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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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 2008
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 | 18195-1501 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
| Registrant’s telephone number, including area code | (610) 481-4911 |
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 | |
| 83/4 % Debentures Due 2021 | New York |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
YES o NO þ
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 (§ 229.405) 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 amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o NO þ
The aggregate market value of the voting stock held by non-affiliates of the registrant on
31 March 2008 was approximately $19.4 billion. For purposes of the foregoing calculations
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.
The number of shares of common stock outstanding as of 17 November 2008 was 209,566,838.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended 30 September
2008 are incorporated by reference into Parts I, II and IV of this report. Portions of the
registrant’s definitive Proxy Statement for the 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS AND FISCAL YEAR 2008 DEVELOPMENTS
Air Products and Chemicals, Inc. (the “Company”), a Delaware corporation originally founded in
1940, serves technology, energy, industrial and healthcare customers globally with a unique
portfolio of products, services and solutions that include atmospheric gases, process and specialty
gases, performance materials, equipment and services. The Company is the world’s largest supplier
of hydrogen and helium and has built leading positions in growth markets such as semiconductor
materials, refinery hydrogen, natural gas liquefaction and advanced coatings and adhesives. As used
in this Report, unless the context indicates otherwise, the term “Company” includes subsidiaries
and predecessors of the registrant and its subsidiaries.
In January 2008, the Company sold its interest in the vinyl acetate ethylene polymers joint
ventures to Wacker Chemie AG, its long time joint venture partner. The Company completed the sale
of the Polymers Emulsions business with the sale of the two remaining production facilities in
Elkton, Maryland and Piedmont, South Carolina and the related North American atmospheric emulsions
and pressure sensitive adhesives businesses in June. During fiscal 2008, the Company also sold the
High Purity Process Chemicals business which had previously been reported as part of the
Electronics and Performance Materials operating segment. In July 2008, the Board of Directors
authorized management to pursue the sale of the U.S. Healthcare business. In September 2008, the
Company sold the healthcare business related to several New York and New Jersey locations, followed
by the sale of the seating and mobility unit in October.
Previously, the Company reported results for a Chemicals segment, which consisted of the Polymer
Emulsions business and the Polyurethane Intermediates (PUI) business, and a Healthcare segment.
Beginning with the first quarter of 2008, the Polymer Emulsions business was accounted for as
discontinued operations, and the PUI business was reported as part of the Tonnage Gases segment.
Beginning with the fourth quarter of 2008, the U.S. Healthcare business was accounted for as
discontinued operations and the Europe Healthcare business was reported as part of the Merchant
Gases segment. The Company now manages its operations, assesses performance and reports earnings
under four business segments: Merchant Gases; Tonnage Gases; Electronics and Performance Materials;
and Equipment and Energy.
FINANCIAL INFORMATION ABOUT SEGMENTS
Financial information concerning the Company’s four business segments appears in Note 22 to the
Consolidated Financial Statements included under Item 8 herein.
NARRATIVE DESCRIPTION OF BUSINESS BY SEGMENTS
MERCHANT GASES
Merchant Gases sells industrial gases such as oxygen, nitrogen and argon (primarily recovered by
the cryogenic distillation of air), hydrogen and helium (purchased or refined from crude helium),
and medical and specialty gases, along with certain services and equipment, throughout the world to
customers in many industries, including those in metals, glass, chemical processing, food
processing, healthcare, steel, general manufacturing and petroleum and natural gas industries.
Merchant Gases includes the following types of products:
(1) “Liquid bulk” — Product is delivered in bulk (in liquid or gaseous form) by tanker or tube
trailer and stored, usually in its liquid state, in equipment designed and installed by the
Company at the customer’s site for vaporizing into a gaseous state as needed. Liquid bulk sales
are typically governed by three-to-five year contracts.
(2) “Packaged gases” — Small quantities of product are delivered in either cylinders or dewars.
The Company operates packaged gas businesses in Europe, Asia and Brazil. In the United States,
the Company’s packaged gas business sells products only for the electronics and magnetic
resonance imaging (principally helium) industries.
(3) “Small on-site plants” — Customers receive product through small on-sites (cryogenic or
non-cryogenic generators) either by a sale of gas contract or the sale of the equipment to the
customer.
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(4) “Healthcare products” — Customers receive respiratory therapies, home medical equipment and
infusion services. These products and services are provided to patients in their homes,
primarily in Europe. The Company has leading market positions in Spain, Portugal, the United
Kingdom and Mexico through its equity affiliate.
Electric power is the largest cost component in the production of atmospheric gases — oxygen,
nitrogen and argon. Natural gas is also an energy source at a number of the Company’s Merchant
Gases facilities. The Company mitigates energy and natural gas prices through pricing formulas and
surcharges. A shortage or interruption of electricity or natural gas supply, or a price increase
that cannot be passed through to customers, possibly for competitive reasons, may adversely affect
the operations or results of Merchant Gases. During fiscal year 2008, no significant difficulties
were encountered in obtaining adequate supplies of energy or raw materials; however, the Company
did experience significant increases in energy costs in most regions, resulting in the need to
increase industrial gas pricing.
Merchant Gases competes worldwide against three global industrial gas companies: L’Air Liquide
S.A., Linde AG and Praxair, Inc., and several regional sellers (including Airgas, Inc.).
Competition in industrial gases is based primarily on price, reliability of supply and the
development of industrial gas applications. Competition in the healthcare business involves
regulatory compliance, price, quality, service and reliability of supply. In Europe, primary
competitors include the same three global industrial gas companies mentioned previously.
Merchant Gases sales constituted approximately 40.3 percent of
the Company’s consolidated sales in fiscal year 2008, 38.9 percent
in fiscal year 2007 and 38.1 percent in fiscal year 2006.
Sales of atmospheric gases (oxygen, nitrogen and argon) constituted approximately 18 percent of the
Company’s consolidated sales in fiscal year 2008, 19 percent in fiscal year 2007 and 20 percent in
fiscal year 2006.
TONNAGE GASES
Tonnage Gases provides hydrogen, carbon monoxide, nitrogen, oxygen and syngas principally to the
energy production and refining, chemical and metallurgical industries worldwide. Gases are produced
at large facilities located adjacent to customers’ facilities or by pipeline systems from
centrally-located production facilities and are generally governed by contracts with fifteen to
twenty year terms. The Company is the world’s largest provider of hydrogen, which is used by oil
refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of
gasoline and diesel fuels to reduce smog and ozone depletion. The energy production industry uses
nitrogen injection for enhanced recovery of oil and natural gas and oxygen for gasification. The
metallurgical industry utilizes nitrogen for inerting and oxygen for the manufacture of steel and
certain non-ferrous metals. The chemical industry uses hydrogen, oxygen, nitrogen, carbon monoxide
and synthesis gas (a hydrogen-carbon monoxide mixture) as feedstocks in the production of many
basic chemicals. The Company delivers product through pipelines from centrally located facilities
in or near the Texas Gulf Coast; Los Angeles, California; Louisiana; Alberta, Canada; Rotterdam,
the Netherlands; Southern England, U.K.; Northern England, U.K. to Western Belgium; Ulsan, Korea;
Tangshan, China; Kuan Yin, Taiwan; Singapore; and Camaçari, Brazil. The Company owns less than
controlling interests in pipelines located in Thailand, Singapore and South Africa.
Tonnage Gases also includes a Polyurethanes Intermediate (PUI) business. At its Pasadena, Texas
facility, the Company produces di-nitrotoluene (“DNT”) which is converted to toluene diamine
(“TDA”) and sold for use as an intermediate in the manufacture of a major precursor of flexible
polyurethane foam used in furniture cushioning, carpet underlay, bedding and seating in
automobiles. Most of the Company’s TDA is sold under long-term contracts with raw material cost and
currency pass-through to a small number of customers. The Company employs proprietary technology
and scale of production to differentiate its polyurethane intermediates from those of its
competitors.
Natural gas is the principal raw material for hydrogen, carbon monoxide and synthesis gas
production. Electric power is the largest cost component in the production of atmospheric gases.
The Company mitigates energy and natural gas prices through long-term cost-pass-through contracts.
Toluene, ammonia and hydrogen are the principal raw materials for the PUI business and are
purchased from various suppliers under multi-year contracts. During fiscal year 2008, no
significant difficulties were encountered in obtaining adequate supplies of energy or raw
materials.
Tonnage Gases competes in the United States and Canada against three global industrial gas
companies: L’Air Liquide S.A., Linde AG and Praxair, Inc., and several regional sellers for gases.
Competition is based primarily on price, reliability of supply, the development of applications
that use industrial gases, and, in some cases, provision of other services or products such as
power and steam generation. Similar competitive situations exist in the European and Asian
industrial gas markets where the Company competes against the three global companies as well as
regional competitors. Global competitors for the PUI business are primarily BASF Corporation and
Bayer AG.
Tonnage Gases sales constituted approximately 34 percent of the Company’s consolidated sales in
fiscal year 2008, 32 percent in fiscal year 2007 and 32 percent in fiscal year 2006. Tonnage Gases
hydrogen sales constituted approximately
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17 percent of the Company’s consolidated sales in fiscal
year 2008, 17 percent in fiscal year 2007 and 16 percent in fiscal year 2006.
ELECTRONICS AND PERFORMANCE MATERIALS
Electronics and Performance Materials employs applications technology to provide solutions to a
broad range of global industries through chemical synthesis, analytical technology, process
engineering and surface science. This segment provides the electronics industry with specialty
gases (such as nitrogen trifluoride, silane, arsine, phosphine, white ammonia, silicon
tetrafluoride, carbon tetrafluoride, hexafluoromethane, critical etch gases and tungsten
hexafluoride), as well as tonnage gases (primarily nitrogen), specialty chemicals, services and
equipment for the manufacture of silicon and compound semiconductors, thin film transistor liquid
crystal displays and photovoltaic devices. These products are delivered through various supply
chain methods, including bulk delivery systems or distribution by pipelines such as those located
in California’s Silicon Valley; Phoenix, Arizona; Tainan, Taiwan; Gumi and Giheung, Korea; and
Tianjin and Shanghai, China.
Electronics and Performance Materials also provides performance materials for a wide range of
products, including coatings, inks, adhesives, civil engineering, personal care, institutional and
industrial cleaning, mining, oil refining and polyurethanes, and focuses on the development of new
materials aimed at providing unique functionality to emerging markets. Principal performance
materials include polyurethane catalysts and other additives for polyurethane foam, epoxy amine
curing agents and auxiliary products for epoxy systems and specialty surfactants for formulated
systems.
The Electronics and Performance Materials segment uses a wide variety of raw materials, including
alcohols, ethyleneamines, cyclohexamine, acrylonitriles and glycols. During fiscal year 2008, no
significant difficulties were encountered in obtaining adequate supplies of energy or raw
materials.
The Electronics and Performance Materials segment faces competition on a product-by-product basis
against competitors ranging from niche suppliers with a single product to larger and more
vertically integrated companies. Competition is principally conducted on the basis of price,
quality, product performance, reliability of product supply, technical innovation, service and
global infrastructure.
Total sales from Electronics and Performance Materials constituted approximately 21 percent of the
Company’s consolidated sales in fiscal year 2008, 23 percent in fiscal year 2007 and 23 percent in
fiscal year 2006.
EQUIPMENT AND ENERGY
Equipment and Energy designs and manufactures cryogenic and gas processing equipment for air
separation (utilizing membrane technology and adsorption technology), hydrocarbon recovery and
purification, natural gas liquefaction (known as “LNG”) and helium distribution (cryogenic
transportation containers), and serves energy markets in a variety of ways.
Equipment is sold globally to customers in the chemical and petrochemical manufacturing, oil and
gas recovery and processing and steel and primary metals processing industries. The segment also
provides a broad range of plant design, engineering, procurement and construction management
services to its customers.
Energy markets are served through the Company’s operation and partial ownership of cogeneration and
flue gas desulphurization facilities and its development of hydrogen as an energy carrier and
oxygen-based technologies to serve energy markets in the future. The Company owns and operates a
cogeneration facility in Calvert City, Kentucky; operates and owns fifty percent interests in a
49-megawatt fluidized-bed coal-fired power generation facility in Stockton, California and a
24-megawatt gas-fired combined-cycle power generation facility near Rotterdam, the Netherlands; and
operates and owns a 47.9 percent interest in a 112-megawatt gas-fueled power generation facility in
Thailand. The Company also operates and owns a fifty percent interest in a flue gas
desulphurization facility in Indiana.
Steel, aluminum and capital equipment subcomponents (compressors, etc.) are the principal raw
materials in the equipment portion of this segment. Adequate raw materials for individual projects
are acquired under firm purchase agreements. Coal, petroleum coke and natural gas are the largest
cost components in the production of energy. The Company mitigates these cost components, in part,
through long-term cost-pass-through contracts. During fiscal year 2008, no significant difficulties
were encountered in obtaining adequate supplies of raw materials.
Equipment and Energy competes with a great number of firms for all of its offerings except LNG heat
exchangers, for which there are fewer competitors due to the limited market size and proprietary
technologies. Competition is based primarily on technological performance, service, technical
know-how, price and performance guarantees.
The backlog of equipment orders (including letters of intent believed to be firm) from third party
customers (including equity affiliates) was approximately $399 million on 30 September 2008,
approximately 76 percent of which is for
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cryogenic air separation equipment and 8 percent of which
is for LNG heat exchangers, as compared with a total backlog of
approximately $258 million on 30 September 2007. The Company expects that approximately
$289 million of the backlog on 30 September 2008 will be completed during fiscal year 2009.
NARRATIVE DESCRIPTION OF THE COMPANY’S BUSINESS GENERALLY
FOREIGN OPERATIONS
The Company, through subsidiaries, affiliates and minority-owned ventures, conducts business in
over forty countries outside the United States. Its international businesses are 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 has majority or wholly-owned foreign subsidiaries that operate in Canada, 17 European
countries (including the United Kingdom and Spain), 10 Asian countries (including China, Korea,
Singapore and Taiwan) and four Latin American countries (including Mexico and Brazil). The Company
also owns less-than-controlling interests in entities operating in Europe, Asia, Africa, the Middle
East and Latin America (including Italy, Germany, China, Korea, India, Singapore, Thailand, South
Africa and Mexico).
Financial information about the Company’s foreign operations and investments is included in Notes
8, 17 and 22 to the Consolidated Financial Statements included under Item 8 herein. Information
about foreign currency translation is included under “Foreign Currency” in Note 1 and information
on the Company’s exposure to currency fluctuations is included under “Currency Risk Management” in
Note 6 to the Consolidated Financial Statements included under Item 8 below and in Management’s
Discussion and Analysis of Financial Condition and Results of Operations under “Foreign Currency
Exchange Rate Risk” included under Item 7 below. Export sales from operations in the United States
to unaffiliated customers amounted to $629 million, $677 million and $709 million in fiscal years
2008, 2007 and 2006, respectively. Total export sales in fiscal year 2008 included $505 million in
export sales to affiliated customers. The sales to affiliated customers were primarily equipment
sales within the Equipment and Energy segment and Electronics and Performance Materials sales.
TECHNOLOGY DEVELOPMENT
The Company pursues a market-oriented approach to technology development through research and
development, engineering and commercial development processes. It conducts research and development
principally in its laboratories located in the United States (Trexlertown, Pennsylvania; Carlsbad,
California; Milton, Wisconsin; and Phoenix, Arizona), the United Kingdom (Basingstoke, London and
Carrington); Germany (Hamburg); the Netherlands (Utrecht); Spain (Barcelona and Madrid) and Asia
(Tokyo, Japan; Shanghai, China; Giheung, Korea; and Hsinchu, Taiwan). The Company also funds and
cooperates in research and development programs conducted by a number of major universities and
undertakes research work funded by others — principally the United States Government.
The Company’s corporate research groups, which include materials, process and analytical centers,
support the research efforts of various businesses throughout the Company. Technology development
efforts for use within Merchant Gases, Tonnage Gases and Equipment and Energy focus primarily on
new and improved processes and equipment for the production and delivery of industrial gases and
new or improved applications for all such products. Research and technology development for
Electronics and Performance Materials is primarily concerned with development of new products and
applications to strengthen and extend the Company’s present positions. Work is also performed in
Electronics and Performance Materials to lower processing costs and develop new processes for the
new products.
Research and development expenditures were $131 million during fiscal year 2008, $129 million in
fiscal year 2007 and $140 million in fiscal year 2006, and the Company expended $25 million on
customer-sponsored research activities during fiscal year 2008, $19 million in fiscal year 2007 and
$21 million in fiscal year 2006.
As of 1 November 2008, the Company owned 983 United States patents and 3,030 foreign patents and is
a licensee under certain patents owned by others. While the patents and licenses are considered
important, the Company does not consider its business as a whole to be materially dependent upon
any particular patent, patent license or group of patents or licenses.
ENVIRONMENTAL CONTROLS
The Company is subject to various environmental laws and regulations in the countries in which it
has operations. Compliance with these laws and regulations results in higher capital expenditures
and costs. 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
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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 and particulars on environmental loss
contingencies are provided in Note 19 to the Consolidated Financial Statements included under Item
8 below.
The amounts charged to income from continuing operations on an after-tax basis related to
environmental matters totaled $31 million in fiscal 2008, $25 million in 2007 and $26 million in
2006. These amounts represent an estimate of expenses for compliance with environmental laws,
remedial activities and activities undertaken to meet internal Company standards. Such costs are
estimated to be $22 million in 2009 and $23 million in 2010.
