WASHINGTON, D.C. 20549

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended 30 June 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

AIR PRODUCTS AND CHEMICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		23-1274455
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
7201 Hamilton Boulevard, Allentown, Pennsylvania		18195-1501
(Address of Principal Executive Offices)		(Zip Code)

610-481-4911
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ   Accelerated filer o   Non-accelerated filer 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 

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at 20 July 2007
Common Stock, $1 par value		216,098,027

 

 

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX

		Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets — 30 June 2007 and 30 September 2006			3
Consolidated Income Statements — Three and Nine Months Ended 30 June 2007 and 2006			4
Consolidated Comprehensive Income Statements — Three and Nine Months Ended 30 June 2007 and 2006			5
Consolidated Statements of Cash Flows — Nine Months Ended 30 June 2007 and 2006			6
Summary by Business Segments — Three and Nine Months Ended 30 June 2007 and 2006			8
Summary by Geographic Regions — Three and Nine Months Ended 30 June 2007 and 2006			9
Notes to Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			37
Item 6. Exhibits			37
Signatures			39
Exhibit Index			40
EX-12: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATIONS

BASIS OF PRESENTATION:

The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (the “Company” or “registrant”) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the Notes to the consolidated financial statements. However, the interim results for the periods indicated herein do not reflect certain adjustments, such as the valuation of inventories on the LIFO cost basis, which can only be finally determined on an annual basis. The consolidated financial statements included herein should be read in conjunction with the financial statements and Notes thereto included in the Company’s latest annual report on Form 10-K in order to fully understand the basis of presentation.

Results of operations for interim periods are not necessarily indicative of the results of operations for a full year. Reference the 2007 Outlook included on page 32 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Risk factors that could impact results are discussed in the Company’s latest annual report on Form 10-K and under Forward-Looking Statements on page 36.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Millions of dollars, except for share data)
		30 June 2007				30 September 2006
ASSETS
CURRENT ASSETS
Cash and cash items		$	31.7			$	35.2
Trade receivables, less allowances for doubtful accounts			1,735.2				1,564.7
Inventories			541.1				509.5
Contracts in progress, less progress billings			218.6				191.6
Prepaid expenses			139.4				55.1
Other receivables and current assets			348.9				256.5
TOTAL CURRENT ASSETS			3,014.9				2,612.6
INVESTMENT IN NET ASSETS OF AND ADVANCES TO EQUITY AFFILIATES			817.9				728.3
PLANT AND EQUIPMENT, at cost			14,711.6				13,590.3
Less accumulated depreciation			8,085.2				7,428.3
PLANT AND EQUIPMENT, net			6,626.4				6,162.0
GOODWILL			1,158.3				989.1
INTANGIBLE ASSETS, net			266.1				113.0
OTHER NONCURRENT ASSETS			685.2				575.7
TOTAL ASSETS		$	12,568.8			$	11,180.7
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Payables and accrued liabilities		$	1,535.7			$	1,655.1
Accrued income taxes			158.2				98.7
Short-term borrowings			810.8				417.5
Current portion of long-term debt			218.8				152.1
TOTAL CURRENT LIABILITIES			2,723.5				2,323.4
LONG-TERM DEBT			2,749.3				2,280.2
DEFERRED INCOME & OTHER NONCURRENT LIABILITIES			697.4				642.0
DEFERRED INCOME TAXES			766.3				833.1
TOTAL LIABILITIES			6,936.5				6,078.7
MINORITY INTEREST IN SUBSIDIARY COMPANIES			176.0				178.0
COMMITMENTS AND CONTINGENCIES — See Note 12
SHAREHOLDERS’ EQUITY
Common stock (par value $1 per share; 2007 and 2006 — 249,455,584 shares)			249.4				249.4
Capital in excess of par value			733.6				682.5
Retained earnings			6,247.6				5,743.5
Accumulated other comprehensive income (loss)			(62.4	)			(221.7	)
Treasury stock, at cost (2007 — 33,382,257 shares; 2006 — 32,205,012 shares)			(1,711.9	)			(1,529.7	)
TOTAL SHAREHOLDERS’ EQUITY			5,456.3				4,924.0
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	12,568.8			$	11,180.7

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS
(Unaudited)

(Millions of dollars, except for share data)
		Three Months Ended								Nine Months Ended
		30 June								30 June
		2007				2006				2007				2006
SALES		$	2,595.0			$	2,245.7			$	7,500.8			$	6,491.0
COSTS AND EXPENSES
Cost of sales			1,903.6				1,643.5				5,516.5				4,802.9
Selling and administrative			304.7				280.0				882.2				802.7
Research and development			35.7				39.1				105.6				114.2
Gain on sale of a chemical facility			—				—				—				(70.4	)
Impairment of loans receivable			—				—				—				65.8
Other (income) expense, net			(13.6	)			(8.8	)			(25.1	)			(52.2	)
OPERATING INCOME			364.6				291.9				1,021.6				828.0
Equity affiliates’ income			35.5				25.9				98.0				78.0
Interest expense			44.2				29.4				121.1				81.0
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND MINORITY INTEREST			355.9				288.4				998.5				825.0
Income tax provision			62.7				75.5				232.1				217.5
Minority interest in earnings of subsidiary companies			8.3				6.4				23.6				22.7
INCOME FROM CONTINUING OPERATIONS			284.9				206.5				742.8				584.8
INCOME FROM DISCONTINUED OPERATIONS, net of tax			—				3.8				—				10.2
NET INCOME		$	284.9			$	210.3			$	742.8			$	595.0
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations		$	1.32			$	.92			$	3.43			$	2.62
Income from discontinued operations			—				.02				—				.05
Net Income		$	1.32			$	.94			$	3.43			$	2.67
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations		$	1.28			$	.90			$	3.33			$	2.56
Income from discontinued operations			—				.02				—				.05
Net Income		$	1.28			$	.92			$	3.33			$	2.61
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING (in millions)			216.1				223.0				216.4				222.6
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING ASSUMING DILUTION (in millions)			223.1				229.2				223.3				228.3
DIVIDENDS DECLARED PER COMMON SHARE — Cash		$	.38			$	.34			$	1.10			$	1.00

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)

