included in these transactions amounted to $20.7.
These acquisitions contributed $155.9 to sales in 2003.
5. DIVESTITURES
| n | Divestitures in 2003 |
Sale of Canadian Packaged Gas Business
On 1 April 2003, the company completed the sale of the
majority of its Canadian packaged gas business to the BOC
Group for cash proceeds of $41.2.
6. FINANCIAL INSTRUMENTS
| n | Currency Risk Management |
The company does business in many foreign countries.
Therefore, its earnings, cash flows and financial position are
exposed to foreign currency risk from foreign currency
denominated transactions and net investments in foreign
operations.
It is the policy of the company to minimize its cash flow
exposure to adverse changes in currency and exchange rates.
This is accomplished by identifying and evaluating the risk
that the company’s cash flows will decline in value due to
changes in exchange rates, and by determining the appropriate
strategies necessary to manage such exposures. The company’s
objective is to maintain economically balanced currency risk
management strategies that provide adequate downside
protection.
The company enters into a variety of foreign exchange
contracts, including forward, option combination and purchased
option contracts, to hedge its exposure to fluctuations in
foreign currency exchange rates. These agreements generally
involve the exchange of one currency for a second currency at
some future date.
The company enters into foreign exchange contracts, including
forward, option combination and purchased option contracts, to
reduce the cash flow exposure to foreign currency fluctuations
associated with certain monetary assets and liabilities, as
well as highly anticipated cash flows and certain firm
commitments. Examples of such exposures are the purchase of
plant and equipment and export sales transactions. Forward
exchange contracts are also used to hedge the value of
investments in certain foreign subsidiaries and affiliates by
creating a liability in a currency in which the company has a
net equity position. The company also uses foreign currency
denominated debt to hedge certain net investments in and
future cash flows from foreign operations.
Certain forward exchange contracts entered into by the company
are not designated as hedging instruments. Contracts used to
hedge the exposure to foreign currency fluctuations associated
with certain monetary assets and liabilities are not
designated as hedging instruments, and changes in the fair
value of these items are recorded in earnings to offset the
foreign exchange gains and losses of the monetary assets and
liabilities. Other forward exchange contracts may be used to
economically hedge foreign currency exposures and not be
designated as hedging instruments due to the immaterial amount
of the underlying hedged exposures. Changes in the fair value
of these contracts are also recorded in earnings.
| n | Debt Portfolio Management |
It is the policy of the company to identify on a continuing
basis the need for debt capital and evaluate the financial
risks inherent in funding the company with debt capital.
Reflecting the result of this ongoing review, the debt
portfolio and hedging program of the company is managed with
the objectives and intent to (1) reduce funding risk with
respect to borrowings made or to be made by the company to
preserve the company’s access to debt capital and provide debt
capital as required for funding and liquidity purposes, and
(2) manage the aggregate interest rate risk of the debt
portfolio in accordance with certain debt management
parameters.
The company enters into interest rate swap agreements to
change the fixed/variable interest rate mix of its debt
portfolio in order to maintain the percentage of fixed- and
variable-rate debt within the parameters set by management. In
accordance with these parameters, the agreements are used to
reduce interest rate risks and costs inherent in the company’s
debt portfolio. In addition, the company uses interest rate
swap agreements to hedge the interest rate on anticipated
fixed-rate debt issuance. The notional amount of the interest
rate swap agreements is equal to or less than the
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
designated debt instrument being hedged. When
variable-rate debt is hedged, the variable-rate indices of the
swap instruments and the debt to which they are designated are
the same. It is the company’s policy not to enter into any
interest rate swap contracts which lever a move in interest
rates on a greater than one-to-one basis.
The company is also party to cross currency interest rate swap
contracts. These contracts entail both the exchange of fixed-
and floating-rate interest payments periodically over the life
of the agreement and the exchange of one currency for another
currency at inception and at a specified future date. These
contracts effectively convert the currency denomination of a
debt instrument into another currency in which the company has
a net equity position while changing the interest rate
characteristics of the instrument. The contracts are used to
hedge intercompany and third-party borrowing transactions and
certain net investments in foreign operations.
| n | Commodity Price Risk Management |
The company has entered into a limited number of commodity
swap contracts in order to reduce the cash flow exposure to
changes in the price of natural gas relative to certain
oil-based feedstocks.
| n | Fair Value Hedges |
| For the years ended 30 September 2005 and 2004, there was no material gain or loss recognized in earnings resulting from hedge ineffectiveness or from excluding a portion of derivative instruments’ gain or loss from the assessment of hedge effectiveness related to derivatives designated as fair value hedges. Also, the amount recognized in earnings in 2005 and 2004 as a result of a hedged firm commitment no longer qualifying as a fair value hedge was not material. |
| n | Cash Flow Hedges |
For the years ended 30 September 2005 and 2004, there was no
material gain or loss recognized in earnings resulting from
hedge ineffectiveness or from excluding a portion of
derivative instruments’ gain or loss from the assessment of
hedge effectiveness related to derivatives designated as cash
flow hedges.
The amount reclassified from accumulated other comprehensive
income into earnings as a result of the discontinuance of
foreign currency cash flow hedges due to the probability of
the original forecasted transactions not occurring by the
original specified time period was not material in 2005 and
2004. The amount in other comprehensive income expected to be
reclassified into earnings in 2006 is also not material.
As of 30 September 2005, the maximum length of time over which
the company is hedging its exposure to the variability in
future cash flows for forecasted transactions is three years.
| n | Hedges of Net Investments in Foreign Operations |
For the years ended 30 September 2005 and 2004, net (gains)/
losses related to hedges of net investments in foreign
operations of $(31.4) and $105.0, respectively, were included
in accumulated other comprehensive income within shareholders’
equity.
| n | Fair Value of Financial Instruments |
Summarized below are the carrying values and fair values of
the company’s financial instruments as of 30 September 2005
and 2004:
| 2005 | 2005 | 2004 | 2004 | |||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| 30 September | Value | Value | Value | Value | ||||||||||||
Assets |
||||||||||||||||
Other investments |
$ | 97.9 | $ | 97.9 | $ | 79.3 | $ | 79.3 | ||||||||
Currency option
contracts |
.4 | .4 | — | — | ||||||||||||
Interest rate swap
agreements |
15.5 | 15.5 | 20.3 | 20.3 | ||||||||||||
Liabilities |
||||||||||||||||
Cross currency interest
rate swap contracts |
$ | 11.6 | $ | 11.6 | $ | 18.4 | $ | 18.4 | ||||||||
Forward exchange
contracts |
9.6 | 9.6 | 90.6 | 90.6 | ||||||||||||
Commodity swap
contracts |
2.9 | 2.9 | — | — | ||||||||||||
Long-term debt,
including current
portion |
2,190.3 | 2,257.4 | 2,358.3 | 2,442.7 | ||||||||||||
The carrying amounts reported in the balance sheet for
cash and cash items, accounts receivable, payables and accrued
liabilities, accrued income taxes and short-term borrowings
approximate fair value due to the short-term nature of these
instruments. Accordingly, these items have been excluded from
the above table. The fair value of other investments is based
principally on quoted market prices.
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The fair values of the company’s debt, interest rate swap
agreements and foreign exchange contracts are based on
estimates using standard pricing models that take into account
the present value of future cash flows as of the balance sheet
date. The computation of the fair values of these instruments
is generally performed by the company. The fair value of
commodity swaps is based on current market price, as provided
by the financial institutions with whom the commodity swaps
have been executed.
The fair value of other investments is reported within other
noncurrent assets on the balance sheet. The fair value of
foreign exchange contracts, cross currency interest rate
swaps, interest rate swaps and commodity swaps is reported in
the balance sheet in the following line items: other
receivables and current assets, other noncurrent assets,
payables and accrued liabilities, and deferred income and
other noncurrent liabilities.
Changes in the fair value of foreign exchange and commodity
swap contracts designated as hedges are recorded or
reclassified into earnings and are reflected in the income
statement classification of the corresponding hedged item,
e.g., hedges of purchases recorded to cost of sales, hedges of
sales transactions recorded to sales. The changes in fair
value of foreign exchange contracts not designated as hedging
instruments are reported in the income statement as other
(income) expense, offsetting the fair value changes of foreign
currency denominated monetary assets and liabilities also
recorded to other (income) expense. Fair value changes of
interest rate swaps are recorded to interest expense,
offsetting changes in the fair value of associated debt
instruments, which are also recorded to interest expense.
The cash flows related to all derivative contracts are
reported in the operating activities section of the cash
flow statement.
7. INVENTORIES
The components of inventories are as follows:
| 30 September | 2005 | 2004 | ||||||
Inventories at FIFO Cost |
||||||||
Finished goods |
$ | 371.8 | $ | 380.8 | ||||
Work in process |
19.4 | 12.6 | ||||||
Raw materials and supplies |
173.1 | 166.2 | ||||||
| 564.3 | 559.6 | |||||||
Less excess of FIFO cost over LIFO cost |
(69.5 | ) | (53.7 | ) | ||||
| $ | 494.8 | $ | 505.9 | |||||
Inventories valued using the LIFO method comprised
43.6% and 46.1% of consolidated inventories before LIFO
adjustment at 30 September 2005 and 2004, respectively.
Liquidation of prior years’ LIFO inventory layers in 2005,
2004 and 2003 did not materially affect results of
operations in any of these years.
FIFO cost approximates replacement cost. The company’s
inventories have a high turnover, and as a result, there is
little difference between the original cost of an item and its
current replacement cost.
8. SUMMARIZED FINANCIAL INFORMATION OF EQUITY
AFFILIATES
The following table presents summarized financial
information on a combined 100% basis of the principal
companies accounted for by the equity method. Amounts
presented include the accounts of the following equity
affiliates: Air Products South Africa (50%); Bangkok
Cogeneration Company Limited (49%); Bangkok Industrial
Gases Company Ltd. (49%); Daido Air Products Electronics, Inc.
(49%); DuPont Air Products Nanomaterials, LLC (50%); Europoort Utility Partners V.O.F. (50%); Helap S.A. (50%); INFRA
Group (40%); INOX Air Products Limited (INOX) (49%); Island
Pipeline Gas (33%); Pure Air on the Lake, L.P. (50%); Sapio
Produzione Idrogeno Ossigeno S.r.L. (49%); SembCorp Air
Products (HyCo) Pte. Ltd. (40%); Stockton CoGen Company (50%);
Tyczka Industrie-Gases GmbH (50%); Wacker Polymer Systems GmbH
& CoKG (20%); and principally, other industrial gas producers.
| 2005 | 2004 | |||||||
Current assets |
$ | 923.0 | $ | 868.8 | ||||
Noncurrent assets |
1,529.6 | 1,499.4 | ||||||
Current liabilities |
491.4 | 508.5 | ||||||
Noncurrent liabilities |
594.5 | 626.7 | ||||||
Net sales |
2,134.7 | 1,879.7 | ||||||
Sales less cost of sales |
792.7 | 717.2 | ||||||
Net income |
264.3 | 240.0 | ||||||
Dividends received from equity affiliates were $64.1,
$46.4 and $64.1 in 2005, 2004 and 2003, respectively.
The investment in net assets of and advances to equity
affiliates as of 30 September 2005 and 2004 included
investment in foreign affiliates of $625.6 and $589.7,
respectively.
As of 30 September 2005 and 2004, the amount of investment in
companies accounted for by the equity method included goodwill
in the amount of $66.1 and $66.9, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost,
are as follows:
| 30 September | 2005 | 2004 | ||||||
Land |
$ | 172.9 | $ | 165.6 | ||||
Buildings |
827.7 | 789.8 | ||||||
Gas generating and chemical facilities,
machinery and equipment |
11,212.3 | 10,842.8 | ||||||
Construction in progress |
700.4 | 403.3 | ||||||
| $ | 12,913.3 | $ | 12,201.5 | |||||
Depreciation expense was $711.3, $696.0 and $640.2 in
2005, 2004 and 2003, respectively.
10. GOODWILL
Changes to the carrying amount of consolidated goodwill
by segment are as follows:
| Balance as of | Gases | Chemicals | Equipment | Total | ||||||||||||
30 September 2003 |
$ | 619.2 | $ | 96.9 | $ | 9.7 | $ | 725.8 | ||||||||
Acquisitions and
adjustments |
78.8 | (.7 | ) | — | 78.1 | |||||||||||
Currency translation
and other |
23.2 | 3.1 | .3 | 26.6 | ||||||||||||
30 September 2004 |
$ | 721.2 | $ | 99.3 | $ | 10.0 | $ | 830.5 | ||||||||
Acquisitions and
adjustments |
84.0 | — | — | 84.0 | ||||||||||||
Currency translation
and other |
5.5 | (.2 | ) | .2 | 5.5 | |||||||||||
30 September 2005 |
$ | 810.7 | $ | 99.1 | $ | 10.2 | $ | 920.0 | ||||||||
The 2005 increase in goodwill was principally related to
the acquisition of five U.S. homecare businesses and
adjustments for contingent consideration associated with prior
year acquisitions. The 2004 increase in goodwill was
principally due to the acquisition of several small U.S.
homecare businesses and a 4% increase in ownership of San Fu
Gas Company, Ltd.
The company conducted the required annual test of goodwill
for impairment in the fourth quarter of 2005. There were no
indications of impairment.
11. INTANGIBLE ASSETS
All acquired intangible assets are subject to
amortization. No residual value is estimated for these
intangible assets. Acquired intangible assets are as
follows:
| Balance as of | Accumulated | |||||||||||
| 30 September 2004 | Gross | Amortization | Net | |||||||||
Customer relationships |
$ | 107.3 | $ | 36.7 | $ | 70.6 | ||||||
Patents and technology |
59.6 | 40.4 | 19.2 | |||||||||
Noncompete covenants |
9.5 | 6.6 | 2.9 | |||||||||
Other |
25.3 | 16.6 | 8.7 | |||||||||
| $ | 201.7 | $ | 100.3 | $ | 101.4 | |||||||
| Balance as of | Accumulated | |||||||||||
| 30 September 2005 | Gross | Amortization | Net | |||||||||
Customer relationships |
$ | 117.5 | $ | 47.3 | $ | 70.2 | ||||||
Patents and technology |
59.6 | 44.3 | 15.3 | |||||||||
Noncompete covenants |
12.1 | 8.8 | 3.3 | |||||||||
Other |
27.0 | 17.1 | 9.9 | |||||||||
| $ | 216.2 | $ | 117.5 | $ | 98.7 | |||||||
Amortization expense for intangible assets was $17.0,
$18.9 and $14.6 in 2005, 2004 and 2003, respectively.
Projected annual amortization expense for intangible assets
as of 30 September 2005 is as follows:
2006 |
$ | 19.0 | ||
2007 |
18.0 | |||
2008 |
15.9 | |||
2009 |
15.2 | |||
2010 |
15.1 | |||
Thereafter |
15.5 | |||
Total |
$ | 98.7 | ||
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12. LONG-TERM DEBT
The following table shows the company’s outstanding
debt at the end of 2005 and 2004:
| 30 September | Maturities | 2005 | 2004 | |||||||||
Payable in U.S. Dollars: |
||||||||||||
Debentures: (effective rate) |
||||||||||||
8.75% (8.95%) |
2021 | $ | 18.4 | $ | 18.4 | |||||||
Notes: (effective rate) |
||||||||||||
7.375% (7.54%) |
— | 150.0 | ||||||||||
Medium-term notes: |
||||||||||||
Weighted average rate
|
||||||||||||
Series D 6.7% |
2007 to 2016 | 134.0 | 134.0 | |||||||||
Series E 7.6% |
2008 to 2026 | 17.4 | 17.4 | |||||||||
Series F 6.5% |
2007 to 2010 | 133.0 | 133.0 | |||||||||
Series G 4.1% |
2011 | 125.0 | 125.0 | |||||||||
Other: 3.0% |
2006 to 2040 | 448.6 | 363.9 | |||||||||
Less: Unamortized discount |
(12.6 | ) | (12.8 | ) | ||||||||
Payable in Other Currencies: |
||||||||||||
Eurobonds 6.0% |
— | 348.9 | ||||||||||
Eurobonds 6.5% |
2007 | 362.2 | 372.8 | |||||||||
Eurobonds 4.25% |
2012 | 362.2 | 372.8 | |||||||||
Eurobonds 3.875% |
2015 | 362.2 | — | |||||||||
Other 3.9% |
2006 to 2014 | 212.4 | 287.0 | |||||||||
Capital Lease Obligations: |
||||||||||||
United States 5.0% |
2006 to 2018 | 18.0 | 17.6 | |||||||||
Foreign 6.5% |
2006 to 2008 | 9.5 | 30.3 | |||||||||
| $ | 2,190.3 | $ | 2,358.3 | |||||||||
Less current portion |
(137.4 | ) | (244.7 | ) | ||||||||
| $ | 2,052.9 | $ | 2,113.6 | |||||||||
Various debt agreements to which the company is a party
include certain financial covenants and other restrictions,
including restrictions pertaining to the ability to create
property liens and enter into certain sale and leaseback
transactions. The company is in compliance with all financial
debt covenants.