Although precise amounts are difficult to define, the Company estimates that in fiscal year 2008 it
spent approximately $7 million on capital projects to control pollution versus $11 million in 2007.
Capital expenditures to control pollution in future years are estimated at approximately $8 million
in 2009 and $7 million in 2010. The cost of any environmental compliance generally is contractually
passed through to the customer.
The Company accrues environmental investigatory and 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 $82 million to a reasonably
possible upper exposure of $95 million. The accrual on the balance sheet for 30 September 2008 was
$82.9 million and for 30 September 2007 was $52.2 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.
EMPLOYEES
On 30 September 2008, the Company (including majority-owned subsidiaries) had approximately 21,100
employees, of whom approximately 20,600 were full-time employees and of whom approximately 11,600
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 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 100 F Street, N.E., 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.
SEASONALITY
Although none of the four business segments are subject to seasonal fluctuations to any material
extent, the Electronics and Performance Materials segment is susceptible to the cyclical nature of
the electronics industry and to seasonal fluctuations in underlying end-use Performance Materials
markets.
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WORKING CAPITAL
The Company maintains inventory where required to facilitate the supply of products to customers on
a reasonable delivery schedule. Merchant Gases inventory consists primarily of industrial, medical,
specialty gas and crude helium inventories
supplied to customers through liquid bulk and packaged gases supply modes. Merchant Gases
inventory also includes home medical equipment to serve healthcare patients. Electronics
inventories consist primarily of bulk and packaged specialty gases and chemicals and also include
inventories to support sales of equipment and services. Performance Materials inventories consist
primarily of bulk and packaged performance chemical solutions. The Tonnage Gases inventory is
primarily Polyurethane Intermediates raw materials and finished goods; the remaining on-site plants
and pipeline complexes have limited inventory. Equipment and Energy has limited inventory.
CUSTOMERS
There is no single or small number of customers upon which the Company is dependent.
GOVERNMENTAL CONTRACTS
No segment’s business is subject to a government entity’s renegotiation of profits or termination
of contracts that would be material to the Company’s business as a whole.
EXECUTIVE OFFICERS OF THE COMPANY
The Company’s executive officers and their respective positions and ages on 15 November 2008
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 | ||||
M. Scott Crocco
|
44 | Vice President and Corporate Controller (became Vice President in 2008; Corporate Controller in 2007; and Director of Corporate Decision Support in 2003) | ||||
Robert D. Dixon
(A)
|
49 | Senior Vice President and General Manager–Merchant Gases (became Senior Vice President in 2008; Vice President and General Manager–Merchant Gases in 2007; President–Air Products Asia in 2003; and Vice President–Air Products Asia in 2003) | ||||
Michael F. Hilton
(A)
|
54 | Senior Vice President and General Manager–Electronics and Performance Materials (became Senior Vice President in 2008; Vice President and General Manager–Electronics and Performance Materials in 2007; and Vice President–Electronics Businesses in 2003) | ||||
Paul E. Huck
(A)
|
58 | Senior Vice President and Chief Financial Officer (became Senior Vice President in 2008; Vice President and Chief Financial Officer in 2004) | ||||
Stephen J. Jones
(A)
|
47 | Senior Vice President, General Counsel and Secretary (became Senior Vice President, General Counsel and Secretary in 2008; Vice President and Associate General Counsel in 2007; and Vice President and General Manager–Industrial Chemicals Division in 2003) | ||||
John W. Marsland
(A)
|
42 | Vice President–Business Services (became Vice President–Business Services in 2009; Vice President and General Manager–Healthcare in 2007; Vice President and General Manager, Global Healthcare in 2005; and Vice President–Corporate Development Office in 2003) | ||||
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| Name | Age | Office | ||||
John E. McGlade
(A)(B)(C)
|
54 | President and Chief Executive Officer (became Chief Executive Officer in 2008; President and Chief Operating Officer in 2006; Group Vice President–Chemicals in 2003) | ||||
Lynn C. Minella
(A)
|
50 | Senior Vice President–Human Resources and Communications (became Senior Vice President–Human Resources and Communications in 2008; Vice President–Human Resources in 2004) | ||||
Scott A. Sherman
(A)
|
57 | Senior Vice President and General Manager–Tonnage Gases, Equipment and Energy (became Senior Vice President in 2008; Vice President and General Manager–Tonnage Gases, Equipment and Energy in 2007; and Vice President and General Manager–Energy and Process Industries in 2001) | ||||
| (A) | Member, Corporate Executive Committee | |
| (B) | Member, Board of Directors | |
| (C) | Member, Executive Committee of the Board of Directors |
ITEM 1A. RISK FACTORS.
The Company operates in over 40 countries around the world and faces a variety of risks and
uncertainties that could materially affect its future operations and financial performance. Many
of these risks and uncertainties are not within the Company’s control. Risks that may
significantly impact the Company include the following:
Overall Economic Conditions – Weakening general economic conditions in markets in which the Company
does business may decrease the demand for its goods and services or its profitability.
Demand for the Company’s products and services depends in part on the general economic conditions
affecting the countries and industries in which the Company does business. Currently, deteriorating
economic conditions in the U.S. and other countries and in industries served by the Company may
negatively impact demand for the Company’s products and services, in turn negatively impacting the
Company’s revenues and earnings. Excess capacity in the Company’s or its competitors’ manufacturing
facilities could decrease the Company’s ability to generate profits. Unanticipated contract
terminations or project delays by current customers can also negatively impact financial results.
Asset
Impairments – The Company may be required to record an impairment
on its long lived assets.
Weakening
demand may create underutilization of the Company’s manufacturing capacity or elimination of
product lines; contract terminations or customer shut downs may force sale or abandonment of
facilities and equipment; contractual provisions may allow customer buy out of facilities or
equipment; or other events associated with weakening economic conditions or specific product or
customer events may require the Company to record an impairment on tangible assets such as
facilities and equipment as well as intangible assets such as intellectual property or goodwill,
which would have a negative impact on the Company’s financial results.
Competition – Inability to compete effectively in a segment could adversely impact sales and
financial performance.
The Company faces strong competition from several large, global competitors and many smaller
regional ones in all of its business segments. Introduction by competitors of new technologies,
competing products or additional capacity could weaken demand for or impact pricing of the
Company’s products, negatively impacting financial results. In addition, competitors’ pricing
policies can materially affect pricing of the Company’s products or its market share, causing an
adverse impact on revenues and/or profitability.
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Raw Material and Energy Cost and Availability – Interruption in ordinary sources of supply or an
inability to recover increases in energy and raw material costs from customers could result in lost
sales or reduced profitability.
Energy, including electricity, natural gas and diesel fuel for delivery trucks, is the largest cost
component of the Company’s business. Because the Company’s industrial gas facilities use
substantial amounts of electricity, energy price fluctuations could materially impact the Company’s
revenues and earnings. Hydrocarbons, including natural gas, are the primary feedstock for the
production of hydrogen, carbon monoxide and synthesis gas. The Electronics and Performance
Materials segment uses a wide variety of raw materials, including alcohols, ethyleneamines,
cyclohexamines, acrylonitriles and glycols. Shortages or price escalation in these materials could
negatively impact financial results. A disruption in the supply of energy and raw materials,
whether due to market conditions, natural events or other disruption, could prevent the Company
from meeting its contractual commitments, harming its business and financial results.
The Company typically contracts to pass through cost increases in energy and raw materials to its
customers, but cost variability can still have a negative impact on its results. The Company may
not be able to raise prices as quickly as costs rise or competitive pressures may prevent full
recovery. Increases in energy or raw materials costs that cannot be passed on to customers for
competitive or other reasons would negatively impact the Company’s revenues and earnings. Even
where costs are passed through, price increases can cause lower sales volume.
Regulatory Changes – The Company is subject to extensive government regulation in jurisdictions
around the globe in which it does business. Changes in regulations addressing, among other things,
environmental compliance, import/export restrictions and taxes, can negatively impact the Company’s
operations and financial results.
The Company is subject to government regulation in the United States and foreign jurisdictions in
which it conducts its business. Compliance with changes in laws or regulations can require
additional capital expenditures or increase operating costs. Export controls or other regulatory
restrictions could prevent the Company from shipping Company products to and from some markets or increase
the cost of doing so. Changes in tax laws and regulations and international tax treaties could
affect the financial results of the Company’s businesses.
Greenhouse Gases — Legislative and regulatory responses to global climate change create financial
risk.
Some of the Company’s operations are within jurisdictions that have, or are developing, regulations
governing emissions of greenhouse gases (GHG). These include existing and expanding coverage under
the European Union Emissions Trading Scheme; mandatory reporting and reductions at manufacturing
facilities in Alberta, Canada; and mandatory reporting and anticipated constraints on GHG emissions
in California and Ontario. In addition, increased public awareness and concern may result in more
international, U.S. federal and/or regional requirements to reduce or mitigate the effects of GHG.
Although uncertain, these developments could increase the Company’s costs related to consumption of
electric power, hydrogen production and fluorinated gases production. The Company believes it will
be able to mitigate some of the potential increased cost through its contractual terms, but the
lack of definitive legislation or regulatory requirements prevents accurate estimate of the
long-term impact on the Company. Any legislation that limits or taxes GHG emissions could impact
the Company’s growth, increase its operating costs or reduce demand for certain of its products.
Environmental Compliance — Costs and expenses resulting from compliance with environmental
regulations may negatively impact the Company’s operations and financial results.
The Company is subject to extensive federal, state, local and foreign environmental and safety laws
and regulations concerning, among other things, emissions in the air, discharges to land and water
and the generation, handling, treatment and disposal of hazardous waste and other materials. The
Company takes it environmental responsibilities very seriously, but there is a risk of
environmental impact inherent in its manufacturing operations. Future developments and more
stringent environmental regulations may require the Company to make additional unforeseen
environmental expenditures. In addition, laws and regulations may require significant expenditures
for environmental protection equipment, compliance and remediation. These additional costs may
adversely affect financial results. For a more detailed description of these matters, see
“Narrative Description of the Company’s Business Generally — Environmental Controls” above.
Foreign Operations, Political and Legal Risks — The Company’s foreign operations can be adversely
impacted by nationalization or expropriation of property, undeveloped property rights and legal
systems or political instability.
The Company’s operations in certain foreign jurisdictions are subject to nationalization and
expropriation risk and some of its contractual relationships within these jurisdictions are subject
to cancellation without full compensation for loss. Economic and political conditions within
foreign jurisdictions, social unrest or strained relations between countries can
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cause fluctuations in demand, price volatility, supply disruptions or loss of property. The
occurrence of any of these risks could have a material, adverse impact on the Company’s operations
and financial results.
Interest Rate Fluctuations — The Company’s earnings, cash flow and financial position can be
impacted by interest rate increases.
At 30
September 2008, the Company had total consolidated debt of
$3,966.8 million, of which
approximately $451.4 million will mature in the next twelve months. The Company expects to continue to
incur indebtedness to fund new projects and replace maturing debt. Although the Company actively
manages its interest rate risk through the use of derivatives and diversified debt obligations, not
all borrowings at variable rates are hedged, and new debt will be priced at market rates. If
interest rates increase, the Company’s interest expense could increase significantly, affecting
earnings and reducing cash flow available for working capital, capital expenditures, acquisitions
and other purposes.
Currency Fluctuations — Changes in foreign currencies may adversely affect the Company’s financial
results.
A substantial amount of the Company’s sales are derived from outside the United States, a
significant portion of which are denominated in foreign currencies. The Company also has
significant production facilities which are located outside of the United States. Financial results
therefore will be affected by changes in foreign currency rates. The Company uses certain financial
instruments to mitigate these effects, but it is not cost effective to hedge foreign currency
exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates
on earnings, cash flows and fair values of assets and liabilities. Accordingly, reported sales, net
earnings, cash flows and fair values have been and in the future will be affected by changes in
foreign exchange rates. For a more detailed discussion of currency exposure, see “Market Ratio and
Sensitivity Analysis” included in Item 7A below.
Catastrophic Events – Catastrophic events could disrupt the Company’s operations or the operations
of its suppliers or customers, having a negative impact on the Company’s business, financial
results and cash flow.
The Company’s operations could be impacted by catastrophic events outside the Company’s control,
including severe weather conditions such as hurricanes, floods, earthquakes and storms; health
epidemics and pandemics; or acts of war and terrorism. Any such event could cause a serious
business disruption that could affect the Company’s ability to produce and distribute its products
and possibly expose it to third-party liability claims. Additionally, such events could impact the
Company’s suppliers, in which event energy and raw materials may be unavailable to the Company, or
its customers may be unable to purchase or accept the Company’s products and services. Any such
occurrence could have a negative impact on the Company’s operations and financial results.
Operational Risks – Operational and execution risks may adversely affect the Company’s operations
or financial results.
The Company’s operation of its facilities, pipelines and delivery systems inherently entails
hazards that require continuous oversight and control, such as pipeline leaks and ruptures, fire,
explosions, toxic releases, mechanical failures or vehicle accidents. If operational risks
materialize, they could result in loss of life, damage to the environment or loss of production,
all of which could negatively impact the Company’s on-going operations, financial results and cash
flow. The Company’s operating results are dependent on the continued operation of its production
facilities and its ability to meet customer requirements. Insufficient capacity may expose the
Company to liabilities related to contract commitments. Operating results are also dependent on the
Company’s ability to complete new construction projects on time, on budget and in accordance with
performance requirements. Failure to do so may expose the business to loss of revenue, potential
litigation and loss of business reputation.
Information Security — The security of the Company’s information technology systems could be
compromised, which could adversely affect its ability to operate.
The Company utilizes a global enterprise resource planning (ERP) system and other technologies for
the distribution of information both within the Company and to customers and suppliers. The ERP
system and other technologies are potentially vulnerable to interruption from viruses, hackers or
system breakdown. To mitigate these risks, the Company has implemented a variety of security
measures, including virus protection, a state of the art data center, redundancy procedures
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and recovery processes. A significant system interruption, however, could materially affect the
Company’s operations, business reputation and financial results.
Litigation and Regulatory Proceedings — The Company’s financial results may be affected by various
legal and regulatory proceedings, including those involving antitrust, environmental or other
matters.
The Company is subject to litigation and regulatory proceedings in the normal course of business
and could become subject to additional claims in the future, some of which could be material. The
outcome of existing legal proceedings may differ from the Company’s expectations because the
outcomes of litigation, including regulatory matters, are often difficult to reliably predict.
Various factors or developments can lead the Company to change current estimates of liabilities and
related insurance receivables where applicable or make such estimates for matters previously not
susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a
significant settlement, significant regulatory developments or changes in applicable law. A future
adverse ruling, settlement or unfavorable development could result in charges that could have a
material adverse effect on the Company’s results of operations in any particular period. For a more
detailed discussion of the legal proceedings involving the Company, see Note 19
to the Consolidated Financial Statements included in Item 8 below.
Recruiting and Retaining Employees — Inability to attract, retain or develop skilled employees
could adversely impact the Company’s business.
Sustaining and growing the Company’s business depend on the recruitment, development and
retention of qualified employees. Demographic trends and changes in the geographic concentration of
global businesses have created more competition for talent. The inability to attract, develop or
retain quality employees could negatively impact the Company’s ability to take on new projects and
sustain its operations which might adversely affect the Company’s operations or its ability to
grow.
Portfolio
Management — The success of portfolio management activities is
not predictable
The Company continuously reviews and manages its portfolio of assets in order to maximize value for its
shareholders. Portfolio management involves many variables, including future acquisitions and
divestitures, restructurings and resegmentations and cost-cutting and productivity initiatives. The
timing, impact and ability to complete such undertakings, the costs and financial charges
associated with such activities and the ultimate financial impact of
such undertakings are uncertain
and can have a negative short or long-term impact on the Company’s operations and financial
results.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
The Company has not received any written comments from the Commission staff that remain unresolved.
ITEM 2. PROPERTIES.
The Company owns its principal executive offices, which are located at its headquarters in
Trexlertown, Pennsylvania, and also owns additional principal administrative offices in Hersham,
near London, England and in Hattingen, Germany. Its principal Asian administrative offices, which
are leased, are located in Hong Kong; Shanghai, China; Taipei, Taiwan; and Singapore. Additional
administrative offices are leased in Ontario, Canada; Kawasaki, Japan; Seoul, Korea; Petaling
Jaya, Malaysia; Brussels, Belgium; Paris, France; Barcelona, Spain; Rotterdam, the Netherlands; and
São Paulo, Brazil. Management believes the Company’s manufacturing facilities, described in more
detail below, are adequate to support its businesses.
Following is a description of the properties used by the Company’s four business segments:
MERCHANT GASES
Merchant Gases currently operates over 160 facilities across the United States and in Canada
(approximately 40 of which sites are owned), over 160 sites in Europe including healthcare
(approximately half of which sites are owned) and over 50 facilities in seven countries within Asia
and in Brazil. Helium is recovered at sites in Kansas and Texas and distributed from several
transfill sites in the U.S., Europe and Asia. Sales support offices are located at its Trexlertown
headquarters as well
as in leased properties in three states, at several sites in Europe and at 15 sites in Asia. R&D
activities for this segment are conducted in the Trexlertown, Pennsylvania laboratory facilities.