(Millions of dollars)
		Three Months Ended
		30 June
		2007				2006
NET INCOME		$	284.9			$	210.3
OTHER COMPREHENSIVE INCOME, net of tax:
Net unrealized holding gain (loss) on investments, net of income tax (benefit) of $(3.6) and $.9			(6.5	)			1.6
Net unrecognized gain (loss) on derivatives qualifying as hedges, net of income tax (benefit) of $.8 and $(1.4)			1.4				(2.1	)
Foreign currency translation adjustments, net of income tax (benefit) of $(3.1) and $(29.2)			45.4				55.6
TOTAL OTHER COMPREHENSIVE INCOME			40.3				55.1
COMPREHENSIVE INCOME		$	325.2			$	265.4

(Millions of dollars)
		Nine Months Ended
		30 June
		2007				2006
NET INCOME		$	742.8			$	595.0
OTHER COMPREHENSIVE INCOME, net of tax:
Net unrealized holding gain on investments, net of income tax of $4.5 and $2.1			7.4				3.8
Net unrecognized gain (loss) on derivatives qualifying as hedges, net of income tax (benefit) of $2.1 and $(.4)			4.7				(1.0	)
Foreign currency translation adjustments, net of income tax (benefit) of $(31.6) and $(28.6)			147.2				134.1
TOTAL OTHER COMPREHENSIVE INCOME			159.3				136.9
COMPREHENSIVE INCOME		$	902.1			$	731.9

Amounts reclassified from other comprehensive income into earnings in 2007 and 2006 were not material.

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Millions of dollars)
		Nine Months Ended
		30 June
		2007				2006
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net Income		$	742.8			$	595.0
Income from discontinued operations, net of tax			—				(10.2	)
Income from Continuing Operations			742.8				584.8
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization			615.1				562.7
Deferred income taxes			(3.9	)			(16.2	)
Undistributed earnings of unconsolidated affiliates			(61.1	)			(48.6	)
Gain on sale of assets and investments			(5.6	)			(9.5	)
Gain on a sale of a chemical facility			—				(70.4	)
Impairment of loans receivable			—				65.8
Share-based compensation			49.2				54.2
Noncurrent capital lease receivables			(46.4	)			(85.6	)
Other			47.1				54.9
Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:
Trade receivables			(111.7	)			(30.1	)
Inventories			(11.4	)			(72.7	)
Contracts in progress			(29.3	)			(45.8	)
Prepaid expenses			(82.9	)			(31.5	)
Payables and accrued liabilities			(256.3	)			(78.3	)
Other			(39.1	)			38.5
CASH PROVIDED BY OPERATING ACTIVITIES (a)			806.5				872.2
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS Additions to plant and equipment (b)			(743.8	)			(1,043.5	)
Acquisitions, less cash acquired			(526.8	)			(127.0	)
Investment in and advances to unconsolidated affiliates			(.4	)			(18.1	)
Proceeds from sale of assets and investments			45.2				200.8
Proceeds from insurance settlements			14.9				49.0
Other			(4.7	)			(2.7	)
CASH USED FOR INVESTING ACTIVITIES			(1,215.6	)			(941.5	)
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS Long-term debt proceeds			503.3				289.7
Payments on long-term debt			(67.1	)			(150.0	)
Net increase in commercial paper and short-term borrowings			397.8				215.8
Dividends paid to shareholders			(229.9	)			(218.2	)
Purchase of Treasury Stock			(380.9	)			(193.1	)
Proceeds from stock option exercises			145.4				89.9
Excess tax benefit from share-based compensation/other			34.7				14.6
CASH PROVIDED BY FINANCING ACTIVITIES			403.3				48.7

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

(Millions of dollars)
		Nine Months Ended
		30 June
		2007				2006
DISCONTINUED OPERATIONS
Cash provided by operating activities			—				27.0
Cash used for investing activities			—				(4.7	)
Cash used for financing activities			—				—
CASH PROVIDED BY DISCONTINUED OPERATIONS			—				22.3
Effect of Exchange Rate Changes on Cash			2.3				3.0
(Decrease) increase in Cash and Cash Items			(3.5	)			4.7
Cash and Cash Items — Beginning of Year			35.2				55.8
Cash and Cash Items — End of Period		$	31.7			$	60.5

(a)		Pension plan contributions in 2007 and 2006 were $273.3 and $119.9, respectively.
(b)		Excludes capital lease additions of $1.3 and $1.3 in 2007 and 2006, respectively. Includes $297.2 for the repurchase of cryogenic vessel equipment in 2006.

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)

(Millions of dollars)
		Three Months Ended								Nine Months Ended
		30 June								30 June
		2007				2006				2007				2006
Revenues from external customers
Merchant Gases		$	817.1			$	699.5			$	2,341.6			$	1,990.8
Tonnage Gases			695.2				546.8				1,906.2				1,610.5
Electronics and Performance Materials			551.6				490.0				1,612.4				1,376.5
Equipment and Energy			134.3				138.3				461.7				406.9
Healthcare			158.6				149.1				471.5				420.9
Chemicals			238.2				222.0				707.4				685.4
Segment and Consolidated Totals		$	2,595.0			$	2,245.7			$	7,500.8			$	6,491.0
Operating income
Merchant Gases		$	147.4			$	121.3			$	427.8			$	341.7
Tonnage Gases			110.6				85.3				280.4				237.3
Electronics and Performance Materials			62.8				48.9				171.4				134.2
Equipment and Energy			15.8				14.8				59.0				49.3
Healthcare			8.5				8.7				24.9				24.9
Chemicals			21.0				15.0				63.2				49.2
Segment Totals			366.1				294.0				1,026.7				836.6
Other			(1.5	)			(2.1	)			(5.1	)			(8.6	)
Consolidated Totals		$	364.6			$	291.9			$	1,021.6			$	828.0
Equity affiliates’ income
Merchant Gases		$	26.5			$	18.0			$	70.9			$	60.8
Chemicals			5.9				6.0				13.6				10.8
Other Segments			3.1				1.9				13.5				6.4
Segment and Consolidated Totals		$	35.5			$	25.9			$	98.0			$	78.0

(Millions of dollars)
		30 June				30 September
		2007				2006
Identifiable assets (a)
Merchant Gases		$	3,943.8			$	3,283.2
Tonnage Gases			3,017.6				2,803.0
Electronics and Performance Materials			2,465.7				2,334.5
Equipment and Energy			299.0				304.4
Healthcare			914.3				856.5
Chemicals			541.7				579.8
Segment Totals			11,182.1				10,161.4
Other			568.8				291.0
Consolidated Totals		$	11,750.9			$	10,452.4

(a)

Identifiable assets are equal to total assets less investments in and advances to equity affiliates.