The company has obtained the commitment of a number of
commercial banks to lend money at market rates whenever
needed. This committed line of credit is used to support the
issuance of commercial paper. At 30 September 2005, the
company’s multicurrency committed line of credit totaled
$700, maturing in December 2008.
No borrowings were outstanding under this commitment at the
end of 2005. Additional commitments of $37.3 are maintained
by the company’s foreign subsidiaries, of which $7.2 was
borrowed and outstanding at 30 September 2005.
Maturities of long-term debt in each of the next five years
are as follows: $137.4 in 2006, $503.2 in 2007, $119.9 in
2008, $16.2 in 2009 and $82.1 in 2010.
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 9 November 2005, the company issued Euro 300.0 ($353.0) of
3.75% Eurobonds maturing 8 November 2013. A portion of these
Eurobonds was exchanged for Euro 146.5 ($172.4) of the
company’s 6.5% Eurobonds due July 2007 pursuant to an exchange
offer announced by the company on 20 October 2005.
13. LEASES
Capital leases, primarily for the right to use machinery
and equipment, are included with owned plant and equipment on
the balance sheet in the amount of $49.0 and $76.2 at the end
of 2005 and 2004, respectively. Related amounts of accumulated
depreciation are $16.9 and $40.9, respectively.
Operating leases principally relate to distribution
equipment and real estate. Certain leases include escalation
clauses, renewal, and/or purchase options. Rent expense is
recognized on a straight-line basis over the minimum lease
term. Rent expense under operating leases, including
month-to-month agreements, was $119.8 in 2005, $111.3 in
2004 and $101.7 in 2003.
During 2001, the company sold and leased back certain U.S.
cryogenic vessel equipment resulting in proceeds of $301.9.
This operating lease has a five-year term with purchase and
renewal options. The company recognized a deferred gain of
$134.7 on this sale-leaseback. This amount was included in
other noncurrent liabilities. The company anticipates
exercising the option to purchase this equipment in 2006.
57
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At 30 September 2005, minimum payments due under leases
are as follows:
| Capital | Operating | |||||||
| Leases | Leases | |||||||
2006 |
$ | 11.8 | $ | 60.6 | ||||
2007 |
6.8 | 35.6 | ||||||
2008 |
3.0 | 26.8 | ||||||
2009 |
1.5 | 20.8 | ||||||
2010 |
1.0 | 15.2 | ||||||
Thereafter |
6.6 | 74.5 | ||||||
| $ | 30.7 | $ | 233.5 | |||||
The present value of the above future capital lease
payments is included in the liability section of the balance
sheet. At the end of 2005, $11.2 was classified as current
and $16.3 as long-term.
14. CAPITAL STOCK
Authorized Capital Stock consists of 25 million
preferred shares with a par value of $1 per share, none of
which was outstanding at 30 September 2005, and 300 million
shares of Common Stock with a par value of $1 per share.
On 17 March 2005, the Board of Directors authorized a $500.0
share repurchase program. During 2005, the company purchased
8.3 million of its outstanding shares at a cost of $500.0.
In 1998, the Board of Directors adopted a shareholder rights
plan under which common stockholders receive an associated
right to purchase one one-thousandth (1/1,000) of a share of
Series A Participating Cumulative Preferred Stock, par value
$1 per share. Such rights are exercisable at a price of $345
and only in the event of certain changes or potential changes
in the beneficial ownership of the company’s Common Stock,
which could result in a person or group owning more than 15%
of the outstanding Common Stock (“Acquiring Person”). If such
rights become exercisable, the rights would entitle the
stockholder (other than the Acquiring Person) to purchase for
the purchase price (i) that number of one one-thousandth of a
share of Series A Participating Cumulative Preferred Stock or
(ii) that number of shares of common stock of the surviving
company (in the event of a business combination with the
Acquiring Person or asset purchase of 50% or more of the
company’s assets by the Acquiring Person), with a value equal
to two times the purchase price of the right. The rights will
expire on 19 March 2008 unless earlier redeemed by the
company.
15. STOCK OPTION AND AWARD PLANS
| n | Stock Options |
Under various plans, executives, employees and outside
directors receive awards of options to purchase common stock.
Under all option awards, the terms are fixed at the grant
date. Generally, the exercise price equals the market price of
the company’s stock on the date of the grant. Options under
the plans generally vest incrementally over three years, and
remain exercisable for ten years from the date of grant.
Options issued to directors are exercisable six months after
the grant date.
The following table reflects activity under all stock option plans:
| Number of | Average | |||||||
| Shares | Price | |||||||
Outstanding at 30 September 2002 |
25,463,372 | $ | 33.44 | |||||
Granted |
4,639,300 | 42.11 | ||||||
Exercised |
(2,712,226 | ) | 27.01 | |||||
Forfeited |
(184,640 | ) | 34.89 | |||||
Outstanding at 30 September 2003 |
27,205,806 | $ | 35.31 | |||||
Granted |
2,764,277 | 45.27 | ||||||
Exercised |
(4,266,693 | ) | 30.83 | |||||
Forfeited |
(309,046 | ) | 40.19 | |||||
Outstanding at 30 September 2004 |
25,394,344 | $ | 37.21 | |||||
Granted |
2,616,000 | 54.19 | ||||||
Exercised |
(4,331,246 | ) | 32.24 | |||||
Forfeited |
(78,382 | ) | 45.52 | |||||
Outstanding at 30 September 2005 |
23,600,716 | $ | 39.96 | |||||
Exercisable at end of year |
17,418,538 | |||||||
Available for future grant at end of year |
4,294,887 | |||||||
The following tables summarize information about
options outstanding and exercisable at 30 September 2005:
Options
Outstanding
| Weighted Average | ||||||||||||
| Remaining | ||||||||||||
| Range of | Number | Contractual | Weighted Average | |||||||||
| Exercise Prices | Outstanding | Life (Years) | Exercise Price | |||||||||
24.79–29.47 |
3,863,899 | 3.15 | $28.90 | |||||||||
30.01–41.31 |
10,333,181 | 4.83 | 37.81 | |||||||||
41.96–57.74 |
9,403,636 | 7.82 | 46.86 | |||||||||
Options
Exercisable
| Range of | Number | Weighted Average | ||||||||||
| Exercise Prices | Outstanding | Exercise Price | ||||||||||
24.79–29.47 |
3,863,899 | $28.90 | ||||||||||
30.01–41.31 |
10,333,181 | 37.81 | ||||||||||
41.96–57.74 |
3,221,458 | 43.86 | ||||||||||
58
Table of Contents
| n | Other Awards |
Share-based awards, other than stock options, are discussed
below. In total, other awards equivalent to 1,678,380 and
1,359,211 shares of stock were outstanding at the end of
2005 and 2004, respectively.
The company has granted deferred stock units identified as
performance shares to executive officers and other key
employees. These awards entitle the recipient to one share of
common stock upon earn-out, conditional upon continued
employment during a deferral period. Earn-out is based on
achievement of certain management objectives during a
performance period, which is a one- to three-year period
following the grant date. The deferral period ends either at
the end of the performance period or after death, disability
or retirement. Performance share awards payable in stock
equivalent to 456,869 and 349,834 shares of stock were
outstanding at the end of 2005 and 2004, respectively.
Prior to the issuance of performance shares, the company
granted deferred stock units as career share awards in 1992
through 1997 to certain executive officers and other key
employees. In 2005 and 2004, additional career share awards
were granted. Career shares are deferred stock units payable
in shares of stock after retirement. Career share awards
equivalent to 372,300 and 484,513 shares of stock were
outstanding at the end of 2005 and 2004, respectively.
In 2005 and 2004, deferred stock units subject to a four-year
deferral period were granted to selected employees. These
units are subject to forfeiture if employment is terminated
prior to death, disability or retirement. Deferred stock units
outstanding under this program, and similar programs in prior
years, were equivalent to 755,711 and 481,864 shares of stock
at the end of 2005 and 2004, respectively.
In 2005 and 2004, the company issued shares of restricted
stock to certain executive officers. Participants are entitled
to cash dividends and to vote their respective shares. The
shares are subject to forfeiture until death, disability or
retirement, and the shares are nontransferable while subject
to forfeiture. Restricted stock shares outstanding were 93,500
and 43,000 at the end of 2005 and 2004, respectively.
Compensation cost is charged to expense over the periods
during which employees perform related services. Compensation
expense recognized relating to the programs granting deferred
stock units and restricted stock shares was $12.9 in 2005,
$6.9 in 2004 and $3.8 in 2003.
16. EARNINGS PER SHARE
The calculation of basic and diluted earnings per
share (EPS) is as follows:
| 30 September | 2005 | 2004 | 2003 | |||||||||
Numerator |
||||||||||||
Used in basic and diluted EPS
|
||||||||||||
Income before cumulative
effect of accounting change |
$ | 711.7 | $ | 604.1 | $ | 400.2 | ||||||
Cumulative effect of accounting
change |
— | — | (2.9 | ) | ||||||||
Net Income |
$ | 711.7 | $ | 604.1 | $ | 397.3 | ||||||
Denominator (in millions) |
||||||||||||
Weighted average number of
common shares used in basic EPS |
225.7 | 223.8 | 219.7 | |||||||||
Effect of dilutive securities: |
||||||||||||
Employee stock options |
5.0 | 4.5 | 3.4 | |||||||||
Other award plans |
.7 | .6 | .5 | |||||||||
| 5.7 | 5.1 | 3.9 | ||||||||||
Weighted average number of common
shares and dilutive potential
common shares used in diluted EPS |
231.4 | 228.9 | 223.6 | |||||||||
Basic EPS |
||||||||||||
Income before cumulative effect of
accounting change |
$ | 3.15 | $ | 2.70 | $ | 1.82 | ||||||
Cumulative effect of accounting
change |
— | — | (.01 | ) | ||||||||
Net Income |
$ | 3.15 | $ | 2.70 | $ | 1.81 | ||||||
Diluted EPS |
||||||||||||
Income before cumulative effect of
accounting change |
$ | 3.08 | $ | 2.64 | $ | 1.79 | ||||||
Cumulative effect of accounting
change |
— | — | (.01 | ) | ||||||||
Net Income |
$ | 3.08 | $ | 2.64 | $ | 1.78 | ||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Diluted EPS reflects the potential dilution that could
occur if stock options or other contracts to issue common
stock were exercised or converted into common stock. The
incremental shares are included using the treasury stock
method, which assumes the proceeds from exercise are used
by the company to purchase common stock at the average
market price during the period. The incremental shares
(difference between shares assumed to be issued versus
purchased), to the extent they would have been dilutive, are
included in the denominator of the diluted EPS calculation.
Options on 3.4 million shares were excluded from the
computation of diluted earnings per share for 2003. The
exercise price of these options was greater than the average
market price of the common shares for the respective year, and
therefore the effect would have been antidilutive.
17. INCOME TAXES
The following table shows the components of the
provision for income taxes:
| 2005 | 2004 | 2003 | ||||||||||
Federal |
||||||||||||
Current |
$ | 62.5 | $ | 23.0 | $ | 19.2 | ||||||
Deferred |
39.3 | 49.2 | 47.6 | |||||||||
| 101.8 | 72.2 | 66.8 | ||||||||||
State |
||||||||||||
Current |
9.3 | 8.4 | 6.8 | |||||||||
Deferred |
8.1 | (11.6 | ) | 4.4 | ||||||||
| 17.4 | (3.2 | ) | 11.2 | |||||||||
Foreign |
||||||||||||
Current |
122.5 | 109.0 | 94.4 | |||||||||
Deferred |
21.6 | 48.6 | (25.2 | ) | ||||||||
| 144.1 | 157.6 | 69.2 | ||||||||||
| $ | 263.3 | $ | 226.6 | $ | 147.2 | |||||||
The significant components of deferred tax assets and
liabilities are as follows:
| 30 September | 2005 | 2004 | ||||||
Gross Deferred Tax Assets |
||||||||
Pension and other compensation accruals |
$ | 244.5 | $ | 236.9 | ||||
Tax loss and tax carryforwards |
47.6 | 53.0 | ||||||
Foreign tax credit |
37.7 | 4.0 | ||||||
Currency losses |
— | 64.8 | ||||||
Unremitted earnings of foreign entities |
— | 26.5 | ||||||
Reserves and accruals |
13.7 | 10.5 | ||||||
Other |
78.7 | 75.0 | ||||||
Valuation allowance |
(17.7 | ) | (15.5 | ) | ||||
Deferred Tax Assets |
404.5 | 455.2 | ||||||
Gross Deferred Tax Liabilities |
||||||||
Plant and equipment |
942.4 | 922.4 | ||||||
Employee benefit plans |
22.2 | 40.3 | ||||||
Investment in partnerships |
20.5 | 22.0 | ||||||
Unrealized gain on cost investment |
22.6 | 15.4 | ||||||
Sale of investments |
— | 13.2 | ||||||
Currency gains |
15.7 | — | ||||||
Unremitted earnings of foreign entities |
7.9 | — | ||||||
Other |
68.9 | 72.2 | ||||||
Deferred Tax Liabilities |
1,100.2 | 1,085.5 | ||||||
Net Deferred Income Tax Liability |
$ | 695.7 | $ | 630.3 | ||||
Net current deferred tax assets of $105.5 and net
noncurrent deferred tax assets of $33.3 were included in other
receivables and current assets and other noncurrent assets at
30 September 2005, respectively. Net current deferred tax
assets of $81.1 and net noncurrent deferred tax assets of
$76.6 were included in other receivables and current assets
and other noncurrent assets at 30 September 2004,
respectively.
Foreign and state operating loss carryforwards as of 30
September 2005 were $67.1 and $369.9, respectively. The
foreign operating losses have an unlimited carryover period.
State operating loss carryforwards are available through 2025.
Foreign capital loss carryforwards were $3.7 on 30 September
2005 and have an unlimited carryover period.
The valuation allowance as of 30 September 2005 primarily
relates to the tax loss carryforwards referenced above. If
events warrant the reversal of the $17.7 valuation
allowance, it would result in a reduction of tax expense.
60
Table of Contents
Major differences between the United States federal statutory
tax rate and the effective tax rate are:
| (percent of income before taxes) | 2005 | 2004 | 2003 | |||||||||
U.S. federal statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal tax
benefit |
1.1 | 1.3 | 1.4 | |||||||||
Income from equity affiliates |
(3.3 | ) | (3.2 | ) | (3.7 | ) | ||||||
Foreign tax credits and refunds
on dividends received from
foreign affiliates |
(2.2 | ) | (2.7 | ) | (3.4 | ) | ||||||
Export tax benefits |
(1.5 | ) | (1.0 | ) | (1.2 | ) | ||||||
Other |
(2.1 | ) | (2.1 | ) | (1.2 | ) | ||||||
Effective Tax Rate after
Minority Interest |
27.0 | % | 27.3 | % | 26.9 | % | ||||||
Minority interest |
(.6 | ) | (.7 | ) | (.9 | ) | ||||||
Effective Tax Rate |
26.4 | % | 26.6 | % | 26.0 | % | ||||||
Included in foreign tax credits in the above table is a
charge related to the company’s annual reconciliation and
analysis of its deferred tax assets and liabilities.
The following table summarizes the income of U.S. and
foreign operations, before taxes and minority interest:
| 2005 | 2004 | 2003 | ||||||||||
Income from consolidated operations: |
||||||||||||
United States |
$ | 398.6 | $ | 365.2 | $ | 293.1 | ||||||
Foreign |
493.7 | 393.4 | 177.9 | |||||||||
Income from equity affiliates |
105.4 | 92.8 | 94.4 | |||||||||
| $ | 997.7 | $ | 851.4 | $ | 565.4 | |||||||
The company does not pay or record U.S. income taxes on
the undistributed earnings of its foreign subsidiaries and
corporate joint ventures as long as those earnings are
permanently reinvested in the companies that produced them.