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TONNAGE GASES
Tonnage Gases operates 50 plants in the United States and Canada that produce over 300 standard
tons-per-day of product. Over 30 of these facilities produce or recover hydrogen, many of which
support the three major pipeline systems located along the Gulf Coast of Texas, on the Mississippi
River corridor and in Los Angeles, California. The Tonnage Gases segment includes a facility in
Pasadena, Texas that produces Polyurethane Intermediate products. The segment also operates over 30
tonnage plants in Europe and 17 tonnage plants within Asia, the majority of which are on leasehold
type long term structured agreements. Sales support offices are located at the Company’s
headquarters in Trexlertown, Pennsylvania, as well as in leased offices in Texas, Louisiana,
California and Calgary, Alberta.
ELECTRONICS AND PERFORMANCE MATERIALS
The electronics business within the Electronics and Performance Materials segment produces,
packages and stores nitrogen, specialty gases and electronic chemicals at over 40 sites in the
United States (the majority of which are leased), nine facilities (including sales offices) in
Europe and over 40 facilities in Asia (approximately half of which are located on customer sites).
The performance materials portion of this segment operates facilities in Los Angeles, California;
Calvert City, Kentucky; Paulsboro, New Jersey; Wichita, Kansas; Milton, Wisconsin; Reserve,
Louisiana; Clayton, U.K.; Singapore; Isehara, Japan; and Changzhou, China. A specialty amines
facility is currently under construction in Nanjing, China. Substantially all of the performance
materials properties are owned.
This segment has eight field sales offices in the United States as well as sales offices in Europe,
Taiwan, Korea, Singapore and China, the majority of which are leased. The segment conducts R&D
related activities at nine locations worldwide.
EQUIPMENT AND ENERGY
Equipment and Energy operates seven manufacturing plants and two sales offices in the U.S. The
Company manufactures a significant portion of the world’s supply of LNG equipment at its
Wilkes-Barre, Pennsylvania site. Air separation columns and cold boxes for Company-owned facilities
and third party sales are produced by operations in Acrefair in the United Kingdom and in Caojing,
China, as well as in the Wilkes-Barre facility when capacity is available. Cryogenic
transportation containers for liquid helium are manufactured and reconstructed at facilities in
eastern Pennsylvania and Liberal, Kansas. A new facility in Istres, France is scheduled for
start-up in 2009, which will reconstruct cryogenic transportation containers. Offices in Hersham,
United Kingdom and Shanghai, China house equipment commercial team members.
Electric power is produced at various facilities including Stockton, California; Calvert City,
Kentucky; and Rotterdam, the Netherlands. Flue gas desulfurization operations are conducted at
the Pure Air facility in Chesterton, Indiana. Additionally, the Company owns a 47.9 percent
interest in a gas-fueled power generation facility in Thailand. The Company or its affiliates own
approximately 50 percent of the real estate in this segment and lease the remaining 50 percent.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business the Company and its subsidiaries are involved in various legal
proceedings, including contract, product liability, intellectual property and insurance matters.
Although litigation with respect to these matters is routine and incidental to the conduct of the
Company’s business, such litigation could result in large monetary awards, especially if a civil
jury is allowed to determine compensatory and/or punitive damages. However, the Company believes
that litigation currently pending to which it is a party will be resolved without any material
adverse effect on its financial position, earnings or cash flows.
The Company is also from time to time involved in certain competition, environmental, health and
safety proceedings involving governmental authorities. The Company is a party to proceedings 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 31 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 including cleanup activity at certain of its manufacturing
sites. 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
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consolidated financial position. Additional
information on the Company’s environmental exposure is included under “Narrative Description of the
Company’s Business Generally — Environmental Controls.”
On 13 March 2008, the Company was notified that the U.S. Environmental Protection Agency had made a
referral to the U.S. Department of Justice concerning alleged violations of the Resource
Conservation and Recovery Act (RCRA) related to sulfuric acid exchange at the Company’s Pasadena,
Texas facility. The Company disputes these allegations, has been in active discussions with the
Department of Justice on the matter and believes the matter will be resolved without legal action.
However, the Company cannot, at this time, reasonably predict the ultimate outcome of any
proceedings that might be instituted or the sanctions, if any, that could be imposed, but the
Company does not expect that any sums it may have to pay in connection with this matter would have
a materially adverse effect on its consolidated financial position or net cash flows.
During the third quarter of 2008, a unit of the Brazilian Ministry of Justice issued a report
(previously issued in January, 2007, and then withdrawn) on its investigation of the Company’s
Brazilian subsidiary, Air Products Brasil Ltda. and several other Brazilian industrial gas
companies. The report recommended that the Brazilian Administrative Council for Economic Defense
impose sanctions on Air Products Brasil Ltda. and the other industrial gas companies for alleged
anticompetitive 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.
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 the
Company’s 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.
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Quarterly Stock Information
| 2008 | High | Low | Close | Dividend | ||||||||||||
First |
$ | 105.02 | $ | 92.05 | $ | 98.63 | $ | .38 | ||||||||
Second |
98.80 | 80.73 | 92.00 | .44 | ||||||||||||
Third |
106.06 | 92.20 | 98.86 | .44 | ||||||||||||
Fourth |
100.14 | 65.05 | 68.49 | .44 | ||||||||||||
| $ | 1.70 | |||||||||||||||
| 2007 | High | Low | Close | Dividend | ||||||||||||
First |
$ | 72.45 | $ | 66.19 | $ | 70.28 | $ | .34 | ||||||||
Second |
78.63 | 68.58 | 73.96 | .38 | ||||||||||||
Third |
82.74 | 73.30 | 80.37 | .38 | ||||||||||||
Fourth |
98.51 | 77.26 | 97.76 | .38 | ||||||||||||
| $ | 1.48 | |||||||||||||||
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. 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)
921-8124 (all other locations), Internet website www.amstock.com, and e-mail address
info@amstock.com. As of 31 October 2008, there were 8,846 record holders of the Company’s common
stock.
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Purchases of Equity Securities by the Issuer
The Company continued a stock repurchase program as described in footnotes 1 and 2 to the following
table. As of 30 September 2008, the Company had purchased 23.7 million of its outstanding shares at
a cost of $1,850.8 million.
Purchases of equity securities by the issuer during the fourth quarter of fiscal 2008 are as
follows:
| (d) Maximum Number (or | ||||||||||||||||
| (a) Total | (c) Total Number of | Approximate Dollar | ||||||||||||||
| Number of | Shares (or Units) | Value) of Shares (or | ||||||||||||||
| Shares (or | Purchased as Part of | Units) that May Yet Be | ||||||||||||||
| Units) | (b) Average Price Paid | Publicly Announced | Purchased Under the | |||||||||||||
| Period | Purchased | per Share (or Unit) | Plans or Programs | Plans or Programs(1) (2) (3) | ||||||||||||
7/1 - 7/31/08 |
0 | 0 | 0 | $ | 882,343,346 | |||||||||||
8/1 - 8/31/08 |
1,474,094 | $ | 90.34 | 1,474,094 | $ | 749,169,984 | ||||||||||
9/1 - 9/30/08 |
1,160,986 | $ | 86.12 | 1,160,986 | $ | 649,183,626 | ||||||||||
TOTAL |
2,635,080 | $ | 88.48 | 2,635,080 | $ | 649,183,626 | ||||||||||
| (1) | On 22 March 2006, the Company announced plans to purchase up to $1.5 billion of Air Products and Chemicals, Inc. common stock under a share repurchase program approved by the Company’s Board of Directors on 16 March 2006. This program was completed during the second quarter of fiscal year 2008. | |
| (2) | On 20 September 2007, the Company’s Board of Directors authorized the repurchase of an additional $1 billion of common stock. The program does not have a stated expiration date. This additional $1 billion program will be completed at the Company’s discretion while maintaining sufficient funds for investing in its businesses and growth opportunities. | |
| (3) | For the quarter ending 30 September 2008, the Company expended $233.2 million in cash for the repurchase of shares. |
ITEM 6. SELECTED FINANCIAL DATA.
The
tabular information appearing under “Five-Year Summary of Selected Financial Data” on page 71
of the Financials of the 2008 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 10 through
31 of the Financials of the 2008 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 page 27 of the
Financials of the 2008 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 reports
thereon of KPMG LLP dated 25 November 2008, appearing on pages
33 through 71 of the Financials of the 2008 Annual Report to Shareholders, are incorporated herein by reference.
Management’s
Report on Internal Control Over Financial Reporting, appearing on
page 32 of the Financials of the 2008
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 33 of the Financials of the 2008 Annual Report to
Shareholders, is incorporated herein by reference.
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The Report
of Independent Registered Public Accounting Firm, KPMG LLP, appearing on page 34 of the
Financials of the 2008 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 2008. 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 has been no change in the Company’s
internal controls over financial reporting (as that term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) which have occurred during the quarter ended 30 September 2008
that has materially affected, or is reasonably likely to materially affect, the Company’s internal
controls over financial reporting.
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 also 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 AND CORPORATE GOVERNANCE.
The biographical information relating to the Company’s directors, appearing in the Proxy Statement
relating to the Company’s 2009 Annual Meeting of Shareholders (the “2009 Proxy Statement”) 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.
Information on Section 16(a) Beneficial Ownership Reporting Compliance, appearing in the 2009 Proxy
Statement under the section, “Air Products Stock Beneficially Owned by Officers and Directors,” is
incorporated herein by reference.
The Company has adopted a Code of Conduct that applies to all employees, including the chief
executive officer, the chief financial officer and the controller. The Code of Conduct can be
found at the Company’s Internet website at
www.airproducts.com/Responsibility/Governance/Code_of_Conduct/EmployeeCodeofConduct/message.htm.
Information on the Company’s procedures regarding its consideration of candidates recommended by
shareholders and a procedure for submission of such candidates, appearing in the 2009 Proxy
Statement under the section, “Selection of Directors” is incorporated by reference. Information on
the Company’s Audit Committee and its Audit Committee Financial Expert, appearing in the 2009 Proxy
Statement under the section, “Audit Committee” is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under “Compensation of Executive Officers” which includes “Report of the Management
Development and Compensation Committee,” “Compensation Discussion and Analysis,” “Executive
Compensation Tables,” “Potential Payments Upon Termination or Change in Control” and “Information
About Stock Performance and Ownership,” appearing in the 2009 Proxy Statement, is incorporated
herein by reference.
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
Securities Authorized for Issuance Under Equity Compensation Plans.
Equity Compensation Plan Information
The following table provides information as of 30 September 2008, about Company stock that may be
issued upon the exercise of options, warrants and rights granted to employees or members of the
Board of Directors under the Company’s existing equity compensation plans, including plans approved
by shareholders and plans that have not been approved by shareholders in reliance on the New York
Stock Exchange’s former treasury stock exception or other applicable exception to the Exchange’s
listing requirements.
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities to be | Weighted-average | future issuance under | ||||||||||
| issued upon exercise of | exercise price of | equity compensation plans | ||||||||||
| outstanding options, | outstanding options, | (excluding securities | ||||||||||
| Plan Category | warrants, and rights | warrants, and rights | reflected in column (a)) | |||||||||
Equity
compensation plans approved by
security holders |
17,807,862 (1) | $ | 50.45 | 5,895,018 | (2) | |||||||
Equity
compensation plans not approved
by security holders |
1,373,820 (3) | $ | 36.64 | 0 | ||||||||
Total |
19,181,682 | $ | 49.47 | 5,895,018 | ||||||||
| (1) | Represents Long-Term Incentive Plan outstanding stock options and deferred stock units that have been granted. Deferred stock units entitle the recipient to one share of Company common stock upon vesting, which is conditioned on continued employment during a deferral period and may also be conditioned on earn out against certain performance targets. | |
| (2) | Represents authorized shares that were available for future grants as of 30 September 2008. These shares may be used for options, deferred stock units, restricted stock and other stock-based awards to officers, directors and key employees. Full value awards such as restricted stock are limited to 20% of cumulative awards. | |
| (3) | Represents outstanding options under Global Employee Stock Awards (219,266), the Stock Incentive Plan (868,963), the Stock Option Plan for Directors (36,000) and the U.K. Savings-Related Share Option Schemes (109,385). This number also includes deferred stock units granted under the Deferred Compensation Plan for Directors prior to 23 January 2003 (44,782) and deferred stock units under the Deferred Compensation Plan (95,424). Deferred stock units issued under the Deferred Compensation Plan are purchased for the fair market value of the underlying shares of stock with eligible deferred compensation. |
The following equity compensation plans or programs were not approved by shareholders. All of these
plans have either been discontinued or do not require shareholder approval because participants
forego current compensation equal to the full market value of any share units credited under the
plans.
Global Employee Stock Option Awards and Stock Incentive Program — No further awards will be made
under these programs. All stock options under these programs were granted at fair market value on
the date of grant, first became exercisable three years after grant, and terminate ten years after
the date of grant or upon the holder’s earlier termination of employment for reasons other than
retirement, disability, death or involuntary termination due to Company action necessitated by
business conditions.
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Stock Option Plan for Directors — No further awards will be made under this plan. All stock options
under this plan were granted at fair market value on the date of grant. The options became
exercisable six months after grant and remain
exercisable for nine and one-half years or, if earlier, two years following the date the director
resigns from the Board (other than because of retirement, disability or death). This plan is no
longer offered. Stock options may now be granted to directors under the Long-Term Incentive Plan;
however, since September 2005, the compensation program for nonemployee directors has not provided
stock options.
The Air Products PLC U.K. Savings-Related Share Option Scheme and the Air Products Group Limited
U.K. Savings-Related Share Option Scheme (together, the “U.K. Plan”) are employee benefit plans for
employees of Air Products PLC (and certain of its U.K. subsidiaries) and Air Products Group Limited
(and certain of its U.K. subsidiaries), respectively (together, the “U.K. Companies”). No further
options will be offered under the U.K. Plan. Employees participate in the U.K. Plan by having
elected to do so during a brief invitation period. An employee who elected to participate chose a
five- or seven-year option period and has amounts of salary automatically withheld and contributed
to a savings account at a bank not affiliated with the Company. At the end of the five-year savings
period, a tax-free bonus is added to the employee’s account. An employee who elected a seven-year
option and retains his savings account for seven years receives a further bonus at the end of the
seventh year. At the end of the option period, the participant may use his savings to purchase
shares of Company stock at the fixed option price or receive in cash the amount of his savings and
bonus(es). His election must be made within six months of the close of the option period. The
option price is an amount determined by the directors of the U.K. Companies on the date the option
is granted, which may not be less than 90 percent of Market Value (as defined in the U.K. Plan) on
the date of grant.
Deferred Compensation Plan for Directors — This plan is no longer offered. It was the vehicle for
providing deferral stock units to the Company’s directors. The compensation program for nonemployee
directors provides that directors have the opportunity to purchase deferred stock units with their
retainers and meeting fees. New directors and directors continuing in office after the annual
meetings are awarded an annual grant of deferred stock units. Each deferred stock unit entitles the
director to one share of Company stock when paid out. Deferred stock units also accrue dividend
equivalents which are equal to the dividends that would have been paid on a share of stock during
the period the units are outstanding. Accumulated dividend equivalents are converted to deferred
stock units on a quarterly basis. Deferred stock units are now provided to directors under the
Long-Term Incentive Plan.
The Company’s Deferred Compensation Plan is an unfunded employee retirement benefit plan available
to certain of the Company’s U.S.-based management and other highly compensated employees (and those
of its subsidiaries) who receive awards under the Company’s Annual Incentive Plan, which is the
annual cash bonus plan for executives and key salaried employees of the Company and its
subsidiaries. Because participants forego current compensation to “purchase” deferred stock units
for full value under the Plan, it is not required to be approved by shareholders under the NYSE
listing standards. Under the Plan, participants may defer a portion of base salary which cannot be
contributed to the Company’s Retirement Savings Plan, a 401(k) and profit-sharing plan offered to
all salaried employees (“RSP”), because of tax limitations (“elective deferrals”) and earn matching
contributions from the Company that they would have received if their elective deferrals had been
contributed to the RSP (“matching credits”). In addition, participants in the Plan may defer all or
a portion of their bonus awards under the Annual Incentive Plan (“bonus deferrals”) under the
Deferred Compensation Plan. Finally, certain participants under the Plan who participate in the
profit-sharing component of the RSP rather than the Company’s salaried pension plans receive
contribution credits under the Plan which are a percentage of their salary ranging from 4-6% based
on their years of service (“contribution credits”). The dollar amount of elective deferrals,
matching credits, bonus deferrals and contribution credits is initially credited to an unfunded
account, which earns interest credits. Participants are periodically permitted while employed by
the Company to irrevocably convert all or a portion of their interest bearing account to deferred
stock units in a Company stock account. Upon conversion, the Company stock account is credited with
deferred stock units based on the fair market value of a share of Company stock on the date of
crediting. Dividend equivalents corresponding to the number of units are credited quarterly to the
interest-bearing account. Deferred stock units generally are paid after termination of employment
in shares of Company stock.
The Deferred Compensation Plan was formerly known as the Supplementary Savings Plan. The name was
changed in 2006 when the deferred bonus program, previously administered under the Annual Incentive
Plan, was merged into this Plan.
The information set forth in the sections headed “Persons Owning More than 5% of Air Products Stock
as of 30 September 2008,” and “Air Products Stock Beneficially Owned by Officers and Directors,”
appearing in the 2009 Proxy Statement, is incorporated herein by reference.