(Millions of dollars)

		Three Months Ended								Nine Months Ended
		30 June								30 June
		2007				2006				2007				2006
Revenues from external customers
United States		$	1,336.5			$	1,246.4			$	3,915.4			$	3,698.2
Canada			49.3				32.6				139.5				69.6
Total North America			1,385.8				1,279.0				4,054.9				3,767.8
Europe			786.4				648.6				2,239.5				1,817.0
Asia			381.1				287.0				1,087.3				817.1
Latin America			41.7				31.1				119.1				89.1
Total		$	2,595.0			$	2,245.7			$	7,500.8			$	6,491.0

Geographic information is based on country of origin. The Europe segment operates principally in Belgium, France, Germany, the Netherlands, the U.K., and Spain. The Asia segment operates principally in China, Japan, Korea, and Taiwan.

(Millions of dollars, except for share data)

Refer to the Company’s 2006 annual report on Form 10-K for a description of major accounting policies. There have been no material changes to these accounting policies during the first nine months of 2007.

Fair Value Option

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This Statement permits companies to elect to measure certain financial instruments at fair value on an instrument-by-instrument basis, with changes in fair value recognized in earnings each reporting period. In addition, SFAS No. 159 establishes financial statement presentation and disclosure requirements for assets and liabilities reported at fair value under the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after 15 November 2007. Retrospective application is not allowed. Early adoption is permitted under certain circumstances. The Company is currently evaluating this Statement.

Postretirement Benefits

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132R.” This Statement requires recognition of the funded status of benefit plans in the balance sheet, with changes in the funded status recognized in comprehensive income within shareholders’ equity in the year in which the changes occur. The funded status is to be determined based on the measurement of plan assets and obligations as of fiscal year end. The requirement to recognize the funded status of benefit plans and the disclosure requirements under the new Statement are effective as of the end of the fiscal year ending after 15 December 2006. Based on the funded status of benefit plans as of 30 September 2006, the Company would have recognized an additional liability of $536. The requirement to measure plan assets and benefit obligations as of fiscal year end is effective for fiscal years ending after 15 December 2008. This will require the Company to measure the plan assets and benefit obligations of its U.K. and Belgium plans as of 30 September instead of 30 June. The Company is currently evaluating the impact of SFAS No. 158 on its consolidated financial statements.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after 15 November 2007, and interim periods within those fiscal years, with earlier application encouraged. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which the Statement is initially applied, except for a limited form of retrospective application for certain financial instruments. The Company is currently evaluating the effect of SFAS No. 157.

Uncertainty in Income Taxes

In July 2006, the FASB issued Financial Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after 15 December 2006. The Company is currently evaluating the effect this Interpretation will have on its consolidated financial statements.

3. GLOBAL COST REDUCTION PLAN

The following table summarizes changes to the carrying amount of the accrual for the 2006 global cost reduction plan for the nine months ended 30 June 2007:

		Severance and Other				Asset
		Benefits				Impairments				Total
Total 2006 Plan Charge		$	60.6			$	11.5			$	72.1
Noncash Expenses			(13.0	)			(11.5	)			(24.5	)
Cash Expenditures			(1.1	)			—				(1.1	)
Accrual Balance at 30 September 2006			46.5				—				46.5
Cash Expenditures			(31.5	)			—				(31.5	)
Accrual Balance at 30 June 2007		$	15.0			$	—			$	15.0

4. ACQUISITION

On 30 April 2007, the Company acquired 98.1% of the Polish industrial gas business of BOC Gazy Sp z o.o from The Linde Group for 370 million Euros or $506.8. The results of operations for BOC Gazy were included in the Company’s consolidated income statement after the acquisition date. A preliminary purchase price allocation has been made and will be finalized when information needed to affirm underlying estimates is obtained. The preliminary estimated values as of the acquisition date for plant and equipment amounted to $193.2, identified intangibles amounted to $158.8, and goodwill amounted to $140.7. With this acquisition, the Company has obtained a significant market position in Central Europe’s industrial gases market. The BOC Gazy business had fiscal year 2006 sales of approximately 126 million Euros. The business has approximately 750 employees, five major industrial gas plants, and six cylinder transfills serving customers across a diverse range of industries, including chemicals, steel and base metals, among others.

5. DISCONTINUED OPERATIONS

In March 2006, the Company announced it was exploring the sale of its Amines and Polymers businesses as part of the Company’s ongoing portfolio management activities. The Company sold its Amines business to Taminco N.V. on 29 September 2006. Accordingly, the Amines business has been accounted for as discontinued operations and the consolidated financial statements for prior periods have been adjusted to reflect this presentation.

6. GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the nine months ended 30 June 2007 are as follows:

						Acquisitions				Currency
		30 September				and				Translation				30 June
		2006				Adjustments				and Other				2007
Merchant Gases		$	265.2			$	139.6			$	14.3			$	419.1
Tonnage Gases			10.3				1.1				.2				11.6
Electronics and Performance Materials			305.4				.3				4.6				310.3
Healthcare			381.4				.7				6.8				388.9
Chemicals			26.8				—				1.6				28.4
		$	989.1			$	141.7			$	27.5			$	1,158.3

The increase in goodwill in the Merchant Gases and Tonnage Gases segments was related to the acquisition of BOC Gazy as discussed in Note 4.

7. LONG-TERM DEBT

On 12 March 2007, the Company issued Euro 300.0 ($395.1) of 4.625% Eurobonds maturing 15 March 2017, the proceeds of which were used to fund a portion of the acquisition of the Polish industrial gas business of BOC Gazy as discussed in Note 4.

At 30 June 2007, the Company’s outstanding debt included Euro 153.5 ($207.4) for a 6.5% Eurobond maturing on 12 July 2007, which was classified as long-term debt as a result of completing a commitment to refinance this Eurobond in June 2007 with a portion of the proceeds of a new Euro 250.0 ($340.1) Eurobond. The new Eurobond is a floating rate Eurobond (initial interest rate of 4.315%) which settled on 3 July 2007 and matures on 2 July 2010. The balance of the net proceeds of the new Eurobond (after repayment of the 6.5% Eurobond principal and interest) was converted to U.S. dollars and used to repay U.S. commercial paper.