These cumulative undistributed earnings are included in
retained earnings on the balance sheet and amounted to
$1,502.6 at the end of 2005. An estimated $391.2 in U.S.
income and foreign withholding taxes would be due if these
earnings were remitted as dividends after payment of all
deferred taxes.
18. RETIREMENT BENEFITS
| n | Plan Modifications |
On 5 October 2004, the company announced changes to the U.S.
Retirement Savings and Stock Ownership Plan (renamed the
“Retirement Savings Plan”) to provide a greater portion of
retirement benefits in a defined contribution program to
eligible salaried employees. Effective 1 January 2005, this
new program provides a company core contribution based on
service, as well as an enhanced company matching contribution
to the Retirement Savings Plan. Eligible U.S. salaried
employees hired on or after 1 November 2004 will earn benefits
only under the defined contribution program starting 1 January
2005. Eligible U.S. salaried employees as of 31 October 2004
were given the opportunity to make a one-time election to
choose the traditional defined benefit plan or the new defined
contribution plan for future service starting 1 January 2005.
Benefits for service through 31 December 2004, including those
applicable to current employees electing the defined
contribution program, will be determined under the defined
benefit pension plan formula. Additionally, the company
modified the early retirement provision related to future
service of the defined benefit pension plan.
The U.K. defined benefit plan was closed to all new hires
effective 1 January 2005. Eligible U.K. employees hired on or
after 1 January 2005 will receive retirement benefits
exclusively under a new defined contribution plan.
| n | Defined Contribution Plans |
The company maintains a nonleveraged employee stock ownership
plan (ESOP) which forms part of the Air Products and
Chemicals, Inc. Retirement Savings Plan (RSP). The ESOP was
established in May of 2002. The balance of the RSP is a
qualified defined contribution plan including a 401(k)
elective deferral component. A substantial portion of U.S.
employees are eligible and participate. Dividends paid on ESOP
shares are treated as ordinary dividends by the company. Under
existing tax law, the company may deduct dividends which are
paid with respect to shares held by the plan. Shares of the
company’s common stock in the ESOP totaled 7,164,282 as of 30
September 2005.
The company matches a portion of the participants’
contributions to the RSP and other various worldwide defined
contribution plans. Contributions expensed to income in 2005,
2004 and 2003 were $22.7, $16.6 and $15.2, respectively. The
increase in contributions in 2005 primarily related to the
plan modifications discussed above.
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Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| n | Defined Benefit Pension Plans |
The company and certain of its subsidiaries sponsor defined
benefit pension plans that cover a substantial portion of its
worldwide employees. Pension benefits earned are generally
based on years of service and compensation during active
employment.
The cost of the company’s defined benefit pension plans
included the following components:
| 2005 | 2004 | 2003 | ||||||||||
Service cost |
$ | 74.4 | $ | 73.5 | $ | 59.3 | ||||||
Interest cost |
139.4 | 129.2 | 117.5 | |||||||||
Expected return on plan assets |
(145.4 | ) | (123.8 | ) | (114.9 | ) | ||||||
Amortization: |
||||||||||||
Prior service cost |
3.5 | 3.4 | 3.7 | |||||||||
Transition |
.1 | (.1 | ) | (3.3 | ) | |||||||
Actuarial loss |
37.9 | 34.3 | 16.3 | |||||||||
Settlements and curtailments |
.2 | 10.5 | — | |||||||||
Special termination benefits |
4.9 | 2.0 | 12.7 | |||||||||
Other |
1.7 | 1.1 | 5.1 | |||||||||
Net Periodic Pension Cost |
$ | 116.7 | $ | 130.1 | $ | 96.4 | ||||||
The company calculates net periodic pension cost for a
given fiscal year based on assumptions developed at the end of
the previous fiscal year.
The following table sets forth the weighted average
assumptions used in the calculation of net periodic pension
cost:
| 2005 | 2004 | 2003 | ||||||||||
Discount rate |
5.9 | % | 5.8 | % | 6.5 | % | ||||||
Expected return on plan assets |
8.8 | % | 8.4 | % | 9.1 | % | ||||||
Rate of compensation increase |
4.2 | % | 4.2 | % | 4.7 | % | ||||||
The company uses a measurement date of 30 September for
all plans except for plans in the United Kingdom and Belgium.
These plans are measured as of 30 June.
Effective 1 January 2005, the company amended the U.S. Pension
Plan for Salaried Employees, which resulted in a remeasurement
of pension expense. The significant assumptions as of the 1
January 2005 remeasurement date did not differ from those used
in the 30 September 2004 valuation. The impact of the
remeasurement on 2005 expense was not material.
The projected benefit obligation (PBO) is the actuarial
present value of benefits attributable to employee service
rendered to date, including the effects of estimated future
salary increases.
The following table reflects the change in the PBO based on
the plan year measurement date:
| 2005 | 2004 | |||||||||||
Obligation at Beginning of Year |
$ | 2,389.7 | $ | 2,215.1 | ||||||||
Service cost |
74.4 | 73.5 | ||||||||||
Interest cost |
139.4 | 129.2 | ||||||||||
Amendments |
2.3 | .9 | ||||||||||
Actuarial loss (gain) |
253.7 | (17.3 | ) | |||||||||
Special termination benefits,
settlements and curtailments |
3.6 | (23.1 | ) | |||||||||
Participant contributions |
7.2 | 7.4 | ||||||||||
Benefits paid |
(92.0 | ) | (76.0 | ) | ||||||||
Currency translation/other |
(23.3 | ) | 80.0 | |||||||||
Obligation at End of Year |
$ | 2,755.0 | $ | 2,389.7 | ||||||||
The increase in the actuarial loss is primarily
driven by the decrease in the discount rate.
The following table sets forth the weighted average
assumptions used in the calculation of the PBO:
| 2005 | 2004 | |||||||
Discount rate |
5.3 | % | 5.9 | % | ||||
Rate of compensation increase |
4.3 | % | 4.2 | % | ||||
The assets of the company’s defined benefit pension
plans consist primarily of equity and fixed income securities.
Except where the company’s equity is a component of an index
fund, the defined benefit plans are prohibited from holding
shares of company stock.
Asset allocation targets are established based on the
long-term return and volatility characteristics of the
investment classes and recognize the benefit of
diversification and the profiles of the plans’ liabilities.
The actual and target allocations at the measurement date are
as follows:
| 2005 | 2005 | 2004 | ||||||||||
| Target | Actual | Actual | ||||||||||
| Asset Category | Allocation | Allocation | Allocation | |||||||||
Equity securities |
67–73 | % | 69 | % | 68 | % | ||||||
Debt securities |
20–30 | 26 | 27 | |||||||||
Real estate |
4–8 | 4 | 4 | |||||||||
Other |
0–5 | 1 | 1 | |||||||||
Total |
100 | % | 100 | % | ||||||||
62
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The company employs a mix of active and passive
investment strategies. Over a full market cycle, the total
return of plan assets is expected to exceed that of an
index tracking the returns achievable with a passive
strategy in each asset category.
The company anticipates contributing approximately $155 to
the defined benefit pension plans in 2006. This amount is
significantly higher than the minimum required
contributions.
The following table summarizes the change in the fair
value of assets of the pension plans based on the
measurement date:
| 2005 | 2004 | |||||||
Beginning of Year |
$ | 1,510.9 | $ | 1,147.5 | ||||
Actual return on plan assets |
239.3 | 146.9 | ||||||
Company contributions |
128.9 | 270.8 | ||||||
Participant contributions |
7.2 | 7.4 | ||||||
Benefits paid |
(92.0 | ) | (76.0 | ) | ||||
Settlements |
(1.2 | ) | (24.1 | ) | ||||
Currency translation/other |
(16.1 | ) | 38.4 | |||||
End of Year |
$ | 1,777.0 | $ | 1,510.9 | ||||
To the extent the expected return on plan assets
varies from the actual return, an actuarial gain or loss
results.
The expected return on plan assets assumption is based on
an estimated weighted average of long-term returns of
major asset classes. In determining asset class returns,
the company takes into account long-term returns of major
asset classes, historical performance of plan assets and
related value added of active management, as well as the
current interest rate environment. Asset allocation is
determined by an asset/liability study that takes into
account plan demographics, asset returns and acceptable
levels of risk.
Projected benefit payments, which reflect expected future
service, are as follows:
2006 |
$ | 87.9 | ||
2007 |
94.5 | |||
2008 |
98.7 | |||
2009 |
109.3 | |||
2010 |
111.1 | |||
2011–2015 |
704.7 |
These estimated benefit payments are based on
assumptions about future events. Actual benefit payments
may vary significantly from these estimates.
The funded status of the pension plans (plan assets less
projected benefit obligation) reconciled to the amount
recognized in the balance sheet is as follows:
| 2005 | 2004 | |||||||
Funded status |
$ | (978.0 | ) | $ | (878.8 | ) | ||
Unrecognized actuarial loss |
928.5 | 815.1 | ||||||
Unrecognized prior service cost |
18.5 | 19.9 | ||||||
Unrecognized net transition liability |
.6 | .6 | ||||||
Employer contributions for U.K. and
Belgium after the measurement date |
8.4 | 6.2 | ||||||
Net Amount Recognized |
$ | (22.0 | ) | $ | (37.0 | ) | ||
The unrecognized actuarial loss represents the
actual changes in the estimated obligation and plan assets
that have not yet been recognized in the income statement.
Actuarial gains and losses are not recognized immediately,
but instead are accumulated as a part of the unrecognized
net loss balance and amortized into net periodic pension
cost over the average remaining service period of
participating employees as certain thresholds are met.
At a minimum, the consolidated balance sheet as of the
fiscal year end should reflect an amount equal to the
unfunded accumulated benefit obligation (ABO). The ABO is
the actuarial present value of benefits attributed to
employee service rendered to date, but does not include
the effects of future pay.
The ABO for all defined benefit pension plans was
$2,244.1 and $1,961.5 at the end of 2005 and 2004,
respectively.
The following table provides information on pension plans
where the ABO exceeds the value of plan assets:
| 2005 | 2004 | |||||||
PBO |
$ | 2,625.4 | $ | 2,370.2 | ||||
ABO |
2,142.9 | 1,948.3 | ||||||
Plan assets |
1,663.2 | 1,493.2 | ||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Included in the table above are several pension
arrangements that are not funded because of jurisdictional
practice. The ABO and PBO related to these plans for 2005
were $102.3 and $133.1, respectively.
In 2005, a $14.3 after-tax charge was recorded to
comprehensive income within shareholders’ equity due to
the recognition of an additional minimum liability. This
charge results principally from the decline in the
discount rate substantially offset by improved asset
positions.
In 2004, comprehensive income within shareholders’ equity
increased $59.4 (after-tax) due to the net reduction of
an additional minimum liability. The reduction in the
additional minimum liability resulted principally from
improved plan asset positions.
The following table summarizes the amounts recognized on
the company’s consolidated balance sheet:
| 2005 | 2004 | |||||||
Prepaid benefit cost |
$ | 15.4 | $ | 4.9 | ||||
Accrued benefit liability |
(470.6 | ) | (453.9 | ) | ||||
Intangible asset |
17.8 | 21.0 | ||||||
Accumulated other comprehensive
income—pretax |
415.4 | 391.0 | ||||||
Net Amount Recognized |
$ | (22.0 | ) | $ | (37.0 | ) | ||
§ Other Postretirement Benefits
The company provides other postretirement benefits
consisting primarily of healthcare benefits to U.S.
retirees who meet age and service requirements. The
healthcare benefit is a continued medical benefit until
the retiree reaches age 65. Healthcare benefits are
contributory, with contribution percentages adjusted
periodically. The retiree medical costs are capped at a
specified dollar amount with the retiree contributing the
remainder.
The cost of the company’s other postretirement benefit
plans included the following components:
| 2005 | 2004 | 2003 | ||||||||||
Service cost |
$ | 4.4 | $ | 4.7 | $ | 4.2 | ||||||
Interest cost |
5.3 | 5.6 | 5.8 | |||||||||
Amortization: |
||||||||||||
Prior service cost |
(2.3 | ) | (.9 | ) | (.7 | ) | ||||||
Actuarial loss |
1.3 | .5 | — | |||||||||
Settlements and curtailments |
(.6 | ) | — | — | ||||||||
Special termination benefits |
— | — | .4 | |||||||||
Net Periodic Benefit Cost |
$ | 8.1 | $ | 9.9 | $ | 9.7 | ||||||
The company calculates net periodic benefit cost
for a given fiscal year based on assumptions developed at
the end of the previous fiscal year. The discount rate
assumption used in the calculation of net periodic benefit
cost for 2005, 2004 and 2003 was 6.0%, 6.0% and 6.8%,
respectively.
The company measures the other postretirement benefits as
of 30 September. The following table reflects the change
in the accumulated postretirement benefit obligation:
| 2005 | 2004 | |||||||
Obligation at Beginning of Year |
$ | 90.2 | $ | 93.3 | ||||
Service cost |
4.4 | 4.7 | ||||||
Interest cost |
5.3 | 5.6 | ||||||
Amendments |
2.3 | (10.8 | ) | |||||
Actuarial loss |
7.5 | 6.7 | ||||||
Benefits paid |
(8.7 | ) | (9.3 | ) | ||||
Obligation at End of Year |
$ | 101.0 | $ | 90.2 | ||||
The discount rate assumption used in the calculation
of the accumulated postretirement benefit obligation was
4.8% and 6.0% for 2005 and 2004, respectively.
The assumed healthcare trend rates are as follows:
| 2005 | 2004 | |||||||
Healthcare trend rate |
11.0 | % | 9.5 | % | ||||
Ultimate trend rate |
5.0 | % | 5.0 | % | ||||
Year the ultimate trend rate is reached |
2010 | 2008 | ||||||
The effect of a change in the healthcare trend rate
is slightly tempered by a cap on the average retiree
medical cost. The impact of a one percent point change in
the assumed healthcare cost trend rate on periodic benefit
cost and the obligation is not material.
A reconciliation of the benefit obligation to the
amounts recognized in the consolidated balance sheet
as a liability is as follows:
| 2005 | 2004 | |||||||
Obligation at End of Year |
$ | (101.0 | ) | $ | (90.2 | ) | ||
Unrecognized actuarial loss |
25.7 | 20.4 | ||||||
Unrecognized prior service cost |
(7.1 | ) | (13.1 | ) | ||||
Net Amount Recognized |
$ | (82.4 | ) | $ | (82.9 | ) | ||
64
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Projected benefit payments are as follows:
2006 |
$ | 11.0 | ||
2007 |
11.3 | |||
2008 |
10.9 | |||
2009 |
10.7 | |||
2010 |
10.8 | |||
2011–2015 |
53.1 |
These estimated benefit payments are based on
assumptions about future events. Actual benefit payments
may vary significantly from these estimates.
On 5 October 2004, the company announced changes to its
retiree medical benefits. Generally, employees are not
eligible to receive retiree medical benefits if they
were under the age of 40 as of 31 December 2004, or joined
the company on or after 1 November 2004. The elimination
of the retiree medical benefit does not affect the
disclosed obligation, as the attribution period does not
begin until age 45.
The retiree medical cost cap was reduced for all eligible
participants who retired on or after 1 January 2005. The
reduction in the retiree medical cost cap, as well as
enhanced retiree contributions, resulted in a prior
service cost gain which will be amortized into expense
over the employees’ average remaining service period.
The changes to the retiree medical benefits noted above
were reflected in the 2004 accumulated postretirement
benefit obligation.
19. 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.
§ Guarantees and Warranties
The company is a party to certain guarantee agreements,
including a residual value guarantee, debt guarantees of
equity affiliates and equity support agreements. These
guarantees are contingent commitments that are related to
activities of the company’s primary businesses.
In September 2001, the company entered into an operating
lease of U.S. cryogenic vessel equipment, which included
a residual value guarantee not to exceed $256. The
guarantee extends to September 2006. As discussed in Note
13, the company anticipates exercising the option to
purchase this equipment in 2006.
The company has guaranteed repayment of some borrowings
of certain foreign equity affiliates. At 30 September
2005, these guarantees have terms primarily in the range
of one to seven years, with maximum potential payments
of $26.
The company has entered into an equity support agreement
related to the financing of an air separation facility
constructed in Trinidad for a venture in which the company,
through equity affiliates, owns 50%. The maximum potential
payments, under a joint and several guarantee with the
partner, are $68. The maximum exposure under the equity
support agreement declines over time as an underlying loan
balance is amortized. Additionally, the company and its
partner provided guarantees of certain obligations related
to the normal operations of this facility. The maximum
potential payments, under the joint and several operations
guarantees, are $32. The total combined maximum potential
payments, under the joint and several equity support
agreement and the operations guarantees, are $100. The term
of these guarantees is related to the underlying
twenty-year customer gas supply contract from the facility.