17
Table of Contents
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information appearing in the 2009 Proxy Statement under the sections “Director Independence”
and “Transactions with Related Persons” are incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information appearing in the 2009 Proxy Statement under the section “Fees of Independent
Registered Public Accountant,” 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
Financials of the Company’s 2008 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 the Financials of the 2008 Annual Report)
Management’s Discussion and Analysis |
10 | |||
Management’s Report on Internal Control over Financial Reporting |
32 | |||
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |
33 | |||
Report of Independent Registered Public Accounting Firm |
34 | |||
Consolidated Income Statements for the years ended 30 September 2008, 2007 and 2006 |
35 | |||
Consolidated Balance Sheets at 30 September 2008 and 2007 |
36 | |||
Consolidated Statements of Cash Flows for the years ended 30 September 2008, 2007 and 2006 |
37 | |||
Consolidated Statements of Shareholders’ Equity for the years ended 30 September 2008, 2007 and 2006 |
38 | |||
Notes to the Consolidated Financial Statements |
39 | |||
Business Segment and Geographic Information |
68 | |||
Five-Year Summary of Selected Financial Data |
71 |
2. The following additional information should be read in conjunction with the consolidated
financial statements in the Company’s Financials of the
2008 Annual Report to
Shareholders:
(Page references to this Report)
Report of Independent Registered Public Accounting Firm on Schedule II |
21 | |||
Consolidated Schedule for the years ended 30 September 2008, 2007 and 2006 as follows: |
| Schedule | ||||
| Number | ||||
II Valuation and Qualifying Accounts |
22 |
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 23 of this Report.
18
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
|
|||||
| Senior Vice President and Chief Financial Officer | ||||||
| (Principal Financial Officer) | ||||||
| Date: 26 November 2008 | ||||||
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 E. McGlade
|
26 November 2008 | |
Director, Chairman, President and |
||
Chief Executive Officer |
||
(Principal Executive Officer) |
||
/s/ M. Scott Crocco
|
26 November 2008 | |
Vice President and Corporate Controller |
||
(Principal Accounting Officer) |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
19
Table of Contents
| Signature and Title | Date | |
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
||
*
|
26 November 2008 | |
Director |
| * | Stephen J. Jones, Senior 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/ Stephen J. Jones
|
||||
| Stephen J. Jones | ||||
| Attorney-in-Fact | ||||
| Date: 26 November 2008 |
20
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II
The Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
Under date of 25 November 2008, we reported on the consolidated balance sheets of Air Products and
Chemicals, Inc. and subsidiaries as of 30 September 2008 and 2007, and the related consolidated
income statements and consolidated statements of shareholders’ equity and cash flows for each of
the years in the three-year period ended 30 September 2008, as contained in the Annual Report to
Shareholders incorporated in the Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, 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.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes,” effective 1 October 2007, Statement of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,” as of 30 September 2007,
and FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,”
effective 30 September 2006.
/s/ KPMG LLP
Philadelphia, Pennsylvania
25 November 2008
25 November 2008
21
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 2008, 2007 and 2006
| Other Changes | ||||||||||||||||||||||||
| Additions | Increase (Decrease) | |||||||||||||||||||||||
| Balance at | Charged | Charged | Cumulative | Balance | ||||||||||||||||||||
| Beginning | to | to other | Translation | at End of | ||||||||||||||||||||
| Description | of period | Expense | Accounts | Adjustment | Other [b] | Period | ||||||||||||||||||
| (in millions of dollars) | ||||||||||||||||||||||||
Year Ended 30 September 2008 |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 24 | $ | 10 | $ | 4 | $ | — | $ | (9 | ) | $ | 29 | |||||||||||
Allowance for deferred tax assets |
33 | 36 | — | — | (8 | ) | 61 | |||||||||||||||||
Year Ended 30 September 2007 |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 21 | $ | 7 | $ | — | $ | 1 | $ | (5 | ) | $ | 24 | |||||||||||
Allowance for deferred tax assets |
37 | (3 | ) | — | (1 | ) | — | 33 | ||||||||||||||||
Year Ended 30 September 2006 |
||||||||||||||||||||||||
Allowance for doubtful accounts |
$ | 17 | $ | 9 | $ | — | $ | — | $ | (5 | ) | $ | 21 | |||||||||||
Allowance for deferred tax assets |
18 | 2 | 17 | [a] | — | — | 37 | |||||||||||||||||
Notes: |
||||||||||||
| [a] | Primarily adjustment associated with acquisition of deferred tax asset. | |||||||||||
| [b] | Primarily write-offs of uncollectible trade receivable accounts and tax valuation allowances. |
22
Table of Contents
INDEX TO EXHIBITS
| Exhibit No. | Description | |
(3)
|
Articles of Incorporation and By-Laws. | |
3.1
|
Amended and Restated By-Laws of the Company. (Filed as Exhibit 99.1 to the Company’s Form 8-K Report dated 18 May 2007.)* | |
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. | |
(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
|
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.)* | |
10.4
|
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.)* | |
10.5
|
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.)* | |
10.6
|
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.)* | |
10.6(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.)* | |
10.6(b)
|
Amendment No. 2 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. relating to the Defined Benefit Plans, adopted 11 April 2007. (Filed as Exhibit 10.7(b) to the Company’s Form 10-K Report for the fiscal year ended 30 September 2007.)* |
23
Table of Contents
| Exhibit No. | Description | |
10.7
|
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.)* | |
10.7(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.)* | |
10.7(b)
|
Amendment No. 2 to the Amended and Restated Trust Agreement by and between the Company and PNC Bank, N.A. relating to the Defined Contribution Plans, adopted 11 April 2007. (Filed as Exhibit 10.8(b) to the Company’s Form 10-K Report for the fiscal year ended 30 September 2007.)* | |
10.8
|
Form of Award Agreement under the Long Term Incentive Plan of the Company, used for the FY 2004 awards. (Filed as Exhibit 10.2 to the Company’s Form 10-Q Report for the quarter ended 31 December 2003.)* | |
10.9
|
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.)* | |
10.9(a)
|
Amendment to the Amended and Restated Annual Incentive Plan of the Company effective 19 July 2006. (Filed as Exhibit 10.11(a) to the Company’s Form 10-K Report for the fiscal year ended 30 September 2006.)* | |
10.9 (b)
|
Amendment to the Amended and Restated Annual Incentive Plan of the Company effective 19 September 2007. | |
10.10
|
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.)* | |
10.11
|
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.)* | |
10.12
|
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.)* | |
10.13
|
Form of Award Agreement under the Long Term Incentive Plan of the Company used for the FY 2005 awards. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 December 2004.)* | |
10.14
|
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.)* | |
10.15
|
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. (Filed as Exhibit 10.26 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2005.)* | |
10.16
|
Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY 2006 awards. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 December 2005.)* | |
10.17
|
Amended and Restated Long Term Incentive Plan of the Company, effective 26 January 2006. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 March 2006.)* | |
10.17 (a)
|
Amendments to the Amended and Restated Long Term Incentive Plan of the Company effective 18 May 2006 and 21 September 2006. (Filed as Exhibit 10.22(a) to the Company’s Form 10-K Report for the fiscal year ended 30 September 2006.)* | |
10.17 (b)
|
Amendment to the Amended and Restated Long Term Incentive Plan of the Company effective 17 May 2007. |
24
Table of Contents
| Exhibit No. | Description | |
10.17 (c)
|
Amendment to the Amended and Restated Long Term Incentive Plan of the Company effective 1 January 2008. | |
10.18
|
Amended and Restated Deferred Compensation Plan of the Company, formerly known as the Supplementary Savings Plan, effective 1 January 2005, reflecting amendments through 1 September 2006. (Filed as Exhibit 10.23 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2006.)* | |
10.19
|
Amended and Restated Supplementary Pension Plan of the Company effective 1 January 2005 reflecting amendments through 30 September 2006. (Filed as Exhibit 10.24 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2006.)* | |
10.20
|
Compensation Program for Directors effective 1 October 2008. | |
10.21
|
Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY 2007 awards. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 December 2006.)* | |
10.22
|
Compensation Program for Nonemployee Directors of the Company, effective 1 October 2007. (Filed as Exhibit 10.26 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2007.)* | |
10.23
|
Air Products and Chemicals, Inc. Retirement Savings Plan as amended and restated effective 1 October 2006 to reflect amendments through 30 September 2007. (Filed as Exhibit 10.27 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2007.)* | |
10.24
|
Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY 2008 awards. (Filed as Exhibit 10.1 to the Company’s Form 10-Q Report for the quarter ended 31 December 2007.)* | |
10.25
|
Air Products and Chemicals, Inc. Corporate Executive Committee Separation Program, as amended and restated effective 1 January 2008. (Filed as Exhibit 10.2 to the Company’s Form 10-Q Report for the quarter ended 31 December 2007.)* | |
10.25(a)
|
Air Products and Chemicals, Inc. Corporate Executive Committee Separation Program as amended effective 16 July 2008. | |
10.26
|
Change in Control Severance Agreement. (Filed as Exhibit 10.1 to the Company’s Form 8-K Report filed on 20 December 2007.)* | |
12
|
Computation of Ratios of Earnings to Fixed Charges. | |
13
|
Financials of the Annual Report to Shareholders for the fiscal year ended 30 September 2008, 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 Conduct. (Filed as Exhibit 14 to the Company’s Form 10-K Report for the fiscal year ended 30 September 2005.)* | |
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. |
25
Exhibit 10.9(b)
AMENDMENT TO THE AIR PRODUCTS AND CHEMICALS, INC. ANNUAL
INCENTIVE PLAN
as amended and restated effective 1 October 2001
INCENTIVE PLAN
as amended and restated effective 1 October 2001
RESOLVED, it is the policy of the Committee that the Company will, to the extent permitted by
governing law, rescind and/or require reimbursement of any equity compensation or any annual
incentive award delivered or paid to an Executive Officer where (i) the delivery or payment of the
compensation or award is predicated upon the achievement of certain financial results that were
subsequently the subject of a restatement; (ii) the Committee determines, in its sole discretion,
that the need for the restatement is caused in whole or part by the misconduct of the Executive
Officer; and (iii) a lower amount of compensation would be paid or delivered to the Officer based
on the restated results; and it is further
RESOLVED, that the foregoing policy shall be enforced, in the discretion of the Committee,
where practical and where in the best interests of the shareholders of the Company and enforcement
need not be uniform and may be undertaken selectively among individual Executive Officers, whether
or not such Executive Officers are similarly situated; and it is further
RESOLVED, that Section 8 of the Air Products and Chemicals, Inc. Annual Incentive Plan shall
be amended to redesignate paragraph 8(h) as paragraph 8(i) and the add a new paragraph 8(h) as
follows:
Notwithstanding any other Plan provision to the contrary, the Committee may, in its
sole discretion, require repayment of any award made to a Participant under the Plan
or rescind any deferred payment award made under the Plan and not yet delivered to a
Participant under the Air Products Deferred Compensation Plan, where the award or
deferred payment award was based in whole or part on the achievement of financial
results that are subsequently the subject of a restatement; the Committee
determines, in its sole discretion, that the Participant engaged in misconduct that
created the need for the restatement and a smaller award or deferred payment award
would have been made to the Participant based upon the restated results. All
determinations regarding enforcement, waiver, or modification of the foregoing
repayment and rescission provision shall be made in the Committee’s sole discretion.
Determinations do not need to be uniform and may be made selectively among
individuals, whether or not similarly situated;
and it is further
RESOLVED, that the first sentence of Section 5.1 of the Air Products and Chemicals, Inc.
Deferred Compensation Plan shall be amended to read as follows:
Subject to Section 7.1 and 9.2, a Participant’s Elective Deferrals, Matching
Credits, Bonus Deferrals, and earnings attributable thereto are 100% vested at all
times; provided that a Participant’s Bonus Deferrals shall be subject to the
repayment and rescission provisions of paragraph 8(h) of the Annual Incentive Plan;
and it is further
RESOLVED, that the proper officers of the Company be, and they each hereby are, authorized and
empowered, in the name and on behalf of the Company, to make, execute, and deliver such
instruments, documents, and certificates and to do and perform such other acts and things as may be
necessary or appropriate to carry out the intent and accomplish the purposes of these Resolutions,
including without limitation, making such additional revisions, if any, to the Annual Incentive
Plan or the Deferred Compensation Plan as may be required, in their discretion and upon advice of
counsel to the Company, for effecting these Resolutions or for compliance with applicable law.
| Management Development and Compensation Committee 19 September 2007 |
||||
-2-
Exhibit 10.17(b)
AMENDMENT TO THE
AIR PRODUCTS AND CHEMICALS, INC. LONG-TERM INCENTIVE PLAN,
as amended and restated effective January 26, 2006 (the “Plan”)
AIR PRODUCTS AND CHEMICALS, INC. LONG-TERM INCENTIVE PLAN,
as amended and restated effective January 26, 2006 (the “Plan”)
WHEREAS, Section 15 of the Air Products and Chemicals, Inc. Long-Term Incentive Plan (the
“Plan”) authorizes the Board of Directors to amend the Plan; and
WHEREAS, it has been recommended the Plan be amended to clarify certain beneficiary
designations and survivorship procedures;
NOW, THEREFORE, IT IS RESOLVED, Section 13(b) of the Plan is revised to read as follows:
(b) Transferability. Except as the Administrator shall otherwise determine in connection
with determining the terms of Awards to be granted or shall thereafter permit, no Award or any
rights or interests therein of the recipient thereof shall be assignable or transferable by such
recipient except upon death to his or her Designated Beneficiary, and, except as aforesaid, during
the lifetime of the recipient, an Award shall be exercisable only by, or payable only to such
recipient or his or her guardian or legal representative. In no event shall an Award be
transferable for consideration;
and, it is further,
RESOLVED, Section 14 of the Plan is amended so that the definition of “Designated Beneficiary”
therein reads as follows:
“Designated Beneficiary” shall mean the person or persons, if any, last designated as such by
the Participant on a form filed by him or her with the Plan Recordkeeper in accordance with such
procedures as the Plan Recordkeeper shall provide and, if there is no such designation, shall be
the person or persons most recently named as the beneficiary or beneficiaries of life insurance
provided to the Participant by the Company or a Participating Subsidiary, and, if there is no such
life insurance beneficiary, shall be the person or persons designated in the Participant’s will
and, if the will is silent, shall be the estate of the Participant; provided that, notwithstanding
the above, if a Participant dies on or before 31 December 2007 and has not designated a beneficiary
on a form filed with the Plan Recordkeeper, the Designated Beneficiary will be the person or
persons, if any, most recently designated on a beneficiary designation form filed with the Company,
and if no such form exists, shall then be the person or persons determined according to the
sequence described above;
and, it is further,
RESOLVED, that Section 14 shall be amended to add a definition of “Plan Recordkeeper” to read
as follows:
“Plan Recordkeeper” shall mean Fidelity Stock Plan Services, LLC or such other person as shall
be engaged by the Company to perform recordkeeping services for the Plan and, if none, shall be the
Company.
| APCI BOARD OF DIRECTORS 17 MAY 2007 |
||||
-2-
Exhibit 10.17(c)
AMENDMENT TO THE
AIR PRODUCTS AND CHEMICALS, INC. LONG-TERM INCENTIVE
PLAN,
as amended and restated effective January 26, 2006 (the “Plan”).
AIR PRODUCTS AND CHEMICALS, INC. LONG-TERM INCENTIVE
PLAN,
as amended and restated effective January 26, 2006 (the “Plan”).
WHEREAS the Management Development and Compensation Committee of the Board of Directors (the
“Board”) of Air Products and Chemicals, Inc. (the “Company”), has recommended that it is in the
best interests of the Company and the Plan’s present and future participants to revise and clarify
the provisions thereunder relating to (i) the treatment of Awards upon the occurrence of a Change
in Control as defined therein and (ii) the timing of payment of certain Awards; and
WHEREAS capitalized terms used in this Amendment and not otherwise defined shall have the
meanings set forth in the Plan or in the applicable Award Agreement thereunder.
NOW, THEREFORE, BE IT RESOLVED THAT, effective January 1, 2008, the Plan is hereby amended as
follows:
1. Section 9(c) of the Plan is hereby amended by adding to the end of clause (i) thereunder
the following sub-clause (C):
“(c) Notwithstanding the provisions of sub-clauses (A) and (B), no payment in respect of
Deferred Stock Units will be made on an accelerated basis if such accelerated payment would result
in the Participant becoming subject to taxes or penalties under Code Section 409A.”
2. Section 9(d) of the Plan is hereby amended by adding the following clause to the end
thereof:
“; provided that payments in respect of Deferred Stock Units that constitute
deferred compensation under Code Section 409A shall be made in compliance with Code Section 409A.”
3. Section 11 of the Plan is hereby replaced in its entirety with the following:
“11. Change in Control
Following or in connection with the occurrence of a Change in Control, the following shall or
may occur as specified below, notwithstanding any other provisions of this Plan to the contrary:
(a) Acceleration and Exercisability of Stock Options and Stock Appreciation Rights;
Amount of Cash and/or Number of Shares for Stock Appreciation Rights. All Stock Options and
Stock Appreciation Rights shall automatically (and without any action by the Administrator) become
immediately exercisable in full for the period of their remaining terms; provided,
however, that the acceleration of the exercisability of any Stock Option or Stock
Appreciation Right that has not been outstanding for a period of at least six months from its
respective date of grant shall occur on the first day following the end of such six-month period.