8. SHARE-BASED COMPENSATION

The Company has various share-based compensation programs, which include stock options, deferred stock units, and restricted stock. During the nine months ended 30 June 2007, the Company granted 1.5 million stock options at a weighted-average exercise price of $67.30 and an estimated fair value of $22.45 per option. The fair value of these options was estimated using a lattice-based option valuation model that used the following assumptions: expected volatility of 30.6%; expected dividend yield of 2.1%; expected life in years of 7.0-9.0; and a risk-free interest rate of 4.6%-4.7%. In addition, the Company granted 391,905 deferred stock units at a weighted-average grant-date fair value of $68.51 and 50,500 restricted stock units at a weighted-average grant-date fair value of $66.69. Refer to Note 15 in the Company’s 2006 annual report on Form 10K for information on the valuation and accounting for these programs.

Share-based compensation cost charged against income in the three and nine months ended 30 June 2007 was $17.8 (before taxes of $6.9) and $49.2 (before taxes of $18.9), respectively. Of the share-based compensation cost recognized, 80% was a component of selling and administrative expense, 14% a component of cost of sales, and 6% a component of research and development. Share-based compensation cost charged against income in the three and nine months ended 30 June 2006 was $17.2 (before taxes of $6.7) and $54.2 (before taxes of $21.2), respectively. The amount of share-based compensation cost capitalized in 2007 and 2006 was not material.

9. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (EPS):

		Three Months Ended								Nine Months Ended
		30 June								30 June
		2007				2006				2007				2006
NUMERATOR
Used in basic and diluted EPS
Income from continuing operations		$	284.9			$	206.5			$	742.8			$	584.8
Income from discontinued operations			—				3.8				—				10.2
Net Income		$	284.9			$	210.3			$	742.8			$	595.0
DENOMINATOR (in millions)
Weighted average number of common shares used in basic EPS			216.1				223.0				216.4				222.6
Effect of dilutive securities
Employee stock options			5.7				5.2				5.7				4.9
Other award plans			1.3				1.0				1.2				.8
			7.0				6.2				6.9				5.7
Weighted average number of common shares and dilutive potential common shares used in diluted EPS			223.1				229.2				223.3				228.3

		Three Months Ended								Nine Months Ended
		30 June								30 June
		2007				2006				2007				2006
BASIC EPS
Income from continuing operations		$	1.32			$	.92			$	3.43			$	2.62
Income from discontinued operations			—				.02				—				.05
Net Income		$	1.32			$	.94			$	3.43			$	2.67
DILUTED EPS
Income from continuing operations		$	1.28			$	.90			$	3.33			$	2.56
Income from discontinued operations			—				.02				—				.05
Net Income		$	1.28			$	.92			$	3.33			$	2.61

10. INCOME TAXES

In June 2007, the Company settled tax audits through fiscal year 2004 with the Internal Revenue Service. The audit settlement resulted in a tax benefit of $27.5 ($.12 per share).

11. RETIREMENT BENEFITS

The components of net pension cost for the defined benefit pension plans and other postretirement benefit cost are as follows:

		Three Months Ended 30 June
		2007				2006				2007				2006
		Pension Benefits								Other Benefits
Service cost		$	20.5			$	19.7			$	1.5			$	1.6
Interest cost			42.2				37.1				1.3				1.3
Expected return on plan assets			(47.2	)			(39.5	)			—				—
Prior service cost amortization			1.1				.8				(.4	)			(.6	)
Actuarial loss amortization			14.4				16.4				.6				.9
Special termination benefits			—				.6				—				—
Other			1.5				1.3				—				—
Net periodic benefit cost		$	32.5			$	36.4			$	3.0			$	3.2

		Nine Months Ended 30 June
		2007				2006				2007				2006
		Pension Benefits								Other Benefits
Service cost		$	60.8			$	58.5			$	4.4			$	4.7
Interest cost			125.6				110.3				4.0				3.8
Expected return on plan assets			(140.6	)			(117.4	)			—				—
Prior service cost amortization			3.2				2.4				(1.3	)			(1.7	)
Actuarial loss amortization			43.0				48.8				1.7				2.7
Special termination benefits			—				2.9				—				—
Other			2.4				2.0				—				—
Net periodic benefit cost		$	94.4			$	107.5			$	8.8			$	9.5

During the nine months ended 30 June 2007, pension contributions of $273.3 were made. The Company expects to contribute approximately $13 to the pension plans during the remainder of 2007. For the nine months ended 30 June 2006, pension contributions of $119.9 were made. During 2006, total contributions were $130.1.

12. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in various legal proceedings, including competition, environmental, health, safety, product liability and insurance matters. In particular, during the second quarter of 2007 a unit of the Brazilian Ministry of Justice issued a report on its investigation of the Company’s Brazilian subsidiary, Air Products Brazil, and several other Brazilian industrial gas companies. The report recommends that the Brazilian Administrative Council for Economic Defense impose sanctions on Air Products Brazil and the other industrial gas companies for alleged anti-competitive activities. The Company intends to defend this action and cannot, at this time, reasonably predict the ultimate outcome of the proceedings or sanctions, if any, that will be imposed. While the Company does not expect that any sums it may have to pay in connection with this or any other legal proceeding would have a materially adverse effect on its consolidated financial position or net cash flows, a future charge for regulatory fines or damage awards could have a significant impact on the Company’s net income in the period in which it is recorded.

Environmental

Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheet at 30 June 2007 and 30 September 2006 included an accrual of $59.5 and $52.4, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. The Company estimates the exposure for environmental loss contingencies to range from $58.6 to a reasonably possible upper exposure of $72.7 as of 30 June 2007, with the upper exposure exceeding the amount accrued by $13.2.

At 30 September 2006, $42.0 of the environmental accrual was related to the Pace, Florida, facility. In the fourth quarter of 2006, the Company sold its Amines business, which included operations at Pace, and recognized a liability for retained environmental obligations associated with remediation activities at Pace. The Company is required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue its remediation efforts. As of 30 September 2006, the Company estimated that it would take an additional 20 years to complete the groundwater remediation and the costs through completion were estimated to range from $42 to $50. As no amount within the range was a better estimate than another, the Company recognized a pretax expense in the fourth quarter of 2006 of $42.0 as a component of income from discontinued operations and recorded an environmental accrual of $42.0 in continuing operations on the consolidated balance sheet. During fiscal year 2007, there has been no change to the estimated exposure range related to the Pace facility and the accrual balance, reduced for spending during 2007, totaled $40.4 at 30 June 2007.