The
company has not accrued any material amounts related to these
guarantees. To date, no equity contributions or payments
have been required since the inception of these
guarantees. The fair value of the above guarantees totals
approximately $6.
The company, in the normal course of business operations,
has issued product warranties in its Equipment segment.
Also, contracts often contain standard terms and
conditions which typically include a warranty and
indemnification to the buyer that the goods and services
purchased do not infringe on third-party intellectual
property rights. The provision for estimated future costs
relating to warranties is not material to the consolidated
results of operations.
The company does not expect that any sum it may have to
pay in connection with guarantees and warranties will
have a materially adverse effect on its consolidated
financial condition, liquidity or results of operations.
65
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
§ Environmental
The company has accrued for certain environmental
investigatory, external legal costs and noncapital
remediation costs consistent with the policy set forth in
Note 1. The potential exposure for such costs is estimated
to range from $8 to a reasonably possible upper exposure of
$17. The consolidated balance sheet at 30 September 2005
includes an accrual of $13.3.
§ Litigation
In July 2003, Honeywell International, Inc. and GEM
Microelectronic 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. This amount was recorded against
previously established accruals. Honeywell filed an
appeal of the Court’s decision and the company filed a
cross-appeal. In September 2005, the company recognized
an expense for an additional amount not considered
material based on a final settlement reached with
Honeywell.
The company is involved in various legal proceedings,
including competition, environmental, health, safety,
product liability and insurance matters. While the
company does not expect that any sums it may have to pay
in connection with these matters would have a materially
adverse effect on its consolidated financial position or
net cash flows, a future charge for any damage award
could have a significant impact on the company’s net
income in the period in which it is recorded.
§ Other Commitments and Contingencies
The company has entered into put option agreements with
certain affiliated companies. 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 2002, the company entered into a put option agreement
as part of the purchase of an additional interest in San
Fu Gas Company, Ltd. (San Fu), an industrial gas company
in Taiwan. Put options were issued which give other
shareholders the right to sell San Fu stock to the company
at market price when exercised. The options are effective
from January 2005 through January 2015 and allow for the
sale of all stock owned by other shareholders to the
company. Currently, the company has an ownership interest
of 74% in San Fu.
At the end of 2006, the company had purchase commitments
to spend approximately $130 for additional plant and
equipment.
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
supplier’s ability to emerge from bankruptcy and to
continue supplying product to the company, the company
agreed to participate in the supplier’s financing and has
continued to provide additional financing. Total loans to
the supplier at 30 September 2005 were $86.0. If the
supplier does not continue to operate, the sales and
profitability of the Chemicals segment could be materially
impacted because of the company’s inability to supply all
of its customers’ base requirements. The company does not
expect a material loss related to this supplier.
66
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20. SUPPLEMENTAL INFORMATION
§ Other Receivables and Current Assets
| 30 September | 2005 | 2004 | ||||||
Other receivables |
$ | 227.6 | $ | 164.7 | ||||
Prepaid expenses |
47.5 | 53.0 | ||||||
Other current assets |
— | 21.0 | ||||||
| $ | 275.1 | $ | 238.7 | |||||
§ Payables and Accrued Liabilities
| 30 September | 2005 | 2004 | ||||||
Trade creditors, payables and accrued
expenses |
$ | 728.0 | $ | 707.0 | ||||
Accrued payroll and employee benefits |
155.6 | 154.3 | ||||||
Customer advances |
190.0 | 130.8 | ||||||
Derivative instruments |
13.9 | 107.4 | ||||||
Pension benefits |
140.4 | 74.7 | ||||||
Accrued interest expense |
31.0 | 38.5 | ||||||
Outstanding checks payable in excess
of certain cash balances |
52.8 | 30.0 | ||||||
Miscellaneous |
66.3 | 76.9 | ||||||
| $ | 1,378.0 | $ | 1,319.6 | |||||
§ Short-Term Borrowings
| 30 September | 2005 | 2004 | ||||||
Bank obligations |
$ | 59.1 | $ | 35.4 | ||||
Commercial paper |
250.5 | — | ||||||
| $ | 309.6 | $ | 35.4 | |||||
The weighted average interest rate of short-term
borrowings outstanding as of 30 September 2005 and 2004
was 3.9% and 3.6%, respectively.
§ Deferred Income and Other Noncurrent Liabilities
| 30 September | 2005 | 2004 | ||||||
Deferred
gain on sale-leaseback of U.S. cryogenic vessel equipment |
$ | 134.7 | $ | 134.7 | ||||
Pension benefits |
330.2 | 379.2 | ||||||
Postretirement benefits |
71.4 | 74.0 | ||||||
Other employee benefits |
77.2 | 63.4 | ||||||
Advance payments |
77.2 | 60.1 | ||||||
Derivative instruments |
42.8 | 17.2 | ||||||
Miscellaneous |
88.1 | 91.7 | ||||||
| $ | 821.6 | $ | 820.3 | |||||
§ Accumulated Other Comprehensive Income (Loss)
| 30 September | 2005 | 2004 | ||||||
(Loss) gain on derivatives |
$ | (6.4 | ) | $ | (2.8 | ) | ||
Unrealized gain on investment |
40.6 | 27.4 | ||||||
Minimum pension liability adjustment |
(272.4 | ) | (258.1 | ) | ||||
Cumulative translation adjustments |
(195.0 | ) | (207.2 | ) | ||||
| $ | (433.2 | ) | $ | (440.7 | ) | |||
§ Other (Income) Expense, Net
| 2005 | 2004 | 2003 | ||||||||||
Technology and royalty income |
$ | (18.5 | ) | $ | (16.3 | ) | $ | (15.1 | ) | |||
Interest income |
(15.7 | ) | (3.9 | ) | (3.8 | ) | ||||||
Foreign exchange |
1.3 | (1.7 | ) | (.8 | ) | |||||||
Gain on sale of assets
and investments |
(13.0 | ) | (7.5 | ) | (5.0 | ) | ||||||
Amortization of intangibles |
15.7 | 13.6 | 10.3 | |||||||||
Insurance settlements |
(5.4 | ) | (6.6 | ) | (3.6 | ) | ||||||
Miscellaneous |
4.4 | (5.5 | ) | (8.5 | ) | |||||||
| $ | (31.2 | ) | $ | (27.9 | ) | $ | (26.5 | ) | ||||
§ Additional Income Statement Information
Hurricanes
As a result of Hurricanes Dennis, Katrina and Rita, the
company incurred losses attributable to property damage and
business interruption in both its Gases and Chemicals
businesses. The company’s New Orleans industrial gas
complex sustained extensive damage from Hurricane Katrina.
This facility should return to substantial operations by
the end of the calendar year. The quarter ended 30
September 2005 included an unfavorable impact of $20, or
$.06 per share on a diluted basis, for the
hurricane-related losses. This amount only reflects
expected insurance recoveries for certain property damage
costs and does not reflect any insurance recovery for
business interruption. A receivable of $14.6 was recorded
for the expected insurance recovery, principally the net
book value of the damaged property. Claims will be filed
with the insurance carriers as the required information is
completed. Insurance recoveries will be recognized for
business interruption and property claims in excess of the
net book value of assets damaged as claims are settled.
Subsequent to year-end, the company received $12.5 as an
advance on its claim for damages sustained in connection
with Hurricane Katrina.
67
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Contract Termination
Effective July 2005, a major customer in the Chemicals business
terminated its contract for the purchase of toluene diamine. In the
fourth quarter of 2005, the company recognized the present value
of the termination payments required under the supply contract. As
a result of the contract termination, operating income included an
additional $16.
Chemicals’ Fertilizer Business
The company decided to exit the fertilizer business at the completion
of its current contractual commitments. The fourth quarter of
2005 included a charge of $7.6, principally for the acceleration
of depreciation due to the shortened useful life of plant and
equipment.
§ Summary by Quarter
These tables summarize the unaudited results of operations for each quarter of 2005 and 2004:
| First | Second | Third | Fourth | Total | ||||||||||||||||
2005 |
||||||||||||||||||||
Sales |
$ | 1,991.0 | $ | 2,003.3 | $ | 2,078.4 | $ | 2,070.8 | $ | 8,143.5 | ||||||||||
Operating income |
238.3 | 252.2 | 262.8 | 249.2 | 1,002.5 | |||||||||||||||
Net income |
166.8 | 175.3 | 190.6 | 179.0 | 711.7 | |||||||||||||||
Basic earnings per common share |
.74 | .77 | .84 | .81 | 3.15 | |||||||||||||||
Diluted earnings per common share |
.72 | .75 | .82 | .79 | 3.08 | |||||||||||||||
Dividends declared per common share |
.29 | .32 | .32 | .32 | 1.25 | |||||||||||||||
Market price per common share: high |
59.18 | 65.81 | 64.06 | 61.60 | ||||||||||||||||
low |
51.85 | 55.99 | 55.53 | 53.30 | ||||||||||||||||
| First | Second | Third | Fourth | Total | ||||||||||||||||
2004 |
||||||||||||||||||||
Sales |
$ | 1,684.9 | $ | 1,856.5 | $ | 1,892.5 | $ | 1,977.5 | $ | 7,411.4 | ||||||||||
Operating income |
198.8 | 210.1 | 233.7 | 237.0 | 879.6 | |||||||||||||||
Net income |
131.8 | 141.2 | 163.0 | 168.1 | 604.1 | |||||||||||||||
Basic earnings per common share |
.59 | .63 | .73 | .75 | 2.70 | |||||||||||||||
Diluted earnings per common share |
.58 | .62 | .71 | .73 | 2.64 | |||||||||||||||
Dividends declared per common share |
.23 | .23 | .29 | .29 | 1.04 | |||||||||||||||
Market price per common share: high |
53.07 | 55.40 | 53.20 | 55.76 | ||||||||||||||||
low |
44.12 | 46.71 | 47.49 | 48.42 | ||||||||||||||||
68
Table of Contents
21. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The company manages its operations, assesses performance and
reports results by three business segments, which are organized
based on differences in products. The company’s three business
segments consist of Gases, Chemicals and Equipment.
§ Gases Segment
The company’s Gases segment includes its industrial gases, electronic
chemicals and healthcare businesses.
The company is a leading international supplier of industrial and
specialty gas products. Principal products of the industrial gases
business are oxygen, nitrogen, argon, hydrogen, carbon monoxide,
carbon dioxide, synthesis gas and helium. The largest market
segments are chemical processing, electronics, refining, metal
production, food processing and medical gases. The company has
its largest industrial gas market positions in the United States and
Europe.
The global healthcare business of the company is directed at
two main markets: institutional and homecare. The institutional
market uses medical gases in hospitals, clinics and nursing
homes, as well as helium for use in magnetic resonance imaging.
The homecare business involves the delivery of respiratory
therapy services, home medical equipment and infusion services
to patients in their homes in Europe, South America and principally
in the eastern United States.
§ Chemicals Segment
The company’s Chemicals segment consists of businesses organized
around two divisions: Performance Materials and Chemical
Intermediates.
Principal products of Performance Materials are emulsions,
specialty additives, polyurethane additives and epoxy additives.
Principal Chemical Intermediates are amines and polyurethane
intermediates. The end markets for the company’s chemical products
are extensive, including paints, coatings, adhesive, paper,
building products, agriculture and furniture. Principal geographic
markets for the company’s chemical products are North America,
Europe, Asia and Latin America.
Within the polyurethane intermediates product line, in 2005, one
customer closed its facility and another terminated its contract.
This contract termination and customer shutdown are expected to
reduce the profitability of this product line in 2006.
§ Equipment Segment
The Equipment segment designs and manufactures cryogenic
and gas processing equipment for air separation, gas processing,
natural gas liquefaction and hydrogen purification. The segment
also designs and builds cryogenic transportation containers for
liquid helium and systems for recovering gases using membrane
technology. Equipment is sold worldwide to companies involved in
chemical and petrochemical manufacturing, oil and gas recovery
and processing, power generation, and steel and primary metal
production. Equipment is also manufactured for the company’s
industrial gas business. Another important market, particularly for
air separation equipment, is the company’s international industrial
gas joint ventures.
§ Customers
The company has a large number of customers, and no single customer
accounts for a significant portion of annual sales.
§ Accounting Policies
The accounting policies of the segments are the same as those
described in Note 1. The company evaluates the performance
of segments based upon reported segment operating income.
Operating income of the business segments includes general
corporate expenses. Corporate expenses not allocated to the
segments, included in all other, are primarily long-term research
and development. Intersegment sales are not material and are
recorded at selling prices that approximate market prices. Equipment
manufactured for the company’s industrial gas business is
generally transferred at cost and not reflected as an intersegment
sale. Corporate assets not allocated to the segments are included
in all other. These assets include cash and cash items, unallocated
administrative facilities and certain deferred items. Long-lived
assets include investment in net assets of and advances to equity
affiliates, net plant and equipment, goodwill and intangibles.
69
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Business segment information is shown below:
| Segment | All | Consolidated | ||||||||||||||||||||||
| Gases | Chemicals | Equipment | Totals | Other | Totals | |||||||||||||||||||
2005 |
||||||||||||||||||||||||
Revenues from external customers |
$ | 5,824.9 | $ | 1,917.6 | $ | 401.0 | $8,143.5 | $ | — | $ | 8,143.5 | |||||||||||||
Operating income |
841.7 | 156.8 | 44.9 | 1,043.4 | (40.9 | ) | 1,002.5 | |||||||||||||||||
Depreciation and amortization |
607.0 | 110.3 | 11.0 | 728.3 | — | 728.3 | ||||||||||||||||||
Equity affiliates’ income |
91.5 | 13.9 | — | 105.4 | — | 105.4 | ||||||||||||||||||
Segment assets: |
||||||||||||||||||||||||
Identifiable assets |
7,764.1 | 1,348.4 | 247.0 | 9,359.5 | 385.6 | 9,745.1 | ||||||||||||||||||
Investment in and advances to equity affiliates |
606.0 | 57.7 | — | 663.7 | — | 663.7 | ||||||||||||||||||
Total segment assets |
8,370.1 | 1,406.1 | 247.0 | 10,023.2 | 385.6 | 10,408.8 | ||||||||||||||||||
Expenditures for long-lived assets |
833.9 | 106.1 | 13.8 | 953.8 | 91.9 | 1,045.7 | ||||||||||||||||||
2004 |
||||||||||||||||||||||||
Revenues from external customers |
$ | 5,221.8 | $ | 1,828.9 | $ | 360.7 | $7,411.4 | $ | — | $ | 7,411.4 | |||||||||||||
Operating income |
800.5 | 116.0 | 10.8 | 927.3 | (47.7 | ) | 879.6 | |||||||||||||||||
Depreciation and amortization |
599.4 | 104.5 | 9.5 | 713.4 | 1.5 | 714.9 | ||||||||||||||||||
Equity affiliates’ income |
78.2 | 14.6 | — | 92.8 | — | 92.8 | ||||||||||||||||||
Segment assets: |
||||||||||||||||||||||||
Identifiable assets |
7,339.8 | 1,402.5 | 226.4 | 8,968.7 | 441.9 | 9,410.6 | ||||||||||||||||||
Investment in and advances to equity affiliates |
572.1 | 57.6 | .1 | 629.8 | — | 629.8 | ||||||||||||||||||
Total segment assets |
7,911.9 | 1,460.1 | 226.5 | 9,598.5 | 441.9 | 10,040.4 | ||||||||||||||||||
Expenditures for long-lived assets |
656.1 | 95.9 | 5.5 | 757.5 | 66.1 | 823.6 | ||||||||||||||||||
2003 |
||||||||||||||||||||||||
Revenues from external customers |
$ | 4,438.3 | $ | 1,591.2 | $ | 267.8 | $6,297.3 | $ | — | $ | 6,297.3 | |||||||||||||
Operating income |
574.8 | 67.1 | 4.2 | 646.1 | (51.6 | ) | 594.5 | |||||||||||||||||
Depreciation and amortization |
532.7 | 109.7 | 6.4 | 648.8 | 6.0 | 654.8 | ||||||||||||||||||
Equity affiliates’ income |
68.3 | 10.8 | .2 | 79.3 | 15.1 | 94.4 | ||||||||||||||||||
Segment assets: |
||||||||||||||||||||||||
Identifiable assets |
7,097.3 | 1,478.1 | 171.4 | 8,746.8 | 173.2 | 8,920.0 | ||||||||||||||||||
Investment in and advances to equity
affiliates |
502.5 | 50.0 | 1.0 | 553.5 | — | 553.5 | ||||||||||||||||||
Total segment assets |
7,599.8 | 1,528.1 | 172.4 | 9,300.3 | 173.2 | 9,473.5 | ||||||||||||||||||
Expenditures for long-lived assets |
946.6 | 82.0 | 5.1 | 1,033.7 | 91.0 | 1,124.7 | ||||||||||||||||||
70
Table of Contents
Geographic information is presented below:
| 2005 | 2004 | 2003 | ||||||||||
Revenues from External Customers |
||||||||||||
United States |
$ | 4,667.8 | $ | 4,224.3 | $ | 3,631.1 | ||||||
Canada |
72.3 | 73.8 | 96.1 | |||||||||
Europe |
2,268.8 | 2,180.1 | 1,790.1 | |||||||||
Asia |
961.1 | 762.5 | 648.4 | |||||||||
Latin America |
173.5 | 170.7 | 131.6 | |||||||||
Total |
$ | 8,143.5 | $ | 7,411.4 | $ | 6,297.3 | ||||||
Long-Lived Assets |
||||||||||||
United States |
$ | 3,625.6 | $ | 3,442.6 | $ | 3,529.8 | ||||||
Canada |
169.8 | 60.1 | 52.3 | |||||||||
Europe |
2,127.0 | 2,305.8 | 2,103.5 | |||||||||
Asia |
1,374.0 | 1,227.9 | 1,084.0 | |||||||||
Latin America |
200.5 | 183.1 | 195.3 | |||||||||
All other |
54.3 | 44.4 | 55.6 | |||||||||
Total |
$ | 7,551.2 | $ | 7,263.9 | $ | 7,020.5 | ||||||
Geographic information is based on country of origin. Included in United States revenues are
export sales to unconsolidated customers of $718.8 in 2005, $610.5 in 2004 and $497.2 in 2003. The
Europe segment operates principally in the U.K., Spain, Belgium, France, Germany and the
Netherlands. The Asia segment operates principally in China, Japan, Korea and Taiwan.