(b) Cash Surrender of Stock Options and Stock Appreciation Rights. Notwithstanding
Section 11(a), all or a portion of outstanding Stock Options or Stock Appreciation Rights may, at
the discretion of the Board or Committee, be required to be surrendered by the holder thereof for
cancellation in exchange for a cash payment for each such Stock Option or Stock Appreciation Right.
The cash payment received for each share subject to the Stock Option or Stock Appreciation Right
shall be 100% of the amount, if any, by which the Change in Control Price exceeds the per share
strike price of such Stock Option or Stock Appreciation Right (as applicable). Any such payment
shall be made as soon as practicable but no later than 30 days after the Change in Control.
(c) Reduction in Accordance with Plan. The number of shares covered by Stock Options
and Stock Appreciation Rights will be reduced on a one-for-one basis to the extent related Stock
Options or Stock Appreciation Rights are exercised, or surrendered for cancellation in exchange for
a cash payment, as the case may be, under this Section 11.
(d) Lapse of Restrictions on Restricted Shares. Unless the applicable Award
agreement or an amendment thereto shall otherwise provide, all restrictions applicable to an
outstanding award of Restricted Shares shall lapse immediately upon the occurrence of a Change in
Control regardless of the scheduled lapse of such restrictions; provided that all
or a portion of such Restricted Shares may, at the discretion of the Board or Committee, be
required to be surrendered by the holder thereof for cancellation in exchange for a cash payment
for each such Restricted Share equal to 100% of the Change in Control Price. Such payment shall be
made as soon as practicable but no later than 30 days after the Change in Control.
(e) Accelerated Payment of Deferred Stock Units. Unless the applicable Award
agreement or amendment thereto shall provide otherwise, all outstanding Deferred Stock Units,
together with any Dividend Equivalents for the period for which such Deferred Stock Units have been
outstanding, shall become fully vested and shall be paid in full
notwithstanding that the Deferral Periods as to such Deferred Stock Units have not been
completed. Such payment shall be in Common Stock (or, at the discretion of the Board or Committee,
in cash equal to the Change in Control Price multiplied by the number of Deferred
Stock Units in respect of which the payment is being made) and shall be made as soon as practicable
but no later than 30 days after the Change in Control; provided that all unearned Deferred
Stock Unit Awards conditioned on the satisfaction of performance conditions shall vest in an amount
determined by multiplying (A) the number of shares or units that would have been earned under the
Award at a target level of performance by (B) a fraction, the numerator of which is the number of
full months that shall have elapsed since the beginning of the applicable performance period and
the denominator of which shall be the number of full months in such performance period.
Notwithstanding the above, payments in respect of Deferred Stock Units that are subject to the
requirements under Code Section 409A will be made in accordance with the applicable Award
Agreement.”
4. Section 12 of the Plan is hereby amended by adding the following to the end thereof:
“Notwithstanding the foregoing sentence or any other provision of this Plan to the contrary
(but subject to the requirements under Code Section 409A), the Board or Committee may, upon the
occurrence of a corporate change under this Section 12 or a Change in Control (i) make provision
for a cash payment to the holder of an outstanding Award in consideration for the cancellation of
such Award (including, in the case of outstanding Stock Options or Stock Appreciation Rights, a
cash payment to the holder of such Stock Options or Stock Appreciation Rights in the amount equal
to the excess, if any, of the Change in Control Price with respect to the Common Stock subject to
such Stock Options or Stock Appreciation Rights over the aggregate exercise price of such Stock
Options or Stock Appreciation Rights), (ii) cancel and terminate any Stock Options or Stock
Appreciation Rights having a per share exercise price equal to, or in excess of, the Fair Market
Value of a share of Common Stock subject to such Stock Options or Stock Appreciation Rights without
any payment or consideration therfor or (iii) make provision for a cash payment to the holder of an
outstanding Award in consideration for cancellation of such Award equal to the value of such Award
(such value to be determined by the Committee in its sole discretion based on appropriate valuation
models).”
5. Section 14 of the Plan is hereby amended by adding the following definition of “Change in
Control Price” after the definition of “Change in Control” and before the definition of “Code”:
“Change in Control Price” shall mean the highest tender or exchange offer price paid or to be
paid for Common Stock pursuant to the offer associated with the Change in Control (such price to be
determined by the Administrator from such source or sources of information as it shall determine
including, without limitation, the Schedule 13D or an amendment thereto filed by the offeror
pursuant to Rule 13d-1 under the Act), or the price paid or to be paid for Common Stock under an
agreement associated with the Change in Control, as the case may be.”
RESOLVED FURTHER, that the proper officers of the Company be, and they each hereby are,
authorized and empowered, in the name and on behalf of the Company, to make, execute, and deliver
such instruments, documents, and certificates and to do and perform such other acts and things as
may be necessary or appropriate to carry out the intent and accomplish the purposes of these
Resolutions, including without limitation, to make such additional revisions, if any, to the Plan
as may be required, in their discretion and upon advice of counsel to the Company, for compliance
with Section 409A of the Internal Revenue Code or other applicable law.
| APCI BOARD OF DIRECTORS 24 January 2008 |
Exhibit 10.20
Compensation Program
for Nonemployee Directors
for Nonemployee Directors
| a. | Each director shall be paid an annual retainer of $60,000 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. Payment of this retainer may be deferred 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 $15,000, which retainer shall be payable in quarterly installments. | |
| c. | The presiding director shall receive an additional annual retainer of $15,000. | |
| d. | Each director shall be paid a meeting fee of $2,000 per Board or Committee meeting attended.*/ | |
| e. | 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. |
| f. | 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 $.585 per mile (effective 07/01/08) 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 reimbursed for such expenses at a rate equivalent to first-class air fare of scheduled carriers. |
G-1
Exhibit 10.25
(a)
AIR PRODUCTS AND CHEMICALS, INC.
CORPORATE EXECUTIVE COMMITTEE
SEPARATION PROGRAM
CORPORATE EXECUTIVE COMMITTEE
SEPARATION PROGRAM
As Amended Effective as of July 16, 2008
ARTICLE I
PURPOSE AND TERM OF PLAN
Section 1.01 Purpose. Air Products and Chemicals, Inc. hereby establishes the Air
Products and Chemicals, Inc. Corporate Executive Committee Separation Program (the “Plan”) for the
purpose of facilitating the planned separations of Covered Executives (as defined below) and
providing severance benefits to a Covered Executive.
Section 1.02 Term of the Plan. The Plan, as set forth herein, was originally
effective July 17, 2003. This amendment and restatement of the Plan shall be effective January 1,
2008 (the “Effective Date”). The Plan will continue until such time as the Committee (as defined
below) acting in its sole discretion, elects to modify, supersede or terminate the Plan in
accordance with, and subject to, the provisions of Article V.
ARTICLE II
DEFINITIONS
Section 2.01 “Administrator” shall mean the Committee or, to the extent the Committee
delegates its powers in accordance with Section 4.01, its delegate with respect to matters so
delegated.
Section 2.02 “Air Products” shall mean Air Products and Chemicals, Inc.
Section 2.03 “Annual Incentive Plan” shall mean the Air Products and Chemicals, Inc. Annual
Incentive Plan and/or any similar, successor or substitute short-term bonus plan, program or pay
practice.
Section 2.04 “Benefit” or “Benefits” shall mean any or all of the benefits that a Covered
Executive is entitled to receive pursuant to Sections 3.02, 3.03 and 3.04 of the Plan.
Section 2.05 “Board” means the Board of Directors of Air Products.
Section 2.06 “Bonus” shall mean 100% of the target bonus for a Covered Executive, determined
as of the Covered Executive’s Employment Termination Date under the grant guidelines for the Annual
Incentive Plan or similar successor or substitute annual incentive plan or program.
Section 2.07 “Cause” shall mean (a) the willful failure of an Executive to substantially
perform his or her duties (other than any such failure due to Disability), after a demand for
substantial performance is delivered, which demand shall identify the manner in which the Company
believes that the Covered Executive has not substantially performed his duties, (b) a Covered
Executive’s engaging in willful and serious misconduct that has caused or would reasonably be
expected to result in material injury to the Company or any of its affiliates, (c) a Covered
Executive’s conviction of, or entering a plea of nolo contendere to, a crime that
constitutes a felony, (d) a Covered Executive’s engaging (i) in repeated acts of insubordination
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or (ii) an act of dishonesty, or (e) violation by the Covered Executive of any provision of
Company’s Code of Conduct.
Section 2.08 “CEO” shall mean the Chief Executive Officer of Air Products, or a former chief
executive officer of Air Products whose removal from such position constituted Good Reason.
Section 2.09 “Change in Control” shall be as defined under the Company’s standard change in
control agreement for senior executives or, if applicable, the change in control agreement that is
in effect for a Covered Executive at the time of the Change in Control.
Section 2.10 “Committee” shall mean the Management Development and Compensation Committee of
the Air Products Board of Directors, or such other person or persons appointed by the Board of
Directors of the Company, to act on behalf of the Company with respect to the Plan as provided in
the Plan.
Section 2.11 “Company” shall mean Air Products and any of its wholly or majority owned
subsidiaries and affiliates. The term “Company” shall include any successor to Air Products such
as a corporation succeeding to the business of Air Products or any subsidiary, by merger,
consolidation or liquidation, or purchase of assets or stock or similar transaction.
Section 2.12 “Covered Executive” shall mean (a) the CEO and (b) each individual who serves as
a member of the Company’s Corporate Executive Committee.
Section 2.13 “Disability” shall be as defined under the Company’s long-term disability plan.
Section 2.14 “Employment Termination Date” shall mean the date on which a Covered Executive
incurs a Termination of Employment.
Section 2.15 “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as
amended.
Section 2.16 “Good Reason” shall mean the occurrence of any of the following without a Covered
Executive’s consent:
(a) A material adverse change in the Covered Executive’s position or office with the Company,
or a material diminution in the Covered Executive’s duties, reporting responsibilities and
authority with the Company, or an assignment to the Covered Executive of duties or
responsibilities, which are materially inconsistent with the Covered Executive’s status or position
with the Company; provided that, any of the foregoing in connection with
termination of a Covered Executive’s employment for Cause, Retirement or Disability shall not
constitute Good Reason.
(b) Reduction of the Covered Executive’s Salary or failure by the Company to pay, in
substantially equal installments conforming with the Company’s normal pay practices, the Covered
Executive’s Salary; provided, however, that the Company may reduce a Covered
Executive’s Salary if such reduction is no less favorable to the Covered Executive than the
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average annual percentage reduction during the applicable Fiscal Year for all Highly
Compensated Employees; provided further that the Company may adjust its normal
payroll practices with respect to the payment of a Covered Executive’s Salary provided that such
adjustment is applicable to all Highly Compensated Employees.
(c) A material reduction in a covered Executive’s annual incentive opportunities under the
Annual Incentive Plan without a corresponding increase in other incentive compensation payable by
the Company; provided, however, that the Company may reduce a Covered Executive’s
annual incentive opportunities under the Annual Incentive Plan if such reduction is on a basis no
less favorable to the Covered Executive than the basis upon which the Company reduces the annual
incentive opportunities payable to all Highly Compensated Employees during the applicable Fiscal
Year;
(d) A material reduction in a Covered Executive’s aggregate Company provided benefits under
the Company’s employee pension benefit, life insurance, medical, dental, health and accident,
disability, severance and paid vacation plans, programs and practices; provided
however that the Company may reduce or adjust the aggregate benefits payable to a Covered
Executive if such reduction is on a basis no less favorable to the Covered Executive than the basis
on which the Company reduces aggregate benefits payable with respect to Highly Compensated
Employees.
(e) A requirement by the Company that a Covered Executive relocate his or her principal place
of employment by more than fifty (50) miles from the location in effect immediately prior to the
Change in Control.
Notwithstanding anything to the contrary contained herein, a Covered Executive’s termination of
employment wll not be treated as for Good Reason as the result of the occurrence of any event
specified in the foregoing clauses (a) through (f) (each such event, a “Good Reason Event”) unless,
within 90 days following the occurrence of such event, the Covered Executive provides written
notice to the Company of the occurrence of such event, which notice sets forth the exact nature of
the event and the conduct required to cure such event. The Company will have 30 days from the
receipt of such notice within which to cure such event (such period, the “Cure Period”). If,
during the Cure Period, such event is remedied, the Covered Executive will not be permitted to
terminate his or her employment for Good Reason. If, at the end of the Cure Period, the Good
Reason Event has not been remedied, a Covered Executive’s voluntary termination will be treated as
for Good Reason during the 90-day period that follows the end of the Cure Period. If a Covered
Executive does not terminate employment during such 90-day period, the Covered Executive will not
be permitted to terminate employment and receive the payments and benefits set forth under this
Agreement as a result of such Good Reason Event.
Section 2.17 “Highly Compensated Employee” shall mean the highest paid one percent of
employees of the Company together with all corporations, partnerships, trusts, or other entities
controlling, controlled by, or under common control with, the Company.
Section 2.18 “Long-Term Incentive Plan” shall mean the Air Products and Chemicals, Inc.
Long-Term Incentive Plan, approved by Air Products’ shareholders most recently on
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26 January 2006, together with all predecessor and similar successor or substitute intermediate
and/or long-term incentive compensation plan or program.
Section 2.19 “Pension Plans” shall mean, the Air Products and Chemicals, Inc. Pension Plan for
Salaried Employees, as amended from time to time together with any similar, succeeding or
substitute plan, and the Supplementary Pension Plan of Air Products and Chemicals, Inc. as amended
from time to time, together with any similar, succeeding or substitute plan, and any private
annuity or pension agreement between the Covered Executive and the Company.
Section 2.20 “Plan” shall mean the Air Products and Chemicals, Inc. Corporate Executive
Committee Separation Program, as set forth herein, and as the same may from time to time be
amended.
Section 2.21 “Retirement Savings Plan” shall mean the Air Products and Chemicals, Inc.
Retirement Savings Plan, as amended from time to time, together with any similar, succeeding or
substitute plan.
Section 2.22 “Plan Year” shall mean each period commencing on October 1 during which the Plan
is in effect and ending on the subsequent September 30.
Section 2.23 “Salary” shall mean an amount equal to the annual rate of a Covered Executive’s
base salary payable to the Covered Executive in all capacities with the Company and its
Subsidiaries or affiliates for the Plan Year in which a Covered Executive’s Employment Termination
Date occurs.
Section 2.24 “Savings Plans” shall mean the Air Products and Chemicals, Inc. Retirement
Savings Plan, as amended from time to time, together with any similar, succeeding or substitute
plan, and the Air Products and Chemicals, Inc. Deferred Compensation Plan, as amended from time to
time, together with any similar, succeeding or substitute plan.
Section 2.25 “Section 409A” shall mean Section 409A of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder as in effect from time to time.
Section 2.26 “Termination of Employment” shall mean termination of the active employment
relationship between a Covered Executive and the Company (a) by the Company for reasons other than
the Covered Executive’s death, Disability, retirement after attaining age 65 or Cause or (b) by the
Covered Executive for Good Reason.
ARTICLE III
ENTITLEMENT TO AND DESCRIPTION OF BENEFITS
Section 3.01 Earned Salary; Accrued Vacation. Upon a Covered Executive’s Termination
of Employment, the Company shall pay to the Covered Executive, as soon as practicable but no later
than 30 days after the Covered Executive’s Employment Termination Date, the Covered Executive’s (i)
Salary, to the extent earned but unpaid as of the Employment
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Termination Date, and (ii) vacation pay accrued through the Employment Termination Date. The
Covered Executive shall also be entitled to business expenses incurred but unreimbursed as of the
Employment Termination Date, earned but unpaid bonuses, and other benefits accrued under the
Company’s benefit plans as of the Employment Termination Date; provided that such
amounts shall be paid to the Covered Executive in accordance with the applicable Company plan,
program or policy.
Section 3.02 Cash Benefits. Upon a Covered Executive’s Termination of Employment and
the Covered Executive’s satisfaction of the conditions specified in Section 3.05 of the Plan, the
Covered Executive shall be entitled to receive the following Benefits, as well as the Benefits
specified in Sections 3.03 and 3.04:
(a) A lump sum cash payment equal to one times (in the case of the CEO,
two times) the sum of the Covered Executive’s Salary plus Bonus.
(b) A lump sum cash payment equal to the Covered Executive’s Bonus for the Plan Year in which
the Employment Termination Date occurs, multiplied by a fraction, the numerator of
which is the number of days in the current Plan Year through the Covered Executive’s Employment
Termination Date, and the denominator of which is 365.
(c)(i) If the Covered Executive is a participant in the Pension Plans and not a Core
Contribution Participant under the Retirement Savings Plan, a lump sum cash payment equal to the
difference between the actuarial present values as of the Employment Termination Date of (A) the
Covered Executive’s accrued vested pension benefits payable at age 65 under the Pension Plans and
(B) those pension benefits calculated by: adding one year (in the case of the CEO, two years) of
service to the actual service credited under such plans for benefit accrual and vesting purposes;
including any early retirement subsidy available under the Pension Plans for which the Covered
Executive is not eligible due to termination before satisfying age and service requirements for
such subsidy; and assuming that the Covered Executive’s benefit will commence in the form of a
straight life annuity on the later of the Employment Termination Date or the date on which the
Covered Executive could retire and commence a benefit under the Pension Plans. The interest rate
used for such purposes shall be the average of the average monthly yields for municipal bonds
published monthly by Moodys Investors’ Service Inc. for the three months immediately preceding the
Covered Executive’s Employment Termination Date. For purposes of determining actuarial present
values in calculating the pension payment, life expectancy assumptions most frequently used by the
Pension Plan’s actuaries for other purposes shall be used. The calculation of the pension payment
described in this subparagraph shall be made by a nationally recognized firm of enrolled actuaries
acceptable to the Covered Executive and the Company. The Company shall pay the reasonable fees and
expenses of such actuarial firm. The calculation made by such actuarial firm shall be binding on
the Covered Executive and the Company.