The Company has implemented many of the remedial corrective measures at the Pace, Florida, facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated and the treated soils have been secured in a lined onsite disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. In 2006, the Company conducted an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990’s might be suitable to more quickly and effectively remove groundwater contaminants. Based on our assessment results, we have identified potential new approaches to accelerate the removal of contaminants and will assess their feasibility and potential effectiveness.

13. SUPPLEMENTAL INFORMATION

Customer Contract Termination

By agreement dated 1 June 2007, the Company entered into a settlement with a customer to resolve a dispute related to a dinitrotoluene (DNT) supply agreement. As part of the settlement agreement, the DNT supply agreement was terminated and certain other agreements between the companies were amended. Selected amendments to the agreements were subject to the approval of the customer’s Board of Directors, which approval was obtained on 12 July 2007. As a result, the Company will recognize a before-tax gain in the range of $30 to $37 in the fourth quarter.

Share Repurchase Program

In March 2006, the Board of Directors approved a $1,500 share repurchase program. The Company began the share repurchase program in the third quarter of 2006 and purchased 7.7 million of its outstanding shares at a cost of $496.1 during 2006. The Company expects to complete an additional $500 of the program during fiscal year 2007 and during the nine months ended 30 June 2007 purchased 5.1 million of its outstanding shares at a cost of $373.1.

Gain on Sale of a Chemical Facility

On 31 March 2006, as part of its announced restructuring of its Polyurethane Intermediates business, the Company sold its dinitrotoluene (DNT) production facility in Geismar, Louisiana, to BASF Corporation for $155.0. The Company wrote off the remaining net book value of assets sold, resulting in the recognition of a gain of $70.4 ($42.9 after-tax, or $.19 per share) on the transaction. The Company’s industrial gas facilities at this same location were not included in this transaction and continue to produce and supply hydrogen, carbon monoxide, and syngas to customers.

Impairment of Loans Receivable

In the second quarter of 2006, the Company recognized a loss of $65.8 ($42.4 after-tax, or $.19 per share) for the impairment of loans receivable from a long-term supplier of sulfuric acid, used in the production of DNT for the Company’s Polyurethane Intermediates business. To facilitate the supplier’s ability to emerge from bankruptcy in June 2003 and continue to supply product to the Company, the Company and other third parties agreed to participate in the supplier’s financing. Subsequent to the initial financing, the Company and the supplier’s other principal lender executed standstill agreements which temporarily amended the terms of the loan agreements, primarily to allow the deferral of principal and interest payments. Based on events occurring within the second quarter of 2006, management concluded that the Company would not be able to collect any amounts due. These events included the Company’s announcement of its plan to restructure its Polyurethane Intermediates business and notification to the supplier of the Company’s intent not to enter into further standstill agreements.

Purchase of Cryogenic Vessel Equipment

On 31 March 2006, the Company exercised its option to purchase certain cryogenic vessel equipment for $297.2, thereby terminating an operating lease originally scheduled to end 30 September 2006. The Company originally sold and leased back this equipment in 2001, resulting in proceeds of $301.9 and recognition of a deferred gain of $134.7, which was included in other noncurrent liabilities. In March 2006, the Company recorded the purchase of the equipment for $297.2 and reduced the carrying value of the equipment by the $134.7 deferred gain derived from the original sale-leaseback transaction.

Hurricanes

In the fourth quarter of 2005, the Company’s New Orleans industrial gas complex sustained extensive damage from Hurricane Katrina. Other industrial gases and chemicals facilities in the Gulf Coast region also sustained damages from Hurricanes Katrina and Rita in fiscal 2005.

Operating income for the three and nine months ended 30 June 2006 included a net gain of $9.1 and $36.3, respectively, related to insurance recoveries net of property damage and other expenses incurred. During the three and nine months ended 30 June 2006, the Company collected insurance proceeds of $13.2 and $49.0, respectively. The Company estimated the impact of business interruption at $(4.6) and $(35.8) for the three and nine months ended 30 June 2006, respectively.

A table summarizing the estimated impact of the Hurricanes for the three and nine months ended 30 June 2006 is provided below:

		Three Months Ended				Nine Months Ended
		30 June 2006				30 June 2006
Insurance Recoveries Recognized		$	18.0			$	54.2
Property Damage/Other Expenses			(8.9	)			(17.9	)
		$	9.1			$	36.3
Estimated Business Interruption			(4.6	)			(35.8	)
Total Estimated Impact		$	4.5			$	.5

The Company closed-out its insurance claim related to the Hurricanes by the end of fiscal 2006. In the first quarter of 2007, the Company collected $19.1 of insurance proceeds. Operating income for the three and nine months ended 30 June 2007 was not impacted except for higher depreciation expense of $1.4 and $4.2, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Millions of dollars, except for share data)

The disclosures in this quarterly report are complementary to those made in the Company’s 2006 annual report on Form 10-K. An analysis of results for the third quarter and first nine months of 2007, including an update to the Company’s 2007 Outlook, is provided in the Management’s Discussion and Analysis to follow.

All comparisons in the discussion are to the corresponding period in the 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.

THIRD QUARTER 2007 VS. THIRD QUARTER 2006

THIRD QUARTER 2007 IN SUMMARY

	•		Sales of $2,595 were up 16% from the prior year, primarily due to higher volumes and pricing in the Merchant Gases segment and increased volumes in the Tonnage Gases and Electronics and Performance Materials segments.
	•		Operating income of $365 increased 25% primarily due to strong volume growth.
	•		Net income of $285 increased 35% and diluted earnings per share of $1.28 increased 39%. A summary table of changes in earnings per share is presented below.
	•		The Company purchased 1.6 million of its outstanding shares at a cost of $126 under the $1,500 share repurchase program announced in the second quarter of 2006.
	•		The Company completed the acquisition of the Polish industrial gas business of BOC Gazy Sp z o.o. from The Linde Group for 370 million Euros ($507) on 30 April 2007.
	•		The Company issued Euro 250 ($340) of floating rate Eurobonds maturing 2 July 2010, the proceeds of which were received on 3 July 2007 and used to repay maturing Eurobonds and outstanding commercial paper.
	•		In June 2007, the Company settled audits through fiscal year 2004 with the Internal Revenue Service. The audit settlement resulted in a tax benefit of $27.
	•		For a discussion of the challenges, risks, and opportunities on which management is focused, refer to the update to the Company’s 2007 Outlook provided on page 32.