71
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
| (millions of dollars, except per share) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
Operating Results |
||||||||||||||||||||
Sales |
$ | 8,144 | $ | 7,411 | $ | 6,297 | $ | 5,401 | $ | 5,858 | ||||||||||
Cost of sales |
6,011 | 5,464 | 4,613 | 3,816 | 4,216 | |||||||||||||||
Selling and administrative |
1,028 | 969 | 843 | 718 | 711 | |||||||||||||||
Research and development |
133 | 127 | 121 | 120 | 122 | |||||||||||||||
Global cost reduction plans, net |
— | — | 153 | 23 | 107 | |||||||||||||||
Operating income |
1,003 | 880 | 595 | 761 | 734 | |||||||||||||||
Equity affiliates’ income |
105 | 93 | 94 | 90 | 93 | |||||||||||||||
Interest expense |
110 | 121 | 124 | 122 | 191 | |||||||||||||||
Income tax provision |
263 | 227 | 147 | 241 | 191 | |||||||||||||||
Net income |
712 | 604 | 397 | 525 | 466 | |||||||||||||||
Basic earnings per common share |
3.15 | 2.70 | 1.81 | 2.42 | 2.17 | |||||||||||||||
Diluted earnings per common share |
3.08 | 2.64 | 1.78 | 2.36 | 2.12 | |||||||||||||||
Year-End Financial Position |
||||||||||||||||||||
Plant and equipment, at cost |
$ | 12,913 | $ | 12,202 | $ | 11,723 | $ | 10,880 | $ | 10,227 | ||||||||||
Total assets |
10,409 | 10,040 | 9,474 | 8,495 | 8,084 | |||||||||||||||
Working capital |
472 | 711 | 528 | 653 | 332 | |||||||||||||||
Total debt(A) |
2,500 | 2,394 | 2,511 | 2,385 | 2,478 | |||||||||||||||
Shareholders’ equity |
4,576 | 4,444 | 3,783 | 3,460 | 3,106 | |||||||||||||||
Financial Ratios |
||||||||||||||||||||
Return on sales |
8.7 | % | 8.2 | % | 6.3 | % | 9.7 | % | 7.9 | % | ||||||||||
Return on average shareholders’ equity |
15.3 | % | 14.7 | % | 10.9 | % | 15.9 | % | 15.8 | % | ||||||||||
Total debt to sum of total debt, shareholders’ equity and
minority interest(A) |
34.5 | % | 34.2 | % | 38.7 | % | 39.6 | % | 43.5 | % | ||||||||||
Cash provided by operations to average total debt |
55.1 | % | 43.1 | % | 42.8 | % | 46.0 | % | 37.8 | % | ||||||||||
Interest coverage ratio |
9.1 | 7.7 | 5.4 | 6.9 | 4.3 | |||||||||||||||
Other Data |
||||||||||||||||||||
For the year: Depreciation and amortization |
$ | 728 | $ | 715 | $ | 655 | $ | 591 | $ | 598 | ||||||||||
Capital expenditures( B) |
1,043 | 816 | 1,171 | 806 | 806 | |||||||||||||||
Dividends declared per common share |
1.25 | 1.04 | .88 | .82 | .78 | |||||||||||||||
Market price range per common share |
66–52 | 56–44 | 49–36 | 54–36 | 49–30 | |||||||||||||||
Weighted average common shares outstanding
(in millions) |
226 | 224 | 220 | 217 | 215 | |||||||||||||||
Weighted average common shares outstanding
assuming dilution (in millions) |
231 | 229 | 224 | 223 | 219 | |||||||||||||||
At year end: Book value per common share |
$ | 20.62 | $ | 19.68 | $ | 17.08 | $ | 15.83 | $ | 14.41 | ||||||||||
Shareholders |
10,300 | 10,700 | 11,100 | 11,100 | 11,200 | |||||||||||||||
Employees(C) |
20,200 | 19,900 | 19,000 | 17,500 | 18,000 | |||||||||||||||
| (A) | Total debt includes long-term debt, current portion of long-term debt, and short-term borrowings as of the end of the year. | |
| (B) | Capital expenditures include additions to plant and equipment, investment in and advances to unconsolidated affiliates, acquisitions (including long-term debt assumed in acquisitions) and capital lease additions. | |
| (C) | Includes full- and part-time employees. |
72
Exhibit 14
Our
Commitment
to Integrity:
Code of Conduct
for
Air Products
and
Its Companies
Letter from CEO John Jones |
1 | |||
Overview |
2 | |||
Leadership |
3 | |||
Company Compliance |
4 | |||
How to File a Report |
||||
Certification |
||||
Fairness |
6 | |||
Fair Dealing |
||||
Protecting Those Who Protect the Company |
||||
Work Environment and Employment |
7 | |||
Diversity and Respect in the Workplace |
||||
Equal Opportunity Employment |
||||
Human Rights and Labor and Employment Laws |
||||
Environment, Health, Safety, and Security |
9 | |||
Protecting the Environment |
||||
Health and Safety at Work |
||||
Security of our Sites and Products |
||||
Company Assets and Information |
11 | |||
Appropriate Use of Company Systems and Equipment |
||||
Managing Documents |
||||
Securities and Insider Trading |
||||
Intellectual Property and Protecting Company Information |
||||
Security in our Computing Environment |
||||
Data Privacy |
||||
Employee Privacy in the Computing Environment |
||||
Conflicting Personal Interests |
14 | |||
What Might Constitute a Conflict of Interest |
||||
Giving or Receiving Gifts During the Course of Business |
||||
Interacting with the Public |
16 | |||
Community Involvement |
||||
Political Involvement, Lobbying, and Contributions |
||||
Communicating with the Public |
||||
Interacting within Our Industry |
18 | |||
Antitrust and Competition Laws |
||||
Competitor Relationships |
||||
Appropriate Ways to Obtain Competitive Information |
||||
Financial Accounting and Reporting Accuracy |
20 | |||
International Trade Laws |
22 | |||
Antiboycott Laws |
||||
Import/Export Laws |
Foreign Corrupt Practices Act |
||||
Healthcare |
24 | |||
Board Responsibility and Waivers |
25 | |||
Country Numbers and Web Address for Reporting |
26 |
a comprehensive guide to
Air Products’ expectations
for integrity on the job
and in the workplace
Air Products’ expectations
for integrity on the job
and in the workplace
in.teg.rity
(in • t_ gre•te) noun
It’s behaving ethically
and being true to our
words.
and being true to our
words.
Letter from CEO John Jones
Dear fellow employee:
Honesty and integrity are crucial to successful relationships. That wisdom applies not only to our
personal relationships but to those we value as part of doing business. Your integrity is yours to
hold or give away.
As a global company, we must follow the law in the countries where we operate. As employees, we
must also follow Air Products’ policies. But behaving with integrity is more than that—it’s a
principle we must hold close in spirit and in action. It encompasses everything from valuing our
employees to protecting the environment to accurate financial reporting. It’s a commitment that our
collective workforce must make.
Most people know what the right course of action is in a given situation. However, there are times
in life when understanding what’s ethical isn’t as straightforward. At work, it’s the Company’s
responsibility to provide employees with guidelines to follow. That’s why we’ve recently expanded
and clarified our Code of Conduct.
Please take time to thoroughly read this Code of Conduct and consider how the information applies
to you, your professional responsibilities, and the people and processes with which you interact.
As an employee, it is your responsibility to know the Code of Conduct expectations.
Behaving with honesty is sometimes an act of courage. But it’s a priceless reward to safeguard our
reputation. We encourage you to report Code of Conduct violations. Please know that no employee
will suffer reprisals or retaliation for reporting. That’s our promise.
You and I and all of our colleagues must personally commit to honesty as we do our work each day.
Integrity is one of our guiding values in Deliver the Difference and one of three unique
characteristics of our brand. It is Air Products. That’s why I have no doubt that Air Products
employees will continue to uphold our outstanding reputation for behaving ethically and being true
to our word.
1
Overview
It’s imperative that the Company maintain the highest standards of ethics in all the business
we do. That means following the laws as well as Air Products’ policies, standards, and procedures
in the countries where we operate. It also means being fair and honest—doing the “right” thing. But
what’s “right” isn’t always completely straightforward.
This Code of Conduct describes moral and ethical behavior that is expected of all employees.
Company policies, standards, and procedures provide more detail about how employees should conduct
themselves as members of the Air Products workforce. You should review the Code and policies that
relate to your position and think about how they apply to you.
If you encounter a situation where what’s “right” isn’t clear, there are resources, described here,
for you to get more information, express concerns, and report suspected Code violations. As an
employee, you’re not only responsible to behave ethically yourself; you’re also obligated to report
violations you become aware of. Air Products promises to enforce a non-retaliation policy for
employees who, in good faith, report violations or suspected violations of the Code of Conduct.
As a company, we must maintain our honesty and integrity. Since Air Products is a multinational
company, employees will encounter many different laws, regulations, policies, and business
practices. Compliance with the laws and Air Products’ policies, standards, and procedures in all
countries in which we do business is a must. Where legal requirements appear to conflict, you
should consult with your manager or contact the Law Department or Chief Risk Officer for guidance.
Employees who don’t comply with the Code of Conduct may be subject to termination of employment
and/or referral for criminal prosecution, and legal action by the Company in some cases. Managers
and supervisors may be subject to disciplinary action and/or personal liability for failure to
discover or address violations committed by their subordinates.
If you have questions or are unsure what to do in a situation, or you need to report a Code
violation you’re aware of, talk to your supervisor or manager. If you are not satisfied with his or
her response or believe he or she is involved in the violation, you can also seek clarification or
assistance from the Law Department, Internal Audit, or the Chief Risk Officer. And if you prefer to
speak to someone outside of Air Products, you can call the IntegrityLine at 1-877-272-9726, which
is operated by a third party.
2
Leadership
It’s the responsibility of each employee to comply with the Code of Conduct. And managers and
supervisors must create and maintain a work environment that encourages and promotes openness and
honesty. Ethical leadership includes fostering a work environment that encourages employees to
voice concerns or seek assistance during compromising situations. It also means supporting those
who speak out. But the Company understands that building such an open environment is challenging.
Employees are encouraged to go to their supervisors or managers with questions, but there are also
other channels for employees to use to meet their responsibility to safeguard our reputation.
3
Company Compliance
How to File a Report
Employees who have questions, need advice, or suspect a Code violation should speak to their
immediate supervisor or manager. But if the suspicions involve the supervisor or manager, or if the
employee prefers to report the suspicions to someone else, he or she should take the matter to
another supervisor or manager, Internal Audit, the Chief Risk Officer, or the Law Department.
Employees may also sometimes be reluctant to report violations or concerns to those within Air
Products. If this is the case, you are encouraged to use another means to report your concerns. Any
employee can make a report, 24 hours a day, 7 days a week. There are several ways you can report
violations or suspected violations through a third-party company that manages this process for Air
Products. The employees of this company are trained to collect sufficient information to allow Air
Products to effectively investigate and resolve reports. You can choose to remain anonymous, but
you are encouraged to identify yourself. Withholding your name or detailed information can make it
difficult for the Company to address or reconcile issues. Here are your options:
1. Call the IntegrityLine in the United States
| • | Call the toll-free IntegrityLine at 1-877-272-9726 (English) | ||
| • | Callers from outside the United States will need to access the toll-free IntegrityLine by first dialing the proper AT&T Access Number, found here— ww.usa.att.com/traveler/index.jsp (Choose your country from the drop-down menu and click “Go” to find the right access code) | ||
| • | If you are not proficient in the English language, you can request to speak with someone fluent in your language | ||
| • | You’ll be asked some questions and can give detailed information about your concerns |
2. Call the toll-free number for the IntegrityLine for your country
| • | See the inside back cover of this booklet for a list of country numbers | ||
| • | The person/message answering the phone will speak your country’s national language(s) | ||
| • | You’ll be asked some questions and can give detailed information about your concerns | ||
| • | If no number is listed for your country on the inside back cover, please use the instructions for the U.S. number, using AT&T access codes (see number 1, above) | ||
| • | You may also visit the Air Products Web site to see if your country’s number has been added. New numbers may be added to the Web site list as appropriate in the future www.airproducts.com/CodeofConduct |
4
3. File a report online at the Web site managed by the third-party company (Spanish,
English, or Traditional Chinese)
| • | Visit the main URL, www.airproducts.com/integrityonline (the default page is in English) | ||
| • | You may also choose Spanish or Traditional Chinese from the navigation bar on the page to see all pages in Spanish or Traditional Chinese | ||
| • | You will come to another page with instructions on how to proceed to submit a report | ||
| • | Follow the steps on the screen to submit the details of your report (some fields are required information) | ||
| • | You may also visit this Web site to see if your language has been added | ||
| • | New languages may be added to the Web pages as appropriate in the future |
No matter which method you choose to file a report, you’ll receive a report number and
identifying number to use if you want to follow up. Then the third-party company will forward
the report to the appropriate people at Air Products for investigation.
Employees who, in good faith, report suspected Code of Conduct violations are protected by
the Company’s policy of non-retaliation. Any retaliation for such a report should itself
be reported.
Employees wishing to report suspected violations related to questionable accounting or
auditing matters to the Audit Committee of the Board of Directors may do so. Employees should
ask that the report be forwarded to the Audit Committee as well, or the complaint may be
mailed directly to the Audit Committee in care of the Corporate Secretary’s Office at Air
Products in Allentown, Pennsylvania.
Certification
Periodically, the Chief Risk Officer may designate certain employees who will be required to
provide a written certification that they have reviewed and understand the Code of Conduct. The
certification will confirm that, during the immediately preceding period, the employee complied
with the Code of Conduct and that he or she has no personal knowledge of any violation of it by
others.
5
Fairness
Fair Dealing
Each employee should endeavor to deal fairly with the Company’s customers, suppliers,
competitors, and employees. No one should take unfair advantage of anyone through manipulation,
concealment, abuse of privileged information, misrepresentation of material facts, or any other
unfair dealing practice.
Protecting Those Who Protect the Company
Our reputation for honesty is itself an asset. That’s why the Company has a non-retaliation
policy for employees who protect it. You should report actual or suspected Code of Conduct or
policy violations. If you feel you are the victim of retaliation because you adhered to the Code of
Conduct or reported a violation, call the IntegrityLine.