(ii) If the Covered Executive is a Core Contribution Participant in the Retirement Savings
Plan, a lump sum cash payment (in lieu of the payment described in clause (i) above) equal to the
sum of: (A) the Company Core Contributions and Core Credits (as defined in the Savings Plans) that
the Covered Executive would have received under the Savings Plans during the one-year period (in
the case of the CEO, two-year period) following the
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Employment Termination Date assuming that (I) the Covered Executive remained actively employed by the Company
during such period, (II) the Covered Executive’s Salary continued at the higher of the rate in
effect on the Employment Termination Date or the rate in effect immediately prior to any purported
reduction in the Covered Executive’s Salary constituting Good Reason and (III) the Covered
Executive’s Annual Incentive Plan awards were equal in amount to the higher of the most recent
award received prior to the Employment Termination Date and the average of the awards available to
the Covered Executive under the Annual Incentive Plan during and/or for each of the three
immediately preceding Fiscal Years; provided that the amount payable to the Covered Executive under
this clause (c) shall in no event include any Company matching contributions or credits on such
Company Core Contributions or Core Credits; and (B) any early retirement subsidy available under
the Pension Plans (as in effect immediately prior to the beginning of the Contract Period) for
which the Covered Executive is not eligible solely due to termination before satisfying age and
service requirements for such subsidy and assuming that his or her benefit under the Pension Plans
will commence in the form of a straight life annuity on the later of the Employment Termination
Date or the date on which he or she could retire and commence a benefit and otherwise calculated on
the basis of the assumptions describe in clause (i) above.
Section 3.03 Non-Cash Benefits. In addition to the Benefits provided under Section
3.02, a Covered Executive shall receive and, subject to the Covered Executive’s satisfaction of the
conditions specified in Section 3.05 of the Plan, shall be permitted to retain, the following
additional benefits:
(a) Following a Covered Executive’s Employment Termination Date, the Company will provide to
the Covered Executive and the Covered Executive’s dependents for one year (in the case of the CEO,
two years) following the Covered Executive’s Employment Termination Date, benefits equivalent to
those provided by the Company under all life insurance, medical, dental, health and accident, long
term disability, long term care plans or programs in which the Covered Executive was participating
on the Covered Executive’s Termination Date or, in the event of a reduction in such benefits
constituting Good Reason, equivalent to those provided immediately before such reduction;
provided that such benefits will not be provided beyond the period of time during
which they would have been provided to the Covered Executive under such plans or programs, as in
effect on the Covered Executive’s Employment Termination Date or immediately before a reduction
constituting Good Reason, had the Covered Executive not had a Termination of Employment and such
benefits will be provided for at least the period during which they would have been provided to
Covered Executive had this Plan not been in effect. In the event of the Covered Executive’s death
during such one-year period (in the case of the CEO, two-year period), benefits in respect of the
Covered Executive or to the Covered Executive’s beneficiaries will be provided in accordance with
the terms of such plans or programs as if the Covered Executive were actively employed by the
Company on the date of deathof the Company. Any continuation of benefits pursuant to this
subparagraph shall not run concurrent with any continuation rights provided pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), and for purposes of
applying COBRA with respect to the Covered Executive’s coverage under any group health plan, the
end of coverage under this subparagraph shall be deemed to be the date of a qualifying event
resulting from the termination of a Covered Executive. Except as specifically permitted by Section
409A, the coverage provided to a Covered Executive during any calendar year will not (i) affect the
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coverage to be provided to the Covered Executive in any other calendar year or (ii) be subject
to liquidation or exchange for another benefit. Notwithstanding anything herein to the contrary,
the cost of continued coverage pursuant to this Section 3.03(a) shall be shared by the Covered
Executive and the Company in the same proportion and on the same terms as such costs were shared by
the Covered Executive and the Company prior to the Employment Termination Date or the proportion
and terms in effect immediately prior to any purported change constituting Good Reason.
(b) Outplacement assistance at times and locations that are convenient to the Covered
Executive; provided that such outplacement services will be provided for a period of no
more than 12 months following the Employment Termination Date.
Section 3.04 Long-Term Incentive Plan Benefits. In addition to the Benefits payable
under Sections 3.02 and 3.03, a Covered Executive’s Long-Term Incentive Plan awards shall, subject
to the Covered Executive’s satisfaction of the conditions specified in Section 3.05 of the Plan, be
treated in accordance with this Section 3.04.
(a) The following rules shall apply only with respect to awards granted prior to the Effective
Date to an individual who was a Covered Executive on September 30, 2007:
(i) All stock options and stock appreciation rights which have been outstanding for at
least one year prior to the Covered Executive’s Employment Termination Date shall continue
to vest in accordance with their normal vesting schedule (if not fully vested as of the
Employment Termination Date) and shall remain in effect for the remainder of their stated
term, as set forth in the agreements governing such awards, in each case as if the Covered
Executive had continued in employment following the Employment Termination Date. All other
stock options and stock appreciation rights shall terminate and be forfeited on the Covered
Executive’s Employment Termination Date.
(ii) All unvested performance shares or other awards with performance-based vesting
shall vest consistent with the decision made by or on behalf of the Company for other senior
executives for the relevant cycle and payments in respect thereof shall be made within 30
days of vesting.
(iii) All awards, including career shares, deferred performance shares and restricted
stock, that are subject to time-based vesting or other non-performance-based conditions,
shall become fully vested and payments in respect thereof shall be made on the day after the
Release Effective Date (as defined below).
(b) The following rules shall apply with respect to awards granted prior to the Effective Date
to an individual who becomes a Covered Executive after September 30, 2007 and with respect to all
awards granted to any Covered Executive on or after the Effective Date:
(i) All stock options and stock appreciation rights that are exercisable as of the
Covered Executive’s Employment Termination Date shall continue to be exercisable following
such Employment Termination Date and shall remain exercisable for the remainder of the term
applicable to the stock option or stock appreciation right. All stock
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options and stock appreciation rights that are not exercisable as of the Covered
Executive’s Employment Termination Date shall automatically terminate as of the Employment
Termination Date.
(ii) All unearned performance shares and other awards with performance-based vesting
shall vest as of the Covered Executive’s Employment Termination Date in an amount determined
by multiplying (A) the number of shares or units that would have been earned under the award
at a target level of performance by (B) a fraction, the numerator of which is the
number of full months that shall have elapsed since the beginning of the applicable
performance period and the denominator of which shall be the number of full months in such
performance period. Payments in respect of such vested awards shall be made on the day
after the Release Effective Date (as defined below).
(iii) All other awards, including deferred stock units (other than deferred stock units
that vest under the Long-Term Incentive Plan or the applicable award agreement upon a
Covered Executive’s death, disability or retirement) and restricted stock, that are subject
to time-based vesting or other non-performance based conditions shall vest as of the Covered
Executive’s Employment Termination Date in an amount determined by multiplying (A) the
number of shares or units that are subject to the award by (B) a fraction, the numerator of
which is the number of full months that shall have elapsed since the beginning of the
applicable vesting period and the denominator of which is the number of full months in the
vesting period. Deferred stock units that become vested under the Long-Term Incentive Plan
or applicable award agreement upon a Covered Executive’s death, disability or retirement
shall become fully vested on the Covered Executive’s Employment Termination Date. Payments
in respect of such vested awards shall be made on the day after the Release Effective Date
(as defined below).
(c) For purposes of this Section 3.04, fractional shares of Common Stock shall be rounded up
to the next highest whole share of stock.
(d) Notwithstanding anything herein to the contrary, the treatment of Long-Term Incentive
Plan awards held by a Covered Executive whose Termination of Employment is a Retirement (as defined
in the Long Term Incentive Plan) shall be determined under the Long-Term Incentive Plan and
applicable award agreement (and not under this Section 3.04) ) to the extent determined by the
Committee on the Covered Executive’s Employment Termination Date to be more favorable to the
Covered Executive; provided that, unearned performance shares and other awards with
performance-based vesting shall instead be settled in accordance with Section 3.04(b)(ii) of the
Plan (and not the Long-Term Incentive Plan and applicable award agreement).
Section 3.05 Conditions to Entitlement to Benefit. To be eligible to receive (or, in
the case of benefits provided under Section 3.03, retain the value of) any Benefits under the Plan
after the Covered Executive’s Employment Termination Date has been set, a Covered Executive must
(a) continue in his then current office and perform such duties for the Company as are typically
related to the Covered Executive’s position (or such other position as the Board reasonably
requests) including identifying, recruiting and/or transitioning the Covered Executive’s successor,
in all events performing all assigned duties in the manner reasonably
-8-
directed by the CEO in his sole discretion, or if the CEO is the Covered Officer, by the Board
in its sole discretion, and cease his employment on the Employment Termination Date; (b) prior to
the 60th day following the Employment Termination Date, execute a release and discharge
of the Company, in substantially the form attached hereto as Appendix A, from any and all claims,
demands or causes of action (other than as provided in said Appendix A) and such release must
become effective and irrevocable prior to the 60th day following the Employment
Termination Date (such 60th day, the “Release Effective Date”); and (c) prior to the
Release Effective Date, execute a noncompetition, nonsolicitation, and nondisparagement agreement
that extends for the two-year period following the Covered Executive’s Employment Termination Date
in substantially the form attached hereto as Appendix B, with such changes therein as the
Administrator shall determine, in his discretion, acting on behalf of the Company. No Benefits due
hereunder shall be paid to a Covered Executive who has not complied in all respects with the
requirements of this Section 3.05.
Section 3.06 Method of Payment. Benefits under the Plan shall be paid as follows:
(a) The cash Benefits determined pursuant to Section 3.02 hereof shall be paid in a lump sum,
subject to all employment and withholding taxes applicable to the type of payments made. Such
payments shall be made on the day after the Covered Executive’s Release Effective Date.
(b) The non-cash Benefits described in Section 3.03 shall be provided after the Employment
Termination Date in accordance with the applicable Company plan, program or policy;
provided that if the Covered Executive fails to comply with all of the conditions
set forth in Section 3.05, the Covered Executive shall be required to repay to the Company in cash
within five (5) business days after written demand is made therefor by the Company, an amount equal
to the value of any Benefit received under Section 3.03.
(c) Long-Term Incentive Plan awards referred to in Section 3.04 will be paid on the later of
the date contemplated under the applicable award agreement and the date (if any) provided for under
Section 3.04; provided that payment shall be made in accordance with the applicable
award agreement to the extent required to avoid taxes or penalties under Section 409A.
Section 3.07 Death or Disability. If a Covered Executive incurs Disability or dies
before the Employment Termination Date has been set, no Plan payments or other benefits will be due
and owing to the Covered Executive or, in the case of his death, to his estate or beneficiary.
If a Covered Executive incurs Disability or dies after his Employment Termination Date has
been set but not attained, the Administrator shall cause any Benefits due under the Plan to be paid
to the Covered Executive or, in the case of his death, to the Covered Executive’s Designated
Beneficiaryas defined in the Long Term Incentive Plan; provided, however, that if the Covered
Executive dies after he has retired prior to attaining the Employment Termination Date, no Benefits
shall be due and owing under the Plan to the Covered Executive’s designated beneficiary, his
estate, or any other person. For this purpose, “retire” means to have separated from employment
and begun to receive an immediate pension benefit under a Company-
-9-
sponsored defined benefit pension plan.
Section 3.08 Change in Control. In the event of a Change in Control of the Company,
the change in control agreement applicable to the Covered Executive shall continue in full force
and effect and the Plan shall be null and void; and, if the Change in Control occurs after the
Employment Termination Date has been set but before the Employment Termination Date, the change in
control agreement applicable to the Covered Executive shall continue in full force and effect and
the Employment Termination Date under the Plan shall be treated under the change in control
agreement as the Covered Executive’s “Termination Date” for other than death, “Disability” or
“Cause”, as such terms appearing in quotations are defined in the change in control agreement, and
the Plan shall be null and void.
ARTICLE IV
ADMINISTRATION
Section 4.01 Authority and Duties. It shall be the duty of the Administrator, on the
basis of information supplied by the Company, to determine the entitlement of each Covered
Executive to Benefits under the Plan and to approve the amount of the cash Benefits payable to each
such Covered Executive. The Company shall make such payments as the Administrator determines to be
due to Covered Executives. The Administrator shall have the full power and authority to (a)
determine whether a Covered Executive’s termination of employment with the Company constitutes a
Termination of Employment for purposes of the Plan and (b) construe, interpret and administer the
Plan, to correct deficiencies therein, and to supply omissions. All decisions, actions, and
interpretations of the Administrator shall be final, binding, and conclusive upon the parties. The
Committee may delegate to appropriate Company officers its authority and its duties as it shall
deem appropriate in its sole discretion, and the actions of such person or persons shall have the
same force and effect as any action of the Committee in respect of the Plan (other than any action
by such person or persons to delegate the Committee’s duties or authority hereunder); provided,
however, that the Committee shall retain authority to approve any payments to persons who are
treated as executive officers of the Company for U.S. securities law purposes.
Section 4.02 Expenses of the Administrator. All reasonable expenses of the
Administrator shall be paid or reimbursed by the Company upon proper documentation. The Company
shall indemnify and defend the Administrator against personal liability for actions taken in good
faith in the discharge of its duties hereunder.
Section 4.03 Actions of the Administrator. Whenever a determination is required of
the Administrator under the Plan, such determination shall be made solely at the discretion of the
Administrator. In addition, the exercise of discretion by the Administrator need not be uniformly
applied to similarly situated Covered Executives and shall be final and binding on each Covered
Executive or beneficiary (ies) to whom the determination is directed.
-10-
ARTICLE V
AMENDMENT AND TERMINATION
The Company, acting through the Committee, retains the right, at any time and from time to
time, to amend, suspend, or terminate the Plan in whole or in part, for any reason, and, except as
provided below, without either the consent of or the prior notification to any Covered Executive.
Notwithstanding the foregoing and except as specifically provided under Section 7.12(d), no such
amendment, suspension or termination shall (a) give the Company the right to recover any amount
paid to a Covered Executive prior to the date of such action, (b) cause the cessation and
discontinuance of payments of Benefits to any person or persons under the Plan already receiving
Benefits, or (c) be effective to terminate or reduce the Benefits or prospective Benefits of any
Covered Executive whose Employment Termination Date has been set as of the date of such amendment,
suspension or termination (unless the express written consent of the Covered Executive has been
obtained with respect thereto).
ARTICLE VI
DUTIES OF THE COMPANY
Section 6.01 Records. The Company shall supply to the Administrator all records and
information necessary to the performance of the Administrator’s duties.
Section 6.02 Discretion. Any decisions, actions or interpretations to be made under
the Plan by the Board, the Committee, the Company, or the Administrator, acting on behalf of the
Company, shall be made in its or their respective sole discretion, not in any fiduciary capacity
and need not be uniformly applied to similarly situated individuals and shall be final, binding and
conclusive upon all parties.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Nonalienation of Benefits. None of the payments, Benefits or rights of
any Covered Executive shall be subject to any claim of any creditor, and, in particular, to the
fullest extent permitted by law, all such payments, Benefits and rights shall be free from
attachment, garnishment, trustee’s process, or any other legal or equitable process available to
any creditor of such Covered Executive. No Covered Executive shall have the right to alienate,
anticipate, commute, pledge, encumber or assign any of the Benefits or payments which he may expect
to receive, contingently or otherwise, under the Plan.
Section 7.02 No Contract of Employment. Neither the establishment of the Plan, nor
any modification thereof, nor the creation of any fund, trust or account, nor the payment of any
Benefits shall be construed as giving any Covered Executive, or any person whosoever, the right
-11-
to be retained in the service of the Company, and all Covered Executives shall remain subject
to discharge to the same extent as if the Plan had never been adopted.
Section 7.03 Entire Agreement. Except as may be provided in a change in control
agreement that is in effect for a Covered Executive at the time of a Change in Control between the
Company and a Covered Executive, this Plan document, as it may be amended by the Committee, and the
documents specifically referenced herein, or in such amendment, shall constitute the entire
agreement between the Company and the Covered Executive with respect to the Benefits promised
hereunder and no other agreements, representations, oral or otherwise, express or implied, with
respect to such Benefits or any severance benefits shall be binding on the Company.
Section 7.04 Severability of Provisions. If any provision of the Plan shall be held
invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions
hereof, and the Plan shall be construed and enforced as if such provisions had not been included.
Section 7.05 Successors, Heirs, Assigns, and Personal Representatives. The Plan shall
be binding upon the heirs, executors, administrators, successors and assigns of the parties,
including each Covered Executive, present and future.
Section 7.06 Headings and Captions. The headings and captions herein are provided for
reference and convenience only, shall not be considered part of the Plan, and shall not be employed
in the construction of the Plan.
Section 7.07 Gender and Number. Except where otherwise clearly indicated by context,
the masculine and the neuter shall include the feminine and the neuter; the singular shall include
the plural, and vice-versa.