Changes in Diluted Earnings per Share
		Three Months Ended								Increase
		30 June								(Decrease)
		2007				2006
Diluted Earnings per Share		$	1.28			$	.92			$	.36
Operating Income (after-tax)
Underlying business
Volume											.20
Price/raw materials/mix											.04
Costs											(.06	)
Acquisitions/divestitures											.01
Currency											.03
Gain on asset disposals											.03
Prior year impact of Hurricanes (A)											(.02	)
Operating Income											.23
Other (after-tax)
Equity affiliates’ income											.03
Interest expense											(.05	)
Discontinued operations											(.02	)
Settlement of tax audits											.12
Income tax rate											.02
Average shares outstanding											.03
Other											.13
Total Change in Diluted Earnings per Share										$	.36

(A)		Includes insurance recoveries, estimated business interruption, asset write-offs, and other expenses during 2006.

RESULTS OF OPERATIONS

Consolidated Results
		Three Months Ended
		30 June
		2007				2006				% Change
Sales		$	2,595.0			$	2,245.7				16	%
Cost of sales			1,903.6				1,643.5				16	%
Selling and administrative			304.7				280.0				9	%
Research and development			35.7				39.1				(9	%)
Other (income) expense, net			(13.6	)			(8.8	)			55	%
Operating Income			364.6				291.9				25	%
Equity affiliates’ income			35.5				25.9				37	%
Interest expense			44.2				29.4				50	%
Effective tax rate			18.0	%			26.8	%			*
Income from continuing operations			355.9				288.4				23	%
Income from discontinued operations			—				3.8				*
Net Income			284.9				210.3				35	%
Basic Earnings per Share		$	1.32			$	.94				40	%
Diluted Earnings per Share		$	1.28			$	.92				39	%

*		Calculation not meaningful.

Discussion of Consolidated Results

Sales
		% Change from
		Prior Year
Underlying business
Volume			11	%
Price/mix			—
Acquisitions/divestitures			1	%
Currency			2	%
Natural gas/raw material cost pass-through			2	%
Total Consolidated Change			16	%

Sales of $2,595.0 increased 16%, or $349.3. Underlying base business growth accounted for 11% of the increase. Sales increased 11% from higher volumes across most segments, as discussed in the Segment Analysis which follows. Sales were flat from price impacts as improved pricing in the Merchant Gases segment was offset by lower pricing in the Electronics and Performance Materials and Chemicals segments. Sales improved 2% from favorable currency effects, primarily the weakening of the U.S. dollar against the Euro and Pound Sterling. Higher natural gas/raw material contractual cost pass-through to customers increased sales by 2% mainly due to higher natural gas prices.

Operating Income
		Change from
		Prior Year
Prior Year Operating Income		$	292
Underlying business
Volume			61
Price/raw materials/mix			13
Costs			(17	)
Acquisitions/divestitures			4
Currency			8
Gain on asset disposals			9
Prior year impact of Hurricanes (A)			(5	)
Operating Income		$	365

(A)		Includes insurance recoveries, estimated business interruption, asset write-offs, and other expenses during 2006.

Operating income of $364.6 increased 25%, or $72.7.

	•		Volume growth across most segments, as discussed in the Segment Analysis which follows, increased operating income $61.
	•		Operating income improved $13 as higher pricing in Merchant Gases and improved variable costs and efficiencies were partially offset by price declines in Electronics and Performance Materials.
	•		Operating income decreased $17 from higher costs to support growth, and inflation, partially offset by productivity benefits.
	•		Favorable currency effects, primarily from the weakening of the U.S. dollar against the Euro and Pound Sterling, increased operating income by $8.
	•		Operating income increased $9 from gains on asset disposals in the current year compared to losses on asset disposals in the prior year as the Company continues to improve its asset utilization.
	•		Operating income decreased $5 from the impacts of Hurricanes Katrina and Rita, primarily from insurance recoveries exceeding estimated business interruption in the prior year.

Equity Affiliates’ Income

Income from equity affiliates of $35.5 increased $9.6, or 37%, primarily due to higher income from affiliates in the Merchant Gases segment.

Selling and Administrative Expense (S&A)

		% Change from
		Prior Year
Acquisitions/divestitures			1	%
Currency			2	%
Other costs			6	%
Total S&A Change			9	%

S&A expense of $304.7 increased 9%, or $24.7. S&A as a percent of sales declined to 11.7% from 12.5% in 2006. The acquisition of BOC Gazy increased S&A by 1%. Currency effects, primarily the weakening of the U.S. dollar against the Euro and Pound Sterling, increased S&A by 2%. Underlying costs increased S&A by 6%, primarily from inflation.

Research and Development (R&D)

R&D decreased 9%, or $3.4, as a result of the Company’s organization simplification efforts. R&D decreased as a percent of sales to 1.4% from 1.7% in 2006.

Other (Income) Expense, Net

Other income of $13.6 increased $4.8. Items recorded to other income arise from transactions and events not directly related to the principal income earning activities of the Company. Results in 2007 included a gain from the sale of assets compared to a loss from the sale of assets in 2006 resulting in a variance of $9.0. Results in 2006 included a gain of $12.1 related to insurance recoveries, net of property damage and other expenses incurred due to Hurricanes Katrina and Rita. Otherwise, no individual items were material in comparison to the prior year.

Interest Expense
		Three Months
		Ended 30 June
		2007				2006
Interest incurred		$	47.7			$	33.4
Less: interest capitalized			3.5				4.0
Interest expense		$	44.2			$	29.4

Interest incurred increased $14.3. The increase resulted from a higher average debt balance excluding currency effects, higher average interest rates, and the impact of a weaker U.S. dollar on the translation of foreign currency interest. Capitalized interest decreased by $.5 due to lower levels of construction in progress for plant and equipment built by the Company.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes less minority interest. The effective tax rate was 18.0% and 26.8% in the third quarter of 2007 and 2006, respectively. In June 2007, the Company settled audits through fiscal year 2004 with the Internal Revenue Service. The audit settlement resulted in a tax benefit of $27.5. This benefit reduced the effective tax rate of the Company by 7.9%. Additionally, the effective tax rate was lower in 2007 as a result of credits and adjustments from the Company’s ongoing tax planning process.