6
Work Environment and Employment
Diversity and Respect in the Workplace
Air Products is sincere in its commitment to build a working environment where openness,
trust, and respect are integral parts of our global corporate culture. Employees are expected to
treat each other with respect and to value each other’s differences and the perspective those
differences bring.
The Company considers harassment and discrimination to be unjust and damaging to our work
environment. In some countries, harassment and discrimination are illegal. Air Products adheres to
existing laws in all countries where we operate. Employees should consult all relevant regional
policies, standards, and procedures related to work environment and respect in the workplace.
Air Products will not tolerate violence or threats of violence in the workplace. Employees who
bring weapons or hazardous materials to work or who act in a manner that frightens or intimidates
other employees will be disciplined.
Equal Opportunity Employment
Air Products’ employees are the Company’s most valuable assets. The Company’s success depends
on attracting and keeping a diverse workforce of talented men and women. Every employee will be
judged on the basis of his or her qualifications and skills, without regard to personal
characteristics. The Company fully supports all principles of equal opportunity in employment and
will adhere to all such laws in the countries where we operate.
Human Rights and Labor and Employment Laws
For creativity and innovation to flourish, people need an environment where their rights are
respected and they are treated with decency and dignity. Air Products is committed to fostering
this environment. The Company follows all labor and employment laws in the countries where we
operate, including laws pertaining to child labor and employee rights such as freedom of
association, privacy, and equal opportunity employment.
Do I contribute to a
respectful environment
at Air Products?
respectful environment
at Air Products?
Ask Yourself
Does my conduct make
colleagues feel valued
and respected?
Could someone be
offended by my words or
my actions?
Does my conduct make
colleagues feel valued
and respected?
Could someone be
offended by my words or
my actions?
7
Q: A coworker hung up a joke in our break room, and I find it offensive. I don’t want to
cause trouble, but I don’t like having to look at it. Can I take the joke down?
A: You should talk to the coworker and explain your feelings. If he or she reacts
negatively to your request, you should speak with your supervisor. Jokes, graphics, verbal
comments, and other communications that embarrass or degrade people are not appropriate for the
workplace. You have every right to speak up.
Q: I’m the hiring manager for a position that involves work in a variety of countries.
Among the candidates, the one with the best qualifications is a woman, but I know that some
businessmen in some of these countries do not like dealing with businesswomen. It might affect our
business. What should I do?
A: It is against the policy of Air Products, and illegal, to exclude the best candidate
from consideration because someone might not like dealing with professional women. It is important
that we follow what we believe to be the right path in what we do, regardless of location.
8
Environment, Health, Safety, and Security
Protecting the Environment
Air Products takes our commitment to preserving the environment seriously. The Company’s
policies meet or exceed government environmental protection laws in the countries where we operate.
And we’re proud to be a Responsible Care® company. Responsible Care is a global
initiative (legally owned by the American Chemistry Council, ACC, in the U.S.) aimed at minimizing
environmental impact from the manufacture, distribution, and use of chemicals. It’s Air Products’
policy to meet Responsible Care guidelines in all instances. Employees must always follow all Air
Products Environment, Health, and Safety policies, standards, and procedures and take any related
training required by their job.
Health and Safety at Work
At Air Products, our highest priority is to make sure employees are provided with safe and
healthy working conditions. Our safety record is commendable, and we’d like to improve it even
further. Improvement takes a strong individual commitment and constant safety vigilance by every
employee. All employees are responsible for working safely and reporting unsafe conditions.
Employee violations of safety policies, standards, and procedures, at work or at customer sites,
can result in disciplinary action. Violence or threats of violence at work won’t be tolerated.
Likewise, substance abuse on the job compromises everyone’s safety and won’t be tolerated.
Security of Our Sites and Products
Protecting our employees, neighboring communities, and property is a matter we take seriously.
Because many of our sites produce chemicals and gases that could cause harm if used by people with
malicious intent, security is a priority for Air Products. The Company has taken stringent measures
to ensure the safety and security of our operations and products. Employees are required to follow
all security policies, standards, and procedures. Employees are also encouraged to alert Corporate
Security when they have security concerns of any sort.
Did I do my part to protect the
environment and ensure a
safe workplace?
environment and ensure a
safe workplace?
Ask Yourself
Did I follow all Air Products
Environment, Health, and
Safety policies, standards,
and procedures designed to
keep us safe?
Did I report any safety
concerns or unsafe conditions
that I saw?
Did I follow all Air Products
Environment, Health, and
Safety policies, standards,
and procedures designed to
keep us safe?
Did I report any safety
concerns or unsafe conditions
that I saw?
9
Q: I was approached by a potential customer who wants to buy some of our product, but he was
vague about the ultimate use. He made a profitable offer, but I know the chemical can be dangerous
if not used for legitimate purposes. Should I agree to supply him?
A: You should refuse to do business unless legitimate use, customer, and destination
information can be established, and until any required export license from the appropriate
government can be properly obtained. We must be vigilant in ensuring that potentially dangerous
chemicals don’t fall into the hands of those with malicious intent.
10
Company Assets and Information
Appropriate Use of Company Systems and Equipment
It’s the responsibility of everyone to protect the Company’s assets. Theft, carelessness, and
waste cut the Company’s profits. Employees should not only follow policy themselves but also help
protect our assets by immediately reporting any suspected fraud, theft, or improper use of Company
assets.
Company equipment, systems, goods, and services should be used only for Company business. Though
incidental personal use is permitted, using such systems or equipment for personal gain is
prohibited.
Managing Documents
Company records are important corporate assets. Prompt, accurate record keeping and filing
help our work processes interact smoothly. All employees are responsible for creating, using,
storing, preserving, and as appropriate, disposing of records according to company policies,
standards, and procedures and current laws and regulations. You should consult your supervisor for
guidance if you are uncertain how to manage documents.
Securities and Insider Trading
It is a violation of Air Products’ policy for an employee to disclose, directly or indirectly,
any confidential information he or she becomes aware of in the course of employment with the
Company. Employees may not use such information to their own advantage or to the Company’s
disadvantage. For example, an employee may not purchase stock in another company that the employee
has reason to believe Air Products may be interested in acquiring. And an employee couldn’t give
such information to another who in turn might make use of it. The policy is consistent with U.S.
laws on insider trading and also aims to prevent damage to the Company from the disclosure of
valuable information.
Insider trading—trading of company stock (including stock in a 401K plan) based on material
nonpublic information is against the law. Serious penalties apply. Material, nonpublic or inside
information means information about Air Products or another company which has not been made public
(such as knowledge about an acquisition or divestiture, management changes, new products, etc.) and
which could affect an investor’s decision to buy, sell, or hold the stock of Air Products or the
other company. Disclosure of inside information relating to the Company may result in criminal or
civil liability. “Insiders” are employees or others who have sensitive or confidential information
that hasn’t been publicly announced and might affect the price of shares.
From time to time, certain employees are told that, because of their knowledge about and/or
involvement in a certain project, they are restricted in buying or selling Air Products stock.
Certain employees, those whose position involves regular access to material information about the
Company, are subject to restrictions on buying or selling Air Products stock, other than during
certain so-called “window periods.”
11
Whether or not you are notified, if you possess material, nonpublic information about the Company,
you are prohibited from trading in Air Products stock.
Intellectual Property and Protecting Company Information
Intellectual assets include the knowledge, information and know-how that a company and its
employees possess. Written plans, product designs, current and future projects, patents,
trademarks, know-how, work processes, and more are all intellectual assets owned by the Company.
The free flow of information at Air Products is critical to our performance. But details about our
intellectual assets could be valuable to a competitor and could undermine the Company’s growth. Air
Products has a comprehensive Intellectual Asset Management program, with training available, so
that employees can not only make the most of our combined intellectual resources but can safeguard
them. Check the Air Products intranet for more information.
The Company may also hold confidential information about other companies or individuals, which we
are legally obligated to protect. If you need to make use of such confidential or proprietary
information, you must have a written agreement approved by one of the attorneys in our Law
Department. Following this step can help avoid potential legal claims or contamination of the
Company’s own research efforts, developments, and business.
Employees should protect all sensitive information about Air Products or others from unauthorized
disclosure or use. Using such information yourself, for personal gain or to the disadvantage of the
Company, is also against Air Products’ policies. Care must be taken when disposing of confidential
and proprietary information.
Security in Our Computing Environment
Sensitive Company information is stored by employees on their work computers and within Air
Products’ systems. That’s why employees must use our computing environment responsibly and follow
policies, standards, and procedures related to its security—they are designed to protect our
information and safeguard our computing environment from viruses.
Computing assets are intended to be used mainly for business purposes. However, some personal use
is allowed as long as it doesn’t affect the employee’s performance or violate any Company policies,
standards, or procedures. It’s the employee’s responsibility to familiarize him- or herself with
such policies.
Employees should not allow anyone else to use their access rights to Air Products’ systems and
should change passwords according to current rules. Unauthorized download or installation of
nonstandard software or systems is not allowed, including games, music, etc.
Data Privacy
Personal data is information that applies to people, such as employment, medical, financial,
and education and training records. It’s the responsibility of the Company and its employees to
protect this information, just as we do Company information. Air Products complies with all laws
about safeguarding personal data, which vary from country to country. Air Products’ policy also
protects the confidentiality and privacy of any personal data.
12
Employee Privacy in the Computing Environment
All of Air Products’ computing systems, including e-mail (and information contained in
e-mail), are Company property. Some e-mail uses are prohibited, including sending illegal,
defamatory, offensive, or harassing messages or files, violating copyright laws, disclosing
confidential information, sending solicitations for funds, and more.
Because the hardware and software used by employees are Company property, individual privacy is not
guaranteed when using any system, including e-mail. Employees should not consider their e-mail
private or personally confidential. The Company reserves the right, to the fullest extent available
under applicable regional law, to intercept and scan e-mail and monitor all other systems to ensure
appropriate use and compliance with policy.
Am I respecting
sensitivity and
confidentiality of
information?
sensitivity and
confidentiality of
information?
Ask Yourself
Can any of the information I
am considering disclosing be
used to harm Air Products?
Will the information affect our
competitive edge? Is it “insider
information” that might affect
stock price?
Can any of the information I
am considering disclosing be
used to harm Air Products?
Will the information affect our
competitive edge? Is it “insider
information” that might affect
stock price?
Q: I was having dinner with a supplier, and he asked how we are doing on a certain customer
bid. Is that confidential information?
A: Yes. While it’s good business to develop our relation-ship with the supplier, keep in mind that
anything you say may be passed on to the competition. You should discuss the bid only if the
supplier is involved in sup-porting our efforts and has signed a confidentiality agreement with Air
Products to allow us to disclose information to him.
Q: My son wants to use my laptop to play games on the Internet. Is this OK?
A: Limited personal use of company equipment is OK, but you should not allow anyone else to use
your computer. What’s more, downloading from the Internet or participating in chat rooms, game
forums, and similar activities exposes Air Products’ computing environment to viruses and other
possible security breaches.
Q: At a social event with friends, one of them asked me “What’s new and exciting at work?” I’m
working on a project that will soon be made public. Is it OK to talk about the new project with my
friend?
A: No. Though you are appropriately proud of the results of your efforts, you should not discuss
this until made public. Buying or selling on the basis of this kind of information could be a
violation of the law.
13
Conflicting Personal Interests
What Might Constitute a Conflict of Interest?
Employees should avoid any situation that involves, or appears to involve, a conflict between
their personal interests and the interests of the Company. That means employees should avoid
circumstances that might cloud their judgment or impartiality when doing their jobs. If your
personal interests or your relationships cause you to feel favoritism (or appear to feel
favoritism), a conflict of interests exists.
Examples of where a conflict of interest may arise:
| • | If an employee is an owner or part-owner of an Air Products customer or supplier company or a consultant, wage earner, or someone who gets other compensation from that company | |
| • | If an employee is an immediate family member of an owner or partner of a customer or supplier | |
| • | If an employee would have personal gain from arranging a relationship between Air Products and a customer, supplier, or partner | |
| • | If an employee receives personal benefits, such as loans or guarantees of obligations, from a customer, supplier, or partner | |
| • | If an employee is connected with any business that is in direct or indirect competition with Air Products | |
| • | If an employee discovers an opportunity for personal gain through his or her position or through the use of Company equipment or systems |
Investing in shares in companies traded on major public exchanges acquired in an arm’s-length
transaction as a part of a normal investment program doesn’t normally constitute a conflict.
If you have questions about whether a situation is a conflict of interest, contact the Law
Department.
Giving or Receiving Gifts During the Course of Business
It’s normal and customary for people to give and receive meals or inexpensive entertainment
during the course of business. Exchanging high-value gifts or providing or receiving excessive or
inappropriate entertainment is unethical. It can be damaging to both your personal business
reputation and that of Air Products.
In business relationships, no employee should offer or accept anything of value that might seem to
be an attempt to influence business decisions or that might look like a bribe or a payoff. Giving
or receiving cash is against Company policy, except in very specific and defined circumstances.
It’s normal to accept reasonable and appropriate meals or entertainment during business
interactions, and employees are encouraged to reciprocate with similar courtesies to maintain a
balanced relationship. But providing or receiving entertainment or gifts that are inappropriate or
in excess of that permitted by the Company’s guidelines is unethical. Likewise, employees should
avoid even inexpensive exchanges when they know they’re against the policy of the other party’s
company.
14
The Company will set limits on the amount of goodwill gifts an employee may give or accept, and
employees are expected to be knowledgeable about these limits. If you have any questions concerning
whether any gift or entertainment is excessive or inappropriate, you should ask your supervisor or
manager or the Chief Risk Officer for advice.
Because there are very technical regulations regarding dealings with government employees,
gift-giving in these relationships might be illegal. No gifts should be given to government
employees without first seeking the approval of your immediate supervisor and a representative of
the Law Department.
Does a conflict
of interest
exist?
of interest
exist?
Ask Yourself
Would I be willing to publicly
talk about this situation
without feeling embarrassment
or fearing legal proceedings?
Would I be willing to publicly
talk about this situation
without feeling embarrassment
or fearing legal proceedings?
Q: My sister is part-owner of a company bidding for a supply agreement with Air Products.
It’s my job to evaluate the incoming bids. Is this a conflict of interest?
A: Yes. Because of your close family tie, you might be perceived as biased in your bid evaluation.
You should explain the situation and ask your supervisor to assign someone else to look at and
compare the supplier proposals.
Q: I’m managing a new customer account for Air Products, and the customer has told me that his
previous supplier bought expensive theater tickets for his family every year. I’m worried he will
not renew his contract if I don’t do the same. What should I do?
A: You should politely explain that it’s against Air Products’ policy to buy expensive gifts for
customers because we base our interactions on the value provided by our services and products. You
might choose to invite him to dinner, on you, and discuss ways our team can work with him to
contribute to his business success.
Q: After solving a unique customer problem, I received a costly gold watch in the mail with a
thank-you card from the company owner. Should I keep it?
A: No. You should graciously refuse the gift. This gift exceeds reasonable courtesies.
15
Interacting with the Public
Community Involvement
Air Products has a long-standing tradition of supporting and helping the communities where we
operate and where our employees and their families live and work. The Company organizes and
sponsors community outreach and education events, and our sites work together with residents in
their areas to improve both the community and the way we do business. However, employees should
only use Company funds for such activities in accordance with existing policies. The Corporate
Relations Department can guide employees with questions in this area.
Joining in is a matter of choice. No employee should feel pressured to participate in any
Company-sponsored outreach event or to contribute to Company-organized fundraising.
Political Involvement, Lobbying, and Contributions
At Air Products, one of our core values is to responsibly care for each other, our
communities, and the global environment. Air Products encourages employees, officers, and directors
to contribute to the community and to fully participate in local, national, and international
politics. However, in doing so, Air Products and its employees must follow the laws governing
participation in political affairs, including political contributions and lobbying. In some
countries and jurisdictions, political contributions and lobbying are not permitted.
No employee may lobby or try to influence the actions of government officials regarding legislation
or other policy decisions on matters relating to Company business unless the action is approved by
Corporate Relations. It’s important to coordinate our lobbying efforts, and often those considered
to be lobbyists must register as lobbyists.
It’s also Air Products’ policy to comply with all laws governing political contributions. And, as a
matter of policy, Air Products does not make corporate political contributions to candidates in any
country or region, even where allowed by law. Employees are free to give to a party or candidate on
their own behalf, but they may not make any contribution of Company funds, property, or services to
any political party or committee, or to any candidate for or holder of any office of any
government.