Section 7.08 Unfunded Plan. The Plan shall not be funded. The Company may, but shall
not be required to, set aside or earmark an amount necessary to provide the Benefits specified
herein (including the establishment of trusts). In any event, no Covered Executive shall have any
right to, or interest in, any assets of the Company.
Section 7.09 Payments to Incompetent Persons, Etc. Any Benefit payable to or for the
Benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be
deemed paid when paid to such person’s guardian or to the party providing or reasonably appearing
to provide for the care of such person, and such payment shall fully discharge the Company, the
Administrator and all other parties with respect thereto.
Section 7.10 Lost Payees. A Benefit shall be deemed forfeited if the Administrator is
unable to locate a Covered Executive to whom a Benefit is due. Such Benefit shall be reinstated if
application is made by the Covered Executive for the forfeited Benefit while the Plan is in
operation.
Section 7.11 Controlling Law and Nature of Plan. The Plan shall be construed and
enforced according to the laws of the Commonwealth of Pennsylvania to the extent not preempted by
Federal law. The Plan is not intended to be included in the definitions of “employee pension
benefit plan” and “pension plan” set forth under Section 3(2) of the
-12-
Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Rather, the Plan is
intended to meet the descriptive requirements of a plan constituting a “severance pay plan” within
the meaning of regulations published by the Secretary of Labor at Title 29, Code of Federal
Regulations, Section 2510.3-2(b).
Section 7.12 Section 409A.
(a) It is intended that the provisions of this Plan comply with Section 409A, and all
provisions of this Plan shall be construed and interpreted in a manner consistent with the
requirements for avoiding taxes or penalties under Section 409A.
(b) Neither the Covered Executive nor any of the Covered Executive’s creditors or
beneficiaries shall have the right to subject any deferred compensation (within the meaning of
Section 409A) payable under this Plan or under any other plan, policy, arrangement or agreement of
or with the Company or any of its affiliates (this Plan and such other plans, policies,
arrangements and agreements, the “Company Plans”) to any anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment or garnishment. Except as permitted under Section
409A, any deferred compensation (within the meaning of Section 409A) payable to the Covered
Executive or for the Covered Executive’s benefit under any Company Plan may not be reduced by, or
offset against, any amount owing by the Covered Executive to the Company or any of its affiliates.
(c) If, at the time of the Covered Executive’s separation from service (within the meaning of
Section 409A), (i) the Covered Executive shall be a specified employee (within the meaning of
Section 409A and using the indemnification methodology selected by the Company from time to time)
and (ii) the Company shall make a good faith determination that an amount payable under a Company
Plan constitutes deferred compensation (within the meaning of Section 409A) the payment of which is
required to be delayed pursuant to the six-month delay rule as set forth in Section 409A in order
to avoid taxes or penalties under Section 409A, then the Company shall not pay such amount on the
otherwise scheduled payment date but shall instead accumulate such amount and pay it, without
interest, on the first business day after such six-month period.
(d) Notwithstanding any provision of this Plan or any Company Plan to the contrary, in light
of the uncertainty with respect to the proper application of Section 409A, the Company reserves the
right to make amendments to this Plan and any Company Plan as the Company deems necessary or
desirable to avoid the imposition of taxes or penalties under Section 409A. In any case, the
Covered Executive is solely responsible and liable for the satisfaction of all taxes and penalties
that may be imposed on the Covered Executive for the Covered Executive’s account in connection with
any Company Plan (including any taxes and penalties under Section 409A), and neither the Company
nor any affiliate shall have any obligation to indemnify or otherwise hold the Covered Executive
harmless from any or all of such taxes or penalties.
-13-
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby, has caused the Plan to
be adopted and approved by the execution of its duly authorized officers as of January 1, 2008.
| AIR PRODUCTS AND CHEMICALS, INC. |
||||
| Date: | By: | |||
| Vice President — Human Resources | ||||
-14-
APPENDIX A
GENERAL RELEASE
1. I, (the “Executive”), for and in consideration of (a) certain
severance benefits to be paid and provided to me by Air Products and Chemicals, Inc. (the
“Company”) under the Air Products and Chemicals, Inc. Corporate Executive Committee Separation
Program (the “Plan”) and (b) the Company’s execution of a release in favor of the Executive, on the
date this General Release becomes irrevocable, substantially in the form attached hereto as
Annex 1, and conditioned upon such payments and provisions, do hereby REMISE, RELEASE, AND
FOREVER DISCHARGE Air Products and Chemicals, Inc. (the “Company”) and each of its past or present
subsidiaries and affiliates, its and their past or present officers, directors, shareholders,
employees and agents, their respective successors and assigns, heirs, executors and administrators,
the pension and employee benefit plans of the Company, or of its past or present subsidiaries or
affiliates, and the past or present trustees, administrators, agents, or employees of the pension
and employee benefit plans (hereinafter collectively included within the term the “Company”),
acting in any capacity whatsoever, of and from any and all manner of actions and causes of actions,
suits, debts, claims and demands whatsoever in law or in equity, which I ever had, now have, or
hereafter may have, or which my heirs, executors or administrators hereafter may have, by reason of
any matter, cause or thing whatsoever from the beginning of my employment with the Company to the
date of these presents and particularly, but without limitation of the foregoing general terms, any
claims arising from or relating in any way to my employment relationship and the termination of my
employment relationship with the Company, including but not limited to, any claims which have been
asserted, could have been asserted, or could be asserted now or in the future under any federal,
state or local laws, including any claims under the Pennsylvania Human Relations Act, 43 PA. C.S.A.
§§ 951 et seq., as amended, the Rehabilitation Act of 1973, 29 USC §§ 701 et seq., as amended,
Title VII of the Civil Rights Act of 1964, 42 USC §§ 2000e et seq., as amended, the Civil Rights
Act of 1991, 2 USC §§ 60/ et seq., as applicable, the Age Discrimination in Employment Act of 1967,
29 USC §§ 621 et seq., as amended (“ADEA”), the Americans with Disabilities Act, 29 USC §§ 706 et
seq., and the Employee Retirement Income Security Act of 1974, 29 USC §§ 301 et seq., as amended,
any contracts between the Company and me and any common law claims now or hereafter recognized and
all claims for counsel fees and costs; provided, however, that this Release shall not apply to any
entitlements under the terms of the Plan or under any other plans or programs of the Company in
which I participated and under which I have accrued and become entitled to a benefit other than
under any Company separation or severance plan or programs. Notwithstanding the foregoing, I
understand that I shall be indemnified by the Company as to any liability, cost or expense for
which I would have been indemnified during employment, in accordance with the Company’s certificate
of incorporation or insurance coverages in force for employees of the Company serving in executive
capacities for actions taken on behalf of the Company within the scope of my employment by the
Company.
2. Subject to the limitations of paragraph 1 above, I expressly waive all rights afforded by
any statute which expressly limits the effect of a release with respect to unknown claims. I
understand the significance of this release of unknown claims and the waiver of statutory
protection against a release of unknown claims.
-15-
3. I hereby agree and recognize that my employment by the Company was/will be permanently and
irrevocably severed on , 20 and the Company has no obligation, contractual or
otherwise to me to hire, rehire or reemploy me in the future. I acknowledge that the terms of the
Plan provide me with payments and benefits which are in addition to any amounts to which I
otherwise would have been entitled.
4. I hereby agree and acknowledge that the payments and benefits provided by the Company are
to bring about an amicable resolution of my employment arrangements and are not to be construed as
an admission of any violation of any federal, state or local statute or regulation, or of any duty
owed by the Company and that the Plan was, and this Release is, executed voluntarily to provide an
amicable resolution of my employment relationship with the Company.
5. I hereby acknowledge that nothing in this Release shall prohibit or restrict me from: (a)
making any disclosure of information required by law; (b) providing information to, or testifying
or otherwise assisting in any investigation or proceeding brought by, any federal regulatory or law
enforcement agency or legislative body, any self-regulatory organization, or the Company’s
designated legal, compliance or human resources officers; or (c) filing, testifying, participating
in or otherwise assisting in a proceeding relating to an alleged violation of any federal, state or
municipal law relating to fraud, or any rule or regulation of the Securities and Exchange
Commission or any self-regulatory organization.
6. I hereby certify that I have read the terms of this Release, that I have been advised by
the Company to discuss it with my attorney, that I have received the advice of counsel and that I
understand its terms and effects. I acknowledge, further, that I am executing this Release of my
own volition with a full understanding of its terms and effects and with the intention of releasing
all claims recited herein in exchange for the consideration described in the Agreement, which I
acknowledge is adequate and satisfactory to me. None of the above named persons, nor their agents,
representatives or attorneys have made any representations to me concerning the terms or effects of
this Release other than those contained herein.
7. I hereby acknowledge that I have been informed that I have the right to consider this
Release for a period of 21 days prior to execution. I also understand that I have the right to
revoke this Release for a period of seven days following execution by giving written notice to the
Company at 7201 Hamilton Boulevard, Allentown Pennsylvania 18195-1501, Attention: General Counsel.
8. I hereby further acknowledge that the terms of Appendix B of the Plan continue to apply for
the balance of the time periods provided therein and that I will abide by and fully perform such
obligations.
-16-
Intending to be legally bound hereby, I execute the foregoing Release this day of
, 20 .
| Witness | Executive |
-17-
ANNEX 1
GENERAL RELEASE
1. Air Products and Chemicals, Inc. (the “Company”) on its behalf and on behalf of its
subsidiaries and affiliates, their officers, directors, partners, employees and agents, their
respective successors and assigns, heirs, executors and administrators (hereinafter collectively
included within the term “Company”), for and in consideration of (the
“Executive”) executing the general release of claims against the Company dated (the
“Executive’s Release of the Company”), and other good and valuable consideration, does hereby
REMISE, RELEASE, AND FOREVER DISCHARGE the Executive, his assigns, heirs, executors and
administrators (hereinafter collectively included within the term “Executive”), acting in any
capacity whatsoever, of and from any and all manner of actions and causes of actions, suits, debts,
claims and demands whatsoever in law or in equity, which it ever had, now have, or hereafter may
have, by reason of any matter, cause or thing whatsoever from the beginning of the Executive’s
employment with the Company to the date of this Release arising from or relating in any way to the
Executive’s employment relationship and the termination of his employment relationship with the
Company, including but not limited to, any claims which have been asserted, could have been
asserted, or could be asserted now or in the future under any federal, state or local laws, any
contracts between the Company and the Executive, other than the Executive’s Release of the Company,
the Executive’s Noncompetition, Nonsolicitation, and Nondisparagement Agreement with the Company,
and the Employee Patent and Confidential Information Agreement entered into by the Executive on
, and any common law claims now or hereafter recognized and all claims for counsel
fees and costs, but in no event shall this release apply to any action attributable to a criminal
act or to an action outside the scope of the Executive’s employment.
2. Subject to the limitations of paragraph 1 above, the Company expressly waives all rights
afforded by any statute which expressly limits the effect of a release with respect to unknown
claims. The Company understands the significance of this release of unknown claims and the waiver
of statutory protection against a release of unknown claims.
3. The Company hereby certifies that it has been advised by counsel in the preparation and
review of this Release.
Intending to be legally bound hereby, Air Products and Chemicals, Inc. executes the foregoing
Release this day of , 20 .
| Witness | By: |
-18-
APPENDIX B
NONCOMPETITION, NONSOLICITATION, AND NONDISPARAGEMENT AGREEMENT
I, (the “Executive”), for and in consideration of (a) certain severance
benefits to be paid and provided to me by Air Products and Chemicals, Inc. (the “Company”) under
the Air Products and Chemicals, Inc. Corporate Executive Committee Separation Program (the “Plan”),
and (b) the Company’s execution of a release in favor of the Executive, I, the Executive, hereby
covenant and agree as follows:
1. The Executive acknowledges that the Company is generally engaged in business throughout the
world. During the Executive’s employment by the Company and for two years after the Executive’s
Employment Termination Date (as defined in the Plan), the Executive agrees that he will not, unless
acting with the prior written consent of the Company, directly or indirectly, own, manage, control,
or participate in the ownership, management or control of, or be employed or engaged by, or
otherwise affiliated or associated with, as an officer, director, employee, consultant, independent
contractor or otherwise, any other corporation, partnership, proprietorship, firm, association, or
other business entity, or otherwise engage in any business which is engaged in any manner anywhere
in any business which, as of the Employment Termination Date, is engaged in by the Company, has
been reviewed with the Board for development to be owned or managed by the Company, and/or has been
divested by the Company but as to which the Company has an obligation to refrain from involvement,
but only for so long as such restriction applies to the Company; provided, however, that the
ownership of not more than 5% of the equity of a publicly traded entity shall not be deemed to be a
violation of this paragraph.
2. The Executive also agrees that he will not, directly or indirectly, during the period
described in paragraph (1), induce any person who is an employee, officer, director, or agent of
the Company, to terminate such relationship, or employ, assist in employing or otherwise be
associated in business with any present or former employee or officer of the Company, including
without limitation those who commence such positions with the Company after the Employment
Termination Date.
3. For the purposes of this Agreement, the term “Company” shall be deemed to include Air
Products and the subsidiaries and affiliates of Air Products.
4. The Executive acknowledges and agrees that the restrictions contained in this Agreement are
reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and
business of the Company, that the Company would not have entered into this Agreement in the absence
of such restrictions and that irreparable injury will be suffered by the Company should the
Executive breach the provisions of this Section. The Executive represents and acknowledges that
(a) the Executive has been advised by the Company to consult the Executive’s own legal counsel in
respect of this Agreement, (b) the Executive has consulted with and been advised by his own counsel
in respect of this Agreement, and (c) the Executive
-19-
has had full opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with the Executive’s counsel.
5. The Executive further acknowledges and agrees that a breach of the restrictions in this
Agreement will not be adequately compensated by monetary damages. The Executive agrees that the
Company shall be entitled to (a) preliminary and permanent injunctive relief, without the necessity
of proving actual damages, or posting of a bond, (b) an equitable accounting of all earnings,
profits and other benefits arising from any violation of this Agreement, and (c) enforce the terms,
including requiring forfeitures, under other plans, programs and agreements under which the
Executive has been granted a benefit contingent on a covenant similar to those contained in this
Agreement, which rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled. In the event that the provisions of this Agreement should ever
be adjudicated to exceed the limitations permitted by applicable law in any jurisdiction, it is the
intention of the parties that the provision shall be amended to the extent of the maximum
limitations permitted by applicable law, that such amendment shall apply only within the
jurisdiction of the court that made such adjudication and that the provision otherwise be enforced
to the maximum extent permitted by law.
6. If the Executive breaches his obligations under this Agreement, he agrees that suit may be
brought, and that he consents to personal jurisdiction, in the United States District Court for the
Eastern District of Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Allentown, Pennsylvania; consents to the
non-exclusive jurisdiction of any such court in any such suit, action or proceeding; and waives any
objection which he may have to the laying of venue of any such suit, action or proceeding in any
such court. The Executive also irrevocably and unconditionally consents to the service of any
process, pleadings, notices or other papers.
7. Executive further agrees, covenants, and promises that he will not in any way communicate
the terms of this Agreement to any person other than his immediate family and his attorney and
financial consultant or when necessary to advise a third party of his obligations under this
Agreement. Notwithstanding the foregoing, the Company and Executive also agree that for a period
of two years following the Employment Termination Date, Executive will provide and that at all
times after the date hereof the Company may similarly provide, with prior written notice to
Executive, a copy of this Agreement to any business or enterprise (a) which Executive may directly
or indirectly own, manage, operate, finance, join, control or of which he may participate in the
ownership, management, operation, financing, or control, or (b) with which Executive may be
connected as an officer, director, employee, partner, principal, agent, representative, consultant,
or otherwise, or in connection with which Executive may use or permit to be used Executive’s name.
Executive agrees not to disparage the name, business reputation, or business practices of the
Company or its subsidiaries or affiliates, or its or their officers, employees, or directors, and
the Company agrees not to disparage the name or business reputation of Executive.
8. The Executive hereby expressly acknowledges and agrees that (a) the provisions of the
Employee Patent and Confidential Information Agreement entered into by him on ,
shall continue to apply in accordance with its terms, and (b) the provisions of the Executive’s
outstanding incentive award agreements granted under the
-20-
Company’s Long-Term Incentive Plan, as defined in the Plan, shall continue to apply in
accordance with their terms except as otherwise provided in Section 3.04 of the Plan and except
that, for purposes of interpreting the provisions of the first indented clause of Section 2 of the
“Conditions”(as defined in, and as set forth in Exhibit A to, each of the Executive’s award
agreements under the Long-Term Incentive Plan), “in Competition with the Company” shall be
construed as provided in this Agreement.
9. No failure or delay on the part of the Company in exercising any power or right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or
power preclude any further or other exercise thereof or the exercise of any other right or power
hereunder. No modification or waiver of any provision of this Agreement or consent to any
departure by any party therefrom shall in any event be effective until the same shall be in writing
and then such waiver or consent shall be effective only in the specific instance and for the
purpose for which given. No notice to or demand on any party in any case shall entitle such party
to any other or further notice or demand in similar or other circumstances.
10. This Agreement shall be construed in accordance with the laws of the Commonwealth of
Pennsylvania without giving effect to its conflict of laws provisions. This Agreement shall extend
to and enure to the benefit of the respective successors and assigns of the Company.