Discontinued Operations

On 29 September 2006, the Company completed the sale of its Amines business to Taminco N.V., a producer of methylamines based in Belgium. As a result of the sale, the operating results of the Amines business have been classified as discontinued operations in the Company’s consolidated financial statements for 2006. The discontinued operations generated sales of $73.9 and income, net of tax, of $3.8 in the third quarter of 2006.

Net Income

Net income was $284.9 compared to $210.3 in 2006. Diluted earnings per share was $1.28 compared to $.92 in 2006. A summary table of changes in earnings per share is presented on page 17.

Segment Analysis

Merchant Gases
		Three Months
		Ended 30 June
		2007				2006				% Change
Sales		$	817.1			$	699.5				17	%
Operating income			147.4				121.3				22	%
Equity affiliates’ income			26.5				18.0				47	%

Merchant Gases Sales
		% Change from
		Prior Year
Underlying business
Volume			5	%
Price/mix			4	%
Acquisitions/divestitures			4	%
Currency			4	%
Total Merchant Gases Change			17	%

Sales of $817.1 increased 17%, or $117.6. Underlying base business growth improved sales by 9%. Sales increased 5% from stronger volumes and higher equipment sales, reflecting demand associated with the Company’s continued success in utilizing applications technology.

	•		Liquid bulk volumes in North America increased 2%. Liquid oxygen (LOX) and liquid nitrogen (LIN) volumes increased 3% from higher demand across most end markets.
	•		Liquid bulk volumes in Europe decreased 1% primarily from lower liquid helium and liquid argon availability.
	•		Packaged gas volumes in Europe increased 2% due to higher demand for industrial cylinders and new offerings in the business.
	•		Liquid bulk volumes in Asia were up 9% due to solid demand growth and new plants brought on-stream.

Pricing increased sales by 4%. Prices for LOX/LIN improved 5% in North America, 2% in Europe, and 3% in Asia from pricing actions to recover higher power and distribution costs.

The acquisition of BOC Gazy during the third quarter improved sales by 4%.

Sales increased 4% from favorable currency effects, primarily the weakening of the U.S. dollar against the Euro and the Pound Sterling.

Merchant Gases Operating Income

Operating income of $147.4 increased 22%, or $26.1. Favorable operating income variances resulted from higher volumes of $19, improved pricing and customer mix of $18, and currency effects of $6. Operating income declined $18 from higher costs to support growth and due to inflation, partially offset by productivity improvements.

Merchant Gases Equity Affiliates’ Income

Merchant Gases equity affiliates’ income of $26.5 increased $8.5, due to higher income from affiliates in all regions.

Tonnage Gases
		Three Months
		Ended 30 June
		2007				2006				% Change
Sales		$	695.2			$	546.8				27	%
Operating income			110.6				85.3				30	%

Tonnage Gases Sales
		% Change from
		Prior Year
Underlying business
Volume			17	%
Acquisitions/divestitures			1	%
Currency			2	%
Natural gas/raw material cost pass-through			7	%
Total Tonnage Gases Change			27	%

Sales of $695.2 increased 27%, or $148.4. Underlying base business volume growth increased sales by 17%. Volumes were higher due to the 2006 start-up of new hydrogen plants supporting the energy industry and current year improved plant loadings.

The acquisition of BOC Gazy during the third quarter improved sales by 1%. Sales increased 2% from favorable currency effects, primarily the weakening of the U.S. dollar against the Euro and Pound Sterling. Higher natural gas cost contractually passed-through to customers increased sales by 7%.

Tonnage Gases Operating Income

Operating income of $110.6 increased 30%, or $25.3. Operating income increased by $11 from higher volumes and $6 from improved variable costs, efficiencies, and higher operating bonuses.

Electronics and Performance Materials
		Three Months
		Ended 30 June
		2007				2006				% Change
Sales		$	551.6			$	490.0				13	%
Operating income			62.8				48.9				28	%

Electronics and Performance Materials Sales
		% Change from
		Prior Year
Underlying business
Volume			14	%
Price/mix			(2	%)
Currency			1	%
Total Electronics and Performance Materials Change			13	%

Sales of $551.6 increased 13%, or $61.6. Underlying base business growth increased sales by 12%. Higher equipment sales and higher electronics specialty materials and tonnage volumes in Electronics and volume growth across all product lines in Performance Materials improved sales by 14%. Pricing decreased sales by 2%, as electronic specialty materials continued to experience pricing pressure. Favorable currency effects, primarily the weakening of the U.S. dollar against key European and Asian currencies, improved sales by 1%.

Electronics and Performance Materials Operating Income

Operating income of $62.8 increased 28%, or $13.9. Operating income increased $22 from higher volumes. Lower pricing, net of variable costs, primarily due to lower electronics specialty materials pricing, decreased operating income by $9.

Equipment and Energy
		Three Months
		Ended 30 June
		2007				2006				% Change
Sales		$	134.3			$	138.3				(3	%)
Operating income			15.8				14.8				7	%

Equipment and Energy Sales and Operating Income

Sales of $134.3 decreased by $4.0, primarily as a result of lower liquefied natural gas (LNG) heat exchanger activity. Operating income of $15.8 increased by $1.0, primarily from lower spending.

The sales backlog for the Equipment business at 30 June 2007 was $268, compared to $446 at 30 September 2006, which reflected a peak level for LNG orders.

Healthcare
		Three Months
		Ended 30 June
		2007				2006				% Change
Sales		$	158.6			$	149.1				6	%
Operating income			8.5				8.7				(2	%)

Healthcare Sales
		% Change from
		Prior Year
Underlying business
Volume			5	%
Price/mix			(3	%)
Currency			4	%
Total Healthcare Change			6	%

Sales of $158.6 increased 6%, or $9.5. Sales increased 5% due to higher volumes in Europe, primarily in Spain and the U.K., partially offset by lower volumes in the United States. Service mix decreased sales by 3% as

prior year results included higher emergency billings during the stabilization period of the U.K. respiratory contract. Favorable currency effects, primarily the weakening of the U.S. dollar against the Euro and the Pound Sterling, increased sales by 4%.