This policy does not prevent, where lawful, the operation of a Political Action Committee (“PAC”).
The Air Products Political Alliance (PAC) makes contributions to U.S. federal and state candidates
who support the Company’s interests.
Communicating with the Public
It is particularly important that external communications are accurate and consistent and do
not violate Company confidentiality, applicable laws, or sensitivities. Published information can
have a significant effect on the Company’s reputation and have business and legal consequences.
External communications could include those to news media, financial analysts and investors, our
communities, our colleagues in industry, customers, and other members of outside groups.
The ease of electronic communication in today’s world means company information that
well-intentioned employees did not mean to be published can easily appear on the Web and be
16
found through Internet search. To be sure that work-related communications comply with current
policy, we require certain reviews. If you are approached by the media or wish to publish
information about your work, contact Corporate Communications for advice and review. If you are
approached by an investor or analyst, contact Investor Relations. Technical papers should include
approval from your supervisor and, in some cases, legal review. If you are asked to make an
external presentation, consult your supervisor, who may decide to review it with Corporate
Communications or the Law Department. These reviews are meant to protect you and the Company from
unintended consequences and to present Air Products consistently and professionally.
If you have contact with the media or publish information in your outside-of-work activities,
specify that you’re offering your personal opinion, not necessarily that of Air Products. Likewise,
use caution not to disclose sensitive information.
Did I behave ethically in
my public interactions?
my public interactions?
Ask Yourself
Did I follow all of Air
Products’ policies related to
community outreach, politics,
and contact with the public?
Did I follow all of Air
Products’ policies related to
community outreach, politics,
and contact with the public?
Q: An industry analyst has asked me some questions about a product. I know the answers. Can I
talk to him?
A: You should refer the call to Investor Relations. Someone from that department will handle the
analyst’s questions and call you for information if needed.
Q: Air Products is a major employer in my area. A reporter from my hometown paper has asked me to
give an interview about working at Air Products. Is this OK?
A: Before talking to the reporter, you should contact Corporate Communications. Someone will
advise you about how to proceed.
17
Interacting within Our Industry
Antitrust and Competition Laws
We expect our employees to follow the “letter and spirit” of the antitrust laws of the United
States and the competition laws of any other country or group of countries whose laws apply to our
business. That means obeying the clearly defined situations covered by the law as well as the
intent of the laws in circumstances that are more complex and ambiguous. If an employee is ever
unsure whether an action will violate the law, he or she should consult the Law Department. Air
Products prospers through the merits of our products and services in a free and open competitive
marketplace. No employee should assume that profits ever require or justify illegal actions.
Business competition is a cornerstone of a robust economy, and antitrust and competition laws
protect the freedom of the marketplace. In general, antitrust and competition laws prohibit
agreements or actions that may restrain trade or reduce competition. One of these U.S. laws, the
Sherman Act, makes certain agreements and understandings between competitors per se unlawful. That
means they are flatly prohibited and cannot be defended or justified in any way. Whether the
understanding or agreement adversely affected competition is not considered; instead it is presumed
to be illegal. For example, per se violations include agreements among competitors to: 1) fix or
control prices or terms, 2) boycott certain suppliers or customers, 3) allocate products,
territories or markets, or 4) limit the production or sale of products.
Antitrust and competition laws are complex and difficult to interpret, and they apply to a broad
range of corporate activities. Violations can carry serious civil and criminal sanctions. And even
the allegation of a violation can be damaging and disruptive to the Company. Great care and
attention is expected of employees in a position to affect the commercial actions of the Company.
Competitor Relationships
Contact with competitors can serve legitimate business purposes such as certain trade
association meetings and activities or the discussion of joint business or research ventures. And
in some cases we buy from and/or sell to our competitors, so business dealings must take place.
However, employees should use caution in their contacts with competitors because some information
should not be freely exchanged. When you have any doubt if a transaction or course of conduct is
consistent with Company policy or when considering a joint business or research venture of this
kind, you should consult our Law Department for guidance.
Appropriate Ways to Obtain Competitive Information
Market research—trying to understand and anticipate the products, plans, and strategies of
competitors—is part of good business. This information can be gathered from many legal sources, but
there are clear limits. Improper acquisition or use of confidential information of competitors can
have serious legal and business consequences. For example, in the U.S., the federal Economic
Espionage Act imposes severe criminal penalties for individuals or organizations that improperly
receive or pass along trade secrets.
18
The World Intellectual Property Organization (WIPO, a United Nations agency) administers treaties
for intellectual property protection internationally. Trade-Related Aspects of Intellectual
Property Rights (TRIPS) are also protected by certain agreements of the World Trade Organization
(WTO) and international intellectual property law such as the Paris Convention for the Protection
of Industrial Property and the Berne Convention.
Did I behave ethically while
interacting with industry
peers?
interacting with industry
peers?
Ask Yourself
Did I disclose information
that should be considered a
trade secret?
Did I obtain information by
legal, legitimate means?
Did I propose agreements or
partnerships that would stifle
free market competition?
Did I disclose information
that should be considered a
trade secret?
Did I obtain information by
legal, legitimate means?
Did I propose agreements or
partnerships that would stifle
free market competition?
Q: At a trade association meeting, a representative of one of our competitors approached me
with an idea to jointly build a production facility in a certain region where both companies need
more product. It would be in everyone’s financial interests. Should I talk further with him about
this?
A: This isn’t a decision you can make alone. Whether this joint production effort would be legal
is a question that requires careful thought. You should contact our Law Department to review it
with you.
Q: While talking to a competitor, he suggested that, in a certain region, we are probably both
suffering with unnecessarily low margins. He said that we could make life simpler for ourselves by
agreeing which of us will get the business of each of the major customers in that region. How
should I respond?
A: While he may be right that short-term support to prices might result from that arrangement, it
would be wrong and illegal, and the legal consequences might turn out to be enormous. You should
make your refusal to consider this very clear. You do not want anyone to be in a position to
suggest that you agreed by your actions, even though you did not say “yes.” This should be reported
to the IntegrityLine or our Law Department.
19
Financial Accounting and Reporting Accuracy
Honest financial reporting is basic to our reputation for integrity. Since Air Products is a
U.S. company, its financial accounting and reporting rules are governed by U.S. law. U.S. law as
well as Air Products’ policy require honest and accurate financial reporting.
Honest reporting means a full, fair, accurate, timely, and understandable disclosure in all
documents. Air Products files complete financial reports with the U.S. Securities and Exchange
Commission (“SEC”) and issues financial summaries in other public statements and communications. It
is essential that these statements be accurate and honest to allow us to comply with the law and
public expectations.
But accurate reporting also helps us make good decisions for our businesses and operations. So our
continued business success demands it too.
This means we should carefully and accurately prepare all business records (accounts, vouchers,
invoices, bills, travel and entertainment expense re-ports, payrolls, service records, reports,
books, etc.). Business records should be compiled in accordance with Air Products’ policies and
local regulations and accounting rules. Local accounting records are later converted to U.S. GAAP
(Generally Accepted Accounting Principles) for consolidated U.S. external reporting.
Here are some other requirements:
| • | Substantiate our ledger entries with detailed documentation | |
| • | Make no false or intentionally misleading entries, including numbers, categories, timing, or other details | |
| • | Keep corporate funds and accounts according to our standard practices | |
| • | Use accounts and funds only for a purpose that is fully and accurately described in the documentation |
Did I maintain
our financial
integrity?
our financial
integrity?
Ask Yourself
Did I follow all legal
requirements as well as
Air Products’ policies
related to financial
reporting?
Did I follow all legal
requirements as well as
Air Products’ policies
related to financial
reporting?
Q: My boss asked me to play with some numbers so that our results for this quarter would look
better, and then fix it next quarter. She implied that my job would be at risk if I don’t do it. I
don’t feel right about it, but I’m scared. What should I do?
A: Do the right thing—accurate and timely reporting is the law. Implied threats to your employment
or attempts to intimidate employees into unethical behavior won’t be tolerated for any reason. You
should report the conversation to your manager’s
20
supervisor promptly or call the IntegrityLine.
Q: I just started in a new position at Air Products, and I’ve learned that some expenses are
recorded in the wrong category even though the amount is correct. If the numbers come out the same,
does it matter?
A: It could be both a violation of Air Products’ policy and possibly the law. Accuracy in
accounting for both use and amount is required, and any misrepresentation is an ethical violation.
You should call your organization’s finance support person to have the details reviewed.
21
International Trade Laws
Antiboycott Laws
Some foreign governments boycott or refuse to deal with the governments of other countries or
businesses in those other countries. These governments try to strengthen their boycott by making
outside customers and suppliers also refuse to deal with the target country (or its companies) as a
condition of doing business in their country. The United States has laws and regulations generally
prohibiting U.S. companies and their foreign and domestic subsidiaries from cooperating with
boycotts that the U.S. government does not support. These laws also require companies to report to
U.S. governmental agencies when they receive written or oral requests to comply with or support
such boycotts. Violations may result in criminal and civil penalties and the loss of tax benefits.
It is the policy of the Company to comply in all respects with the U.S. antiboycott laws and
regulations.
Import/Export Laws
Global importing and exporting laws require accurate classification, valuation, license
determination, end-user/end-use screening, record keeping, timely filing, and marking of
commodities and technologies crossing international borders. The United States and other
governments may restrict, through required licensing, the exportation, importation, or
reexportation of commodities based on factors such as origin, classification, or the dual-use
nature of many of our commodities and technologies, as well as the identity of the customer.
Exports and reexports to countries designated “embargoed” under U.S. law or the jurisdiction of the
exporting country are prohibited. Violations may result in criminal and civil penalties and loss of
exporting or importing privileges. It is the policy of the Company to comply with these laws.
Foreign Corrupt Practices Act
It’s Air Products’ policy to comply with the U.S. Foreign Corrupt Practices Act. That Act
prohibits payments and offers of payments of anything of value to foreign officials, political
parties, or candidates for foreign political office to get, keep, or direct business. And claiming
not to know of the wrongdoing will not serve as a defense where circumstances should reason-ably
have alerted you to it. Payments made indirectly through intermediaries, such as sales agents and
consultants, when most people would understand that such payments are being passed along for
prohibited purposes, are also illegal.
In addition to certain prohibited actions, the law also requires internal accounting control and
record keeping by the Company in connection with any payments by its foreign subsidiaries.
The issues presented by this law are more complex than they may at first appear. For example,
although you might not consider the term “foreign official” to include employees of businesses
owned by a foreign government, the law would generally consider them to be “foreign officials.” To
complicate things further, certain exceptions exist in the law. For these reasons and others, the
assistance of legal counsel experienced in this area is essential for working through the
complexities of the issues encountered in connection with complying with this law.
22
Some have complained that, by enacting this law, the U.S. government has unfairly handicapped
U.S.-based companies in competing globally. However, many countries, including many of the major
industrialized countries in Western Europe, have or are enacting similar laws. Before doing
business outside of their home countries, employees need to have a working knowledge of the laws
and policies of the countries in which they will be doing business. If you have questions about any
International Trade Law matter, please contact the Law Department.
Did I follow
international trade
laws?
international trade
laws?
Ask Yourself
Did I follow the law while
importing or exporting?
Did I offer inappropriate gifts
which might be considered
bribes or payoffs to facilitate
business?
Did I follow the law while
importing or exporting?
Did I offer inappropriate gifts
which might be considered
bribes or payoffs to facilitate
business?
Q: I just won a supply bid for Air Products, but the draft contract contains a provision
requiring that we agree not to use components or persons from a certain country in performing the
contract. We don’t need to use anything from that country, but is signing it against U.S.
antiboycott law?
A: The Law Department needs to review this contract (and any contract). In this case, the boycott
language contained in all documentation must be removed or appropriately amended. These
details cannot be replaced with a verbal agreement either, so use caution when speaking to the
customer.
Q: I’ve been trying to sell our long-term services to a government-owned business in an emerging
nation. But the key decision maker told our local sales agent he needs a sign of our support in the
form of a large sum of cash. The sales agent says that he would probably be more successful if we
help by raising his commission for this project. What should I do now?
A: You should say no, and review the events with the Law Department. While paying for the services
of a sales agent is often appropriate, these circumstances should lead you to worry that the sales
agent intended to pass all or a part of the increased commission on to the decision maker. It would
be inappropriate and illegal for us to participate in such an arrangement if our suspicions were
correct.
23
Healthcare
The Company provides healthcare equipment and services operating in many different regulatory
environments in many countries around the world. Wherever you operate, all of the Company’s
employees involved in our Healthcare businesses should not directly or indirectly engage in the
following conduct:
| • | Offering, making, soliciting, or receiving payments or anything of value in exchange for making or recommending the referral of patients, the purchase or lease of any service or items, or the award of any contract | |
| • | Submitting or causing the submission of false, fraudulent, or misleading claims, including claims for service not rendered, claims which characterize the service differently than the service actually rendered, or falsification of medical necessity documentation or prescriptions | |
| • | Making false representations to any person or entity in order to gain or retain participation in a program, contract, or right to supply services or equipment or obtain payment from a payer |
Employees also have an obligation to actively protect and safeguard the confidentiality of patient
information, including sensitive medical, demo-graphic, and financial information (such as payment
and reimbursement information) in accordance with applicable laws or regulations.
24
Board Responsibility and Waivers
The Board of Directors has adopted the Code of Conduct, and only the Board may approve
amendments to the Code. In rare circumstances, the Chief Compliance Officer may determine it is
appropriate to waive a portion of the Code of Conduct. Any waiver of the application of the Code
that would apply to Executive Officers (any officer as defined for purposes of Section 16 of the
Securities Exchange Act of 1934) of the Company, however, can be made only by the Corporate
Governance and Nominating Committee of the Board of Directors. All such waivers shall be promptly
disclosed to the shareholders of the Company.
25
Country Toll-free Numbers for Reporting Code of Conduct Violations
Belgium |
0800-71658 | |||
Brazil |
0800-891-4169 | |||
China |
10-800-711-0635-North | |||
| 10-800-110-0581-South | ||||
Czech Republic |
800-142-716 | |||
France |
0800-90-0198 | |||
Germany |
0800-180-0837 | |||
Indonesia |
001-803-1-008-3251 | |||
Italy |
800-788319 | |||
Japan |
00531-11-4454 | |||
| 0044-22-11-2562 0034-800-900066 | ||||
Korea |
00798-1-1-005-6156 | |||
Malaysia |
1-800-81-2303 | |||
Netherlands/Holland |
0800-022-0720 | |||
Poland |
00-800-111-1582 | |||
Portugal |
800-8-11604 | |||
Spain |
###-##-#### | |||
Taiwan |
00801-10-4062 | |||
United Kingdom |
0808-234-6711 | |||
United States |
877-272-9726 | |||
*Other |
||||
Web (Online) Address for Reporting Code of Conduct Violations (Type this URL into your browser to
access the Web site. English, Spanish, and Traditional Chinese are currently available. Other
languages may be added as appropriate in the future.)
wwvv.airproducts.com/integrityonline
*You may also visit the Air Products Web site to see if your country’s number has been added. New
numbers will be added to the Web site list as appropriate in the future. Other current contact
information pertaining to the Code of Conduct will also be available at this site: wwwairproducts.com/CodeofConduct
26
Exhibit 21
Subsidiaries of Air Products and Chemicals, Inc.
The following is a list of the Company’s subsidiaries, all of which are wholly owned as of 30
September 2004, except for certain subsidiaries of the Registrant which do not in the aggregate
constitute a significant subsidiary as that term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934.
UNITED STATES
All companies are incorporated in the State of Delaware unless otherwise indicated.
Registrant — Air Products and Chemicals, Inc.
Air Products HyCal Company, L.P. (California)
Air Products Seating and Mobility, Inc.
Air Products Didcot LLC
Air Products (Middle East), Inc.
Air Products (Rozenburg), Inc.
Air Products Asia, Inc.
Air Products Caribbean Holdings, Inc.
Air Products China, Inc.
Air Products Electronics, LLC
Air Products Energy Holdings, Inc.
Air Products Europe, Inc.
Air Products Helium, Inc.
Air Products Hydrogen Company, Inc.
Air Products International Corporation
Air Products L.P.
Air Products LLC
Air Products Manufacturing Corporation
Air Products Polymers Holdings, L.P.
Air Products Polymers L.P.
Air Products Powders, Inc.
Air Products Trinidad Services, Inc.
Air Products Healthcare Southeast, Inc.