Intending to be legally bound hereby, I execute the Noncompetition, Nonsolicitation, and
Nondisparagement Agreement this day of , 20 .
| Witness | Executive |
-21-
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 Sep | |||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||
Earnings: |
||||||||||||||||||||||||
Income from continuing operations |
$ | 407.2 | $ | 574.9 | $ | 659.0 | $ | 734.1 | $ | 1,019.6 | $ | 1,090.5 | ||||||||||||
Add (deduct): |
||||||||||||||||||||||||
Provision for income taxes |
144.8 | 209.3 | 235.7 | 271.9 | 289.0 | 381.7 | ||||||||||||||||||
Fixed charges, excluding capitalized interest |
146.4 | 144.0 | 139.1 | 146.7 | 190.9 | 188.8 | ||||||||||||||||||
Capitalized interest amortized during the
period |
6.5 | 7.0 | 6.1 | 6.5 | 6.4 | 6.6 | ||||||||||||||||||
Undistributed earnings of
less-than-fifty-percent-owned affiliates |
(16.2 | ) | (28.7 | ) | (29.2 | ) | (29.2 | ) | (61.2 | ) | (72.7 | ) | ||||||||||||
Earnings, as adjusted |
$ | 688.7 | $ | 906.5 | $ | 1,010.7 | $ | 1,130.0 | $ | 1,444.7 | $ | 1,594.9 | ||||||||||||
Fixed Charges: |
||||||||||||||||||||||||
Interest on indebtedness, including capital lease
obligations |
$ | 125.5 | $ | 123.0 | $ | 113.0 | $ | 119.8 | $ | 163.7 | $ | 164.4 | ||||||||||||
Capitalized interest |
6.2 | 7.9 | 14.9 | 18.8 | 14.6 | 27.3 | ||||||||||||||||||
Amortization of debt discount premium and expense |
2.1 | 1.4 | 4.1 | 4.8 | 4.1 | 4.0 | ||||||||||||||||||
Portion of rents under operating leases
representative of the interest factor |
18.8 | 19.6 | 22.0 | 22.1 | 23.1 | 20.4 | ||||||||||||||||||
Fixed charges |
$ | 152.6 | $ | 151.9 | $ | 154.0 | $ | 165.5 | $ | 205.5 | $ | 216.1 | ||||||||||||
Ratio of Earnings to Fixed Charges (1): |
4.5 | 6.0 | 6.6 | 6.8 | 7.0 | 7.4 | ||||||||||||||||||
| (1) | The ratio of earnings to fixed charges is determined by dividing earnings, which include income from continuing operations 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). |
Exhibit 13
Financials
Management’s Discussion and Analysis |
10 | |||
Management’s Report on Internal Control over Financial Reporting |
32 | |||
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |
33 | |||
Report of Independent Registered Public Accounting Firm |
34 | |||
The Consolidated Financial Statements |
35 | |||
Notes to the Consolidated Financial Statements |
39 | |||
Five-Year Summary of Selected Financial Data |
71 |
9
Management’s Discussion and Analysis
(Millions of dollars, except for share data)
Business Overview |
10 | |||
2008 in Summary |
11 | |||
2009 Outlook |
12 | |||
Results of Operations |
12 | |||
Pension Benefits |
20 | |||
Environmental Matters |
22 | |||
Liquidity and Capital Resources |
23 | |||
Contractual Obligations |
25 | |||
Off-Balance Sheet Arrangements |
27 | |||
Related Party Transactions |
27 | |||
Market Risks and Sensitivity Analysis |
27 | |||
Inflation |
28 | |||
Critical Accounting Policies and Estimates |
28 | |||
New Accounting Standards |
31 | |||
Forward-Looking Statements |
31 |
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, except as noted. All
amounts are presented in millions of dollars, except
for share data, unless otherwise indicated.
BUSINESS OVERVIEW
Air Products and Chemicals, Inc. and its subsidiaries
(the Company) serve customers in industrial, energy,
technology, and healthcare markets. The Company offers
a broad portfolio of atmospheric gases, process and
specialty gases, performance materials, and equipment
and services. Geographically diverse, with operations
in over 40 countries, the Company has sales of $10.4
billion, assets of $12.6 billion, and a worldwide
workforce of more than 21,000 employees.
The Company organizes its operations into four
reportable business segments: Merchant Gases, Tonnage
Gases, Electronics and Performance Materials, and
Equipment and Energy. A general description of each
segment and the key variables impacting the segment
follow.
Previously, the Company reported results for a
Chemicals segment, which consisted of the Polymer
Emulsions business and the Polyurethane Intermediates
(PUI) business, and a Healthcare segment. Beginning
with the first quarter of 2008, the Polymer Emulsions
business was accounted for as discontinued operations
and the PUI business was reported as part of the
Tonnage Gases segment. The PUI business model is
similar to Tonnage Gases in that it has long-term
contracts and raw material cost pass-through
provisions. Beginning with the fourth quarter of
2008, the U.S. Healthcare business was accounted for as
discontinued operations and the Europe Healthcare
business was reported as part of the Merchant Gases
segment. The Europe Healthcare business model is
similar to Merchant Gases in that it has shorter-term
requirement contracts and delivers oxygen in cylinders
to end customers. Prior period information has been
restated. For additional information on discontinued
operations, refer to Note 5 to the Consolidated
Financial Statements.
Merchant Gases
The Merchant Gases segment sells industrial gases such
as oxygen, nitrogen and argon (primarily recovered by
the cryogenic distillation of air), hydrogen and helium
(purchased or refined from crude helium), and medical
and specialty gases, along with certain services and
equipment, throughout the world to customers in many
industries, including those in metals, glass, chemical
processing, food processing, healthcare, medical gases,
steel, general manufacturing, and petroleum and natural
gas industries. There are four principal types of
products: liquid bulk, packaged gases, small on-sites,
and healthcare products. Most merchant product is
delivered via bulk supply, in liquid or gaseous form,
by tanker or tube trailer. Smaller quantities of
industrial, specialty, and medical gases are delivered
in cylinders and dewars as “packaged gases,” or through
small on-site gas generation plants (cryogenic or
noncryogenic generators). Through its healthcare
business, the Company offers respiratory therapies,
home medical equipment, and infusion services.
Electricity is the largest cost component in the
production of atmospheric gases. The Company mitigates
energy prices through pricing formulas and surcharges.
Merchant Gases competes worldwide against global and
regional industrial gas companies. Competition in
industrial gases is based primarily on price,
reliability of supply, and the development of
industrial gas applications. Competition in the
healthcare business involves regulatory compliance,
price, quality, service, and reliability of supply.
Tonnage Gases
The Tonnage Gases segment supplies industrial gases,
including hydrogen, carbon monoxide, syngas, nitrogen,
and oxygen, via large on-site facilities or pipeline
systems, principally to customers in the petroleum
refining, chemical, and metallurgical industries. The
Tonnage Gases segment also includes the Company’s PUI
business. The PUI business markets toluene diamine to
customers under long-term contracts. For large-volume,
or “tonnage” industrial gas users, the Company either
constructs a gas plant adjacent to or near the
customer’s
10 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
facility—hence the term “on-site”—or delivers product
through a pipeline from a nearby location. The Company
is the world’s largest provider of hydrogen, which is
used by refiners to lower the sulfur content of
gasoline and diesel fuels to reduce smog and ozone
depletion. Electricity is the largest cost component in
the production of atmospheric gases, and natural gas is
the principal raw material for hydrogen, carbon
monoxide, and syngas production. The Company mitigates
energy and natural gas price changes through its
long-term cost pass-through type contracts. Tonnage
Gases competes against global industrial gas companies
as well as regional sellers. Competition is based
primarily on price, reliability of supply, the
development of applications that use industrial gases
and, in some cases, provision of other services or
products such as power and steam generation.
Electronics and Performance Materials
The Electronics and Performance Materials segment
employs applications technology to provide solutions to
a broad range of global industries through expertise in
chemical synthesis, analytical technology, process
engineering, and surface science. This segment provides
specialty and tonnage gases, specialty chemicals,
services, and equipment to the electronics industry for
the manufacture of silicon and compound semiconductors,
LCD and other displays, and photovoltaic devices. The
segment also provides performance chemical solutions
for the coatings, inks, adhesives, civil engineering,
personal care, institutional and industrial cleaning,
mining, oil field, polyurethane, and other industries.
The Electronics and Performance Materials segment faces
competition on a product-by-product basis against
competitors ranging from niche suppliers with a single
product to larger and more vertically integrated
companies. Competition is principally conducted on the
basis of product performance, reliability of product
supply, global infrastructure, technical innovation,
service, quality, and price.
Equipment and Energy
The Equipment and Energy segment designs and
manufactures cryogenic and gas processing equipment for
air separation, hydrocarbon recovery and purification,
natural gas liquefaction (LNG), and helium
distribution, and serves energy markets in a variety of
ways. Equipment is sold worldwide to customers in a
variety of industries, including chemical and
petrochemical manufacturing, oil and gas recovery and
processing, and steel and primary metals processing.
Energy markets are served through the Company’s
operation and partial ownership of cogeneration and
flue gas treatment facilities. The Company is
developing technologies to continue to serve energy
markets in the future, including gasification and
alternative energy technologies. Equipment and Energy
competes with a great number
of firms for all of its offerings except LNG heat
exchangers, for which there are fewer competitors due
to the limited market size and proprietary
technologies. Competition is based primarily on
technological performance, service, technical
know-how, price, and performance guarantees.
2008 IN SUMMARY
Overall, 2008 represented another year of solid
performance by the Company, with 14% sales growth and
9% earnings per share growth from continuing
operations. These results were attributable to
underlying base business volume increases, higher
prices in Merchant Gases, favorable currency impacts,
and higher natural gas contractual cost pass-through.
The strong financial performance enabled the Company to
invest in new plant and equipment, repurchase its
stock, and raise dividends for the 26th consecutive
year.
The Company continued to improve its business portfolio
by selling its Polymer Emulsions business and
completing the sale of its High Purity Process
Chemicals (HPPC) business. In July 2008, the Board of
Directors authorized management to pursue the sale of
the U.S. Healthcare business. These businesses have
been accounted for as discontinued operations.
Highlights for 2008
| • | Sales increased 14% to $10,415 due to volume growth in the Merchant Gases, Tonnage Gases, and Electronics and Performance Materials segments; improved pricing in Merchant Gases; favorable currency effects; and higher natural gas contractual cost pass-through. | |
| • | Operating income increased 9%, reflecting volume growth, improved pricing, and favorable currency effects. These gains were somewhat offset by higher pension settlement charges, the unfavorable impacts of a fire at an Electronics production facility in Korea, and recent Gulf Coast hurricanes. The prior year included a gain of $37 from a customer contract settlement. | |
| • | Equity affiliates’ income increased 27% due to underlying growth and favorable adjustments to certain affiliates. | |
| • | The effective tax rate was 25.1%, compared to 22.0%, as 2007 was favorably impacted by settlements of tax audits and the donation of a cost-based investment. | |
| • | Income and diluted earnings per share from continuing operations increased 7% and 9%, respectively. | |
| • | The Company sold its Polymer Emulsions business, recognizing a gain of $120 ($76 after-tax, or $.35 per share), and completed the sale of its HPPC business. |
11
| • | In July, the Board of Directors authorized the Company to pursue the sale of its U.S. Healthcare business. The Company recognized a total charge of $329 ($246 after-tax, or $1.12 per share) related to the impairment/write-down of the U.S. Healthcare assets to net realizable value. | |
| • | The Company purchased 8.7 million of its outstanding shares at a cost of $787. | |
| • | The quarterly cash dividend was raised by 16%, from 38 cents to 44 cents. |
Changes in Diluted Earnings per Share
| Increase | ||||||||||||
| 2008 | 2007 | (Decrease) | ||||||||||
Diluted Earnings per Share |
||||||||||||
Net Income |
$ | 4.15 | $ | 4.64 | $ | (.49 | ) | |||||
Discontinued Operations |
(.82 | ) | .07 | (.89 | ) | |||||||
Continuing Operations |
$ | 4.97 | $ | 4.57 | $ | .40 | ||||||
Operating Income (after-tax) |
||||||||||||
Underlying business
|
||||||||||||
Volume |
.27 | |||||||||||
Price/raw materials |
.07 | |||||||||||
Costs |
(.01 | ) | ||||||||||
Acquisitions/divestitures |
.05 | |||||||||||
Currency |
.27 | |||||||||||
Plant fire and hurricanes |
(.10 | ) | ||||||||||
2007 Customer contract settlement |
(.11 | ) | ||||||||||
2007 Global cost reduction plan |
.04 | |||||||||||
Pension settlement |
(.05 | ) | ||||||||||
2007 Sale/donation of cost investment |
(.02 | ) | ||||||||||
Operating Income |
.41 | |||||||||||
Other (after-tax) |
||||||||||||
Equity affiliates’ income |
.10 | |||||||||||
Minority interest |
(.01 | ) | ||||||||||
Average shares outstanding |
.09 | |||||||||||
Income tax rate |
.05 | |||||||||||
2007 Tax audit settlements/adjustments |
(.17 | ) | ||||||||||
2007 Tax benefit from donation of
cost investment |
(.07 | ) | ||||||||||
Other |
(.01 | ) | ||||||||||
Total Change in Diluted Earnings
per Share
from Continuing Operations |
$ | .40 | ||||||||||
2009 OUTLOOK
Looking forward, the Company will continue to focus on improving its
operating margin and increasing return on capital
through volume growth, effective cost management, and
implementation of price increases.
The present economic downturn and the uncertainty of
future economic conditions will be a challenge facing
the Company in 2009. In response, the Company plans to
implement several initiatives, including lowering
discretionary spending, reducing selling and
administrative expenses through effective utilization
of existing information technology systems, increasing
the energy efficiency of its plants, and investing in
fuel-efficient equipment to reduce distribution
expenses.
RESULTS OF OPERATIONS
Discussion of Consolidated Results
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 10,414.5 | $ | 9,148.2 | $ | 7,885.0 | ||||||
Operating income |
1,495.8 | 1,375.6 | 1,041.9 | |||||||||
Equity affiliates’ income |
145.0 | 114.4 | 91.5 | |||||||||
Sales
| % Change from Prior Year | ||||||||
| 2008 | 2007 | |||||||
Underlying business
|
||||||||
Volume |
4 | % | 12 | % | ||||
Equipment and Energy |
(2 | )% | 1 | % | ||||
Price |
2 | % | — | |||||
Acquisitions/divestitures |
1 | % | 1 | % | ||||
Currency |
4 | % | 3 | % | ||||
Natural gas/raw material
cost pass-through |
5 | % | (1 | )% | ||||
Total Consolidated Sales Change |
14 | % | 16 | % | ||||
2008 vs. 2007
Sales of $10,414.5 increased 14%, or $1,266.3.
Underlying base business growth accounted for 4% of
the increase. Sales increased 4% from higher volumes
as further discussed in the Segment Analysis which
follows. Lower Equipment and Energy activity decreased
sales by 2%. Improved pricing, principally in Merchant
Gases, increased sales by 2%. Sales improved 4% from
favorable currency effects, primarily the weakening of
the U.S. dollar against the Euro. Higher natural
gas/raw material contractual cost pass-through to
customers increased sales by more than $450, or 5%.
12 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
2007 vs. 2006
Sales of $9,148.2 increased 16%, or $1,263.2.
Underlying base business growth of 13% resulted
primarily from improved volumes across all business
segments, as further discussed in the Segment Analysis
which follows. Pricing impacts were flat, with improved
pricing in Merchant Gases offset primarily by lower
pricing in Electronics and Performance Materials. Sales
improved 3% from favorable currency effects, driven
primarily by 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 1%, mainly due to lower natural gas
prices.
Operating Income
| Change from Prior Year | ||||||||
| 2008 | 2007 | |||||||
Prior Year Operating Income |
$ | 1,376 | $ | 1,042 | ||||
Underlying business |
||||||||
Volume |
82 | 293 | ||||||
Price/raw materials |
21 | 44 | ||||||
Costs |
(3 | ) | (129 | ) | ||||
Acquisitions/divestitures |
16 | 11 | ||||||
Currency |
80 | 41 | ||||||
Global cost reduction plan |
||||||||
2007 |
14 | (14 | ) | |||||
2006 |
— | 71 | ||||||
Pension settlement |
(20 | ) | (10 | ) | ||||
2008 Plant fire and hurricanes |
(28 | ) | — | |||||
2007 Sale/donation of cost investment |
(5 | ) | 5 | |||||
2007 Customer contract settlement |
(37 | ) | 37 | |||||
2006 Hurricanes |
— | (18 | ) | |||||
Stock option expense |
— | 7 | ||||||
2006 Impairment of loans receivable |
— | 66 | ||||||
2006 Gain on a sale of a chemical facility |
— | (70 | ) | |||||
Operating Income |
$ | 1,496 | $ | 1,376 | ||||
2008 vs. 2007
| Operating income of $1,495.8 increased 9%, or $120.2. | ||
| • | Higher volumes in the Merchant Gases, Tonnage Gases, and Electronics and Performance Materials segments, offset by a decrease in Equipment and Energy activity, increased operating income by $82, as discussed in the Segment Analysis that follows. | |
| • | Improved pricing, net of variable costs, increased operating income by $21, as pricing increases in Merchant Gases were partially offset by lower pricing in electronics specialty materials. | |
| • | Favorable currency effects, primarily the weakening of the U.S. dollar against the Euro, increased operating income by $80. | |
| • | Higher pension settlement charges negatively impacted operating income by $20. | |
| • | Unfavorable impacts caused by Hurricanes