Healthcare Operating Income

Operating income of $8.5 decreased as the favorable impacts from higher volumes and cost improvement as a result of volume loading in the U.K. were more than offset by the unfavorable impact of service mix and higher costs, primarily from inflation.

Chemicals
		Three Months
		Ended 30 June
		2007				2006				% Change
Sales		$	238.2			$	222.0				7	%
Operating income			21.0				15.0				40	%

Chemicals Sales and Operating Income

Sales and operating income increased primarily from higher volumes in the Polymer Emulsions and Polyurethane Intermediates (PUI) businesses. PUI results were higher due to prior year customer outages.

Other
		Three Months
		Ended 30 June
		2007				2006
Operating loss			($1.5	)			($2.1	)

Other operating loss includes other expense and income which cannot be directly associated with the business segments, including foreign exchange gains and losses and interest income. The loss in 2006 includes certain costs previously allocated to the Amines business. Corporate research and development costs are fully allocated to the business segments.

The operating loss of $1.5 decreased by $.6. No individual items were material in comparison to the prior year.

FIRST NINE MONTHS 2007 VS. FIRST NINE MONTHS 2006

FIRST NINE MONTHS 2007 IN SUMMARY

	•		Sales of $7,501 were up 16% from the prior year, due to strong volume growth.
	•		Operating income of $1,022 increased 23%, also from strong volume growth.
	•		Net income of $743 increased 25% and diluted earnings per share of $3.33 increased 28%. A summary table of changes in earnings per share is presented below.
	•		The Company purchased 5.1 million of its outstanding shares at a cost of $373 under the $1,500 share repurchase program announced in the second quarter of 2006.
	•		The Company completed the acquisition of the Polish industrial gas business of BOC Gazy Sp z o.o. from The Linde Group for 370 million Euros ($507) on 30 April 2007.
	•		The Company issued Euro 300 ($395) of 4.625% Eurobonds maturing 15 March 2017, the proceeds of which were used to fund a portion of the BOC Gazy Sp z o.o. acquisition.
	•		The Company issued Euro 250 ($340) of floating rate Eurobonds maturing 2 July 2010, the proceeds of which were received on 3 July 2007 and used to repay maturing Eurobonds and outstanding commercial paper.
	•		In June 2007, the Company settled audits through fiscal year 2004 with the Internal Revenue Service. The audit settlement resulted in a tax benefit of $27.
	•		For a discussion of the challenges, risks, and opportunities on which management is focused, refer to the update to the Company’s 2007 Outlook provided on page 32.

Changes in Diluted Earnings per Share
		Nine Months Ended								Increase
		30 June								(Decrease)
		2007				2006
Diluted Earnings per Share		$	3.33			$	2.61			$	.72
Operating Income (after-tax)
Underlying business
Volume											.70
Price/raw materials/mix											.08
Costs											(.27	)
Acquisitions/divestitures											.01
Currency											.10
Prior year gain on sale of a chemical facility											(.19	)
Prior year impairment of loans receivable											.19
Operating Income											.62
Other (after-tax)
Equity affiliates’ income											.07
Interest expense											(.13	)
Discontinued operations											(.05	)
Settlement of tax audits											.12
Income tax rate											.02
Average shares outstanding											.07
Other											.10
Total Change in Diluted Earnings per Share										$	.72

RESULTS OF OPERATIONS

Consolidated Results
		Nine Months Ended
		30 June
		2007				2006				% Change
Sales		$	7,500.8			$	6,491.0				16	%
Cost of sales			5,516.5				4,802.9				15	%
Selling and administrative			882.2				802.7				10	%
Research and development			105.6				114.2				(8	%)
(Gain) on sale of a chemical facility			—				(70.4	)			*
Impairment of loans receivable			—				65.8				*
Other (income) expense, net			(25.1	)			(52.2	)			(52	%)
Operating Income			1,021.6				828.0				23	%
Equity affiliates’ income			98.0				78.0				26	%
Interest expense			121.1				81.0				50	%
Effective tax rate			23.8	%			27.1	%			*
Income from continuing operations			742.8				584.8				27	%
Income from discontinued operations			—				10.2				*
Net Income			742.8				595.0				25	%
Basic Earnings per Share		$	3.43			$	2.67				28	%
Diluted Earnings per Share		$	3.33			$	2.61				28	%

Discussion of Consolidated Results

Sales
		% Change from
		Prior Year
Underlying business
Volume			14	%
Price/mix			—
Acquisitions/divestitures			1	%
Currency			3	%
Natural gas/raw material cost pass-through			(2	%)
Total Consolidated Change			16	%

Sales of $7,500.8 increased 16%, or $1,009.8. Underlying base business growth accounted for 14% of the increase. Sales increased 14% from higher volumes across all segments, as discussed in the Segment Analysis which follows. Pricing was flat, as improved pricing in the Merchant Gases segment was offset by lower pricing in Electronics and Performance Materials. Sales improved 3% from favorable currency effects, primarily the weakening of the U.S. dollar against the Euro and Pound Sterling. Lower natural gas/raw material contractual cost pass-through to customers decreased sales by 2% mainly due to lower natural gas prices.

Operating Income
		Change from
		Prior Year
Prior Year Operating Income		$	828
Underlying business
Volume			218
Price/raw materials/mix			26
Costs			(81	)
Acquisitions/divestitures			3
Currency			32
Prior year gain on sale of a chemical facility			(70	)
Prior year impairment of loans receivable			66
Operating Income		$	1,022

Operating income of $1,021.6 increased 23%, or $193.6.

	•		Operating income increased $218 from volume growth across all segments, as discussed in the Segment Analysis which follows.
	•		Operating income improved $26 as higher pricing in Merchant Gases and improved variable costs and efficiencies were partially offset by price declines in Electronics and Performance Materials.
	•		Operating income decreased $81 from higher costs to support growth and due to inflation.
	•		Favorable currency effects, primarily from the weakening of the U.S. dollar against the Euro and Pound Sterling, increased operating income by $32.
	•		Operating income decreased $70 due to the prior year gain on the sale of the Company’s DNT production facility in Geismar, Louisiana.
	•		Operating income increased $66 due to the prior year impairment of loans receivable from a long-term supplier of sulfuric acid used in the production of DNT.