American Homecare Supply IV Georgia, Inc. (Georgia)
American Homecare Supply Mid-Atlantic, LLC
American Homecare Supply New York, LLC
American Homecare Supply West Virginia, Inc.
American Homecare Supply, LLC
AmHealth Group, Inc.
APCI (U.K.), Inc.
C.O.P.D. Services, Inc. (New Jersey)
Collins I.V. Care, Inc. (Connecticut)
Denmark’s, Inc. (Massachusetts)
Ducolake, Inc. (Indiana)
DependiCare Home Health, Inc. (Illinois)
Electron Transfer Technologies, Inc. (New Jersey)
Genox Homecare, Inc. (Connecticut)
i.e. Med Systems, Inc. (Pennsylvania)
Laurel Mountain Medical Supply, Inc. (Pennsylvania)
Lakeway Medical Rentals, Inc. (Tennessee)
Middletown Oxygen Company, Inc.
Mosso’s Medical Supply Company, Inc. (Pennsylvania)
Nightingale Medical of Indiana, LLC (Indiana)
Prodair Corporation
Pure Air Holdings Corp.
Pure Air on the Lake (I), Inc.
Pure Air on the Lake (IV), Inc.
SCWC Corp.
Stockton CoGen (I), Inc.
Ultra Care, Inc. (Illinois)
Air Products HyCal Company, L.P. (California)
Air Products Seating and Mobility, Inc.
Air Products Didcot LLC
Air Products (Middle East), Inc.
Air Products (Rozenburg), Inc.
Air Products Asia, Inc.
Air Products Caribbean Holdings, Inc.
Air Products China, Inc.
Air Products Electronics, LLC
Air Products Energy Holdings, Inc.
Air Products Europe, Inc.
Air Products Helium, Inc.
Air Products Hydrogen Company, Inc.
Air Products International Corporation
Air Products L.P.
Air Products LLC
Air Products Manufacturing Corporation
Air Products Polymers Holdings, L.P.
Air Products Polymers L.P.
Air Products Powders, Inc.
Air Products Trinidad Services, Inc.
Air Products Healthcare Southeast, Inc.
American Homecare Supply IV Georgia, Inc. (Georgia)
American Homecare Supply Mid-Atlantic, LLC
American Homecare Supply New York, LLC
American Homecare Supply West Virginia, Inc.
American Homecare Supply, LLC
AmHealth Group, Inc.
APCI (U.K.), Inc.
C.O.P.D. Services, Inc. (New Jersey)
Collins I.V. Care, Inc. (Connecticut)
Denmark’s, Inc. (Massachusetts)
Ducolake, Inc. (Indiana)
DependiCare Home Health, Inc. (Illinois)
Electron Transfer Technologies, Inc. (New Jersey)
Genox Homecare, Inc. (Connecticut)
i.e. Med Systems, Inc. (Pennsylvania)
Laurel Mountain Medical Supply, Inc. (Pennsylvania)
Lakeway Medical Rentals, Inc. (Tennessee)
Middletown Oxygen Company, Inc.
Mosso’s Medical Supply Company, Inc. (Pennsylvania)
Nightingale Medical of Indiana, LLC (Indiana)
Prodair Corporation
Pure Air Holdings Corp.
Pure Air on the Lake (I), Inc.
Pure Air on the Lake (IV), Inc.
SCWC Corp.
Stockton CoGen (I), Inc.
Ultra Care, Inc. (Illinois)
ARGENTINA
Terapias Medicas Domiciliarias, S.A.
AUSTRIA
Air Products Gesellschaft mbH
BELGIUM
Air Products S.A.
Air Products Management S.A.
Medigaz, S.A.
Air Products Management S.A.
Medigaz, S.A.
BERMUDA
Asia Industrial Gas Company Ltd.
BRAZIL
Air Products Brasil Ltda. (The organization of this affiliate more closely resembles a partnership
with limited liability than a corporation.)
CANADA
Air Products Canada Limited
CHINA
Air Products and Chemicals (China) Investment Co. Ltd.
Air Products and Chemicals (Fujian) Co., Ltd.
Air Products and Chemicals (Nanjing) Co., Ltd.
Air Products and Chemicals (Ningbo) Co., Ltd.
Air Products and Chemicals (Shanghai) Co. Ltd.
Air Products and Chemicals (Tangshan) Co., Ltd.
Air Products and Chemicals (Zibo) Co., Ltd.
Air Products (Nanjing) Co., Ltd.
Air Products and Chemicals Shanfeng (Changzhou) Co., Ltd.
Air Products (Shanghai) Co., Ltd.
Air Products and Chemicals (Shanghai) Systems Co. Ltd.
Air Products and Chemicals (Tongxiang) Co., Ltd.
Air Products and Chemicals (Zhangjiagang) Co., Ltd.
Beijing AP BAIF Gas Industry Co., Ltd.
Chun Wang Industrial Gases (H.K.) Limited
Chun Wang Industrial Gases (Shenzhen) Ltd.
Eastern Air Products (Shanghai) Co. Ltd.
High-Tech Gases (Beijing) Co., Ltd.
Northern Air Products (Tianjin) Co., Ltd.
Permea China, Ltd.
Southern Air Products (Guangzhou) Ltd.
Southern Air Products (Zhuhai) Ltd.
Air Products and Chemicals (Fujian) Co., Ltd.
Air Products and Chemicals (Nanjing) Co., Ltd.
Air Products and Chemicals (Ningbo) Co., Ltd.
Air Products and Chemicals (Shanghai) Co. Ltd.
Air Products and Chemicals (Tangshan) Co., Ltd.
Air Products and Chemicals (Zibo) Co., Ltd.
Air Products (Nanjing) Co., Ltd.
Air Products and Chemicals Shanfeng (Changzhou) Co., Ltd.
Air Products (Shanghai) Co., Ltd.
Air Products and Chemicals (Shanghai) Systems Co. Ltd.
Air Products and Chemicals (Tongxiang) Co., Ltd.
Air Products and Chemicals (Zhangjiagang) Co., Ltd.
Beijing AP BAIF Gas Industry Co., Ltd.
Chun Wang Industrial Gases (H.K.) Limited
Chun Wang Industrial Gases (Shenzhen) Ltd.
Eastern Air Products (Shanghai) Co. Ltd.
High-Tech Gases (Beijing) Co., Ltd.
Northern Air Products (Tianjin) Co., Ltd.
Permea China, Ltd.
Southern Air Products (Guangzhou) Ltd.
Southern Air Products (Zhuhai) Ltd.
CZECH REPUBLIC
Air Products spol s.r.o.
FRANCE
Air Prod 99 S.A.S.
Air Products Medical S.a.r.l.
Air Products SAS
Prodair et Cie S.C.S.
Prodair S.A.S.
Henno Oxygene S.A.S.
Hold’Air SAS
Soprogaz SNC
Domisante SAS
Air Products Medical S.a.r.l.
Air Products SAS
Prodair et Cie S.C.S.
Prodair S.A.S.
Henno Oxygene S.A.S.
Hold’Air SAS
Soprogaz SNC
Domisante SAS
2
GERMANY
Air Products GmbH
Air Products Medical GmbH
Air Products Polymers GmbH & Co KG
Air Products Polymers Verwaltungs GmbH
Air Products Powders GmbH
Air Products Medical GmbH
Air Products Polymers GmbH & Co KG
Air Products Polymers Verwaltungs GmbH
Air Products Powders GmbH
INDONESIA
PT Air Products Indonesia
IRELAND
Air Products Ireland Limited
Air Products Medical Ireland Limited
Air Products Medical Ireland Limited
ITALY
Air Products Italia S.r.l.
APP Holding S.R.L.
APP Holding S.R.L.
JAPAN
Air Products Japan, Inc.
KOREA
Air Products Korea Inc.
Air Products ACT Korea Limited
Air Products and Chemicals Korea Ltd.
Han Mi Specialty Gases Co., Ltd.
Hanyang Technology Co., Ltd.
Korea Industrial Gases, Limited
Korea Specialty Gases Ltd.
Air Products ACT Korea Limited
Air Products and Chemicals Korea Ltd.
Han Mi Specialty Gases Co., Ltd.
Hanyang Technology Co., Ltd.
Korea Industrial Gases, Limited
Korea Specialty Gases Ltd.
MALAYSIA
Air Products STB Sdn Bhd
Sitt Tatt Industries Sdn Bhd
Sitt Tatt Industries Sdn Bhd
MEXICO
Air Products and Chemicals de Mexico, S.A. de C.V.
THE NETHERLANDS
Air Products Amsterdam B.V.
Air Products Chemicals Europe B.V.
Air Products Holdings B.V.
Air Products Investments B.V.
Air Products Leasing B.V.
Air Products Nederland B.V.
Air Products Utilities B.V.
Air Products Polymers B.V.
Air Products Chemicals Europe B.V.
Air Products Holdings B.V.
Air Products Investments B.V.
Air Products Leasing B.V.
Air Products Nederland B.V.
Air Products Utilities B.V.
Air Products Polymers B.V.
NORWAY
Air Products A/S
PERU
Air Products Peru S.A.C.
3
POLAND
Air Products Gazy Sp. z o.o.
Air Products Polska Sp. z o.o.
Air Products Polska Sp. z o.o.
RUSSIA
Air Products O.O.O.
SINGAPORE
Sanwa Chemical (Singapore) Pte. Ltd.
Air Products Singapore Pte. Ltd.
Air Products Singapore Pte. Ltd.
SLOVAKIA
Air Products Slovakia s.r.o.
SPAIN
Air Products Iberica, S.L.
Air Products Investments Espana, S.L.
Air Products Ventas y Servicios, S.A.
Andaluza de Gases, S.A.
Carb-IQA de Tarragona, S.L.
Distribuidora de Gases Iruna, S.L.
Fir-Salus, s.a.
Gases Industriais, S.A.R.L.
Gases Medicinales e Industriales, S.A.
Iberica del Carbonico, S.A.
Matgas 2000 A.I.E.
Oxigeno y Carbogenos, S.A.
Oxigenol, S.A.
Oximeca, S.A.
Altanova Residencial, S.L.
Sociedad Espanola de Carburos Metalicos S.A.
Air Products Investments Espana, S.L.
Air Products Ventas y Servicios, S.A.
Andaluza de Gases, S.A.
Carb-IQA de Tarragona, S.L.
Distribuidora de Gases Iruna, S.L.
Fir-Salus, s.a.
Gases Industriais, S.A.R.L.
Gases Medicinales e Industriales, S.A.
Iberica del Carbonico, S.A.
Matgas 2000 A.I.E.
Oxigeno y Carbogenos, S.A.
Oxigenol, S.A.
Oximeca, S.A.
Altanova Residencial, S.L.
Sociedad Espanola de Carburos Metalicos S.A.
SWITZERLAND
Air Products Switzerland Sàrl
TAIWAN
Airpro Gases Co., Ltd.
Air Products San Fu Co., Ltd.
Air Products Electronics Taiwan Limited
Air Products Taiwan Co., Ltd.
Air Products Taiwan Holdings, LLC
Air Products San Fu Co., Ltd.
Air Products Electronics Taiwan Limited
Air Products Taiwan Co., Ltd.
Air Products Taiwan Holdings, LLC
TRINIDAD AND TOBAGO
Air Products Unlimited
UNITED ARAB EMIRATES
Air Products Middle East FZE
4
UNITED KINGDOM
Air Products (BR) Limited
Air Products (Chemicals) Public Limited Company
Air Products Cryogenic Services Limited
Air Products (GB) Limited
Air Products Group Limited
Air Products PLC
Air Products (UK) Limited
Air Products Yanbu Limited
Anchor Chemical (UK) Limited
Cryomed Limited
Cryosurgery Clinic Limited
On-Site Engineering Services Limited
Oxygen Therapy Company Limited
Prodair Services Limited
Rimer-Alco International Limited
Air Products (Chemicals) Teesside Limited
Air Products (Chemicals) Public Limited Company
Air Products Cryogenic Services Limited
Air Products (GB) Limited
Air Products Group Limited
Air Products PLC
Air Products (UK) Limited
Air Products Yanbu Limited
Anchor Chemical (UK) Limited
Cryomed Limited
Cryosurgery Clinic Limited
On-Site Engineering Services Limited
Oxygen Therapy Company Limited
Prodair Services Limited
Rimer-Alco International Limited
Air Products (Chemicals) Teesside Limited
5
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
We consent to the incorporation by reference in the Registration Statements (File Nos.
333-121262, 333-123477, 333-21145, 333-45239, 333-71405, 333-18955, 333-73105, 333-54224,
333-81358, 333-56292, 333-60147, 333-95317, 333-31578, 333-100210, 333-103809, 333-113882,
333-113881, and 333-111793) on Form S-8 and in the Registration Statements (File Nos. 333-33851 and
333-111792) on Form S-3 of Air Products and Chemicals, Inc. and subsidiaries of our reports dated
22 November 2005, with respect to the consolidated balance sheets of Air Products and Chemicals,
Inc. as of 30 September 2005 and 2004, and the related consolidated statements of income, cash
flows, and shareholders’ equity for each of the years in the three-year period then ended, the
related financial statement schedule, and management’s assessment of the effectiveness of internal
control over financial reporting as of 30 September 2005 and the
effectiveness of internal control over financial reporting as of 30
September 2005, which reports appear in the 30 September
2005 Annual Report on Form 10-K of Air Products and Chemicals, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
22 November 2005
22 November 2005
Exhibit 24
POWER OF ATTORNEY
Know All Men By These Presents, that each person
whose signature appears below constitutes and appoints John P. Jones III or Paul E.
Huck or W. Douglas Brown, acting severally, his/her true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him/her and in his/her name,
place and stead, in any and all capacities, to sign the Form 10-K Annual Report for the fiscal year
ended 30 September 2005 and all amendments thereto and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully to all intents and
purposes as he/she might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Power of
Attorney has been signed below by the following persons in the capacities and on the dates
indicated.
| Signature | Title | Date | ||||||
/s/ Mario L. Baeza
|
Director | 17 November 2005 | ||||||
Mario L. Baeza |
||||||||
/s/ Michael J. Donahue
|
Director | 17 November 2005 | ||||||
Michael J. Donahue |
||||||||
/s/ William L. Davis
|
Director | 17 November 2005 | ||||||
William L. Davis |
||||||||
/s/ Ursula O. Fairbairn
|
Director | 17 November 2005 | ||||||
Ursula O. Fairbairn |
||||||||
/s/ W. Douglas Ford
|
Director | 17 November 2005 | ||||||
W. Douglas Ford |
||||||||
/s/ Edward E. Hagenlocker
|
Director | 17 November 2005 | ||||||
Edward E. Hagenlocker |
||||||||
/s/ James F. Hardymon
|
Director | 17 November 2005 | ||||||
James F. Hardymon |
| Signature | Title | Date | ||||||
/s/ John P. Jones III
|
Director | 17 November 2005 | ||||||
John P. Jones III |
||||||||
/s/ Margaret G. McGlynn
|
Director | 17 November 2005 | ||||||
Margaret G. McGlynn |
||||||||
/s/ Terrence Murray
|
Director | 17 November 2005 | ||||||
Terrence Murray |
||||||||
/s/ Charles H. Noski
|
Director | 17 November 2005 | ||||||
Charles H. Noski |
||||||||
/s/ Lawrence S. Smith
|
Director | 17 November 2005 | ||||||
Lawrence S. Smith |
||||||||
| Director | 17 November 2005 | |||||||
Lawrason D. Thomas |
||||||||
2
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION
I, John P. Jones III, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K 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 registrant’s 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 registrant’s 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 registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s |
Exhibit
31.1
| auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial
reporting.
Date: 22 November 2005
| /s/ John P. Jones III | ||||
| John P. Jones III | ||||
| Chairman, President, and Chief Executive Officer |
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION
I, Paul E. Huck, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K 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 registrant’s 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 registrant’s 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 registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial
reporting.
Date: 22 November 2005
| /s/ Paul E. Huck | ||||
| Paul E. Huck | ||||
| Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Air Products and Chemicals, Inc. (the
“Company”) for the year ending September 30, 2005, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), we, John P. Jones III, Chairman, President, and Chief
Executive Officer of the Company, and Paul E. Huck, Vice President and 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: 22 November 2005
|
/s/ John P. Jones III | |||
| John P. Jones III | ||||
| Chairman, President and | ||||
| Chief Executive Officer | ||||
| /s/ Paul E. Huck | ||||
| Paul E. Huck | ||||
| Vice President and | ||||
| Chief Financial Officer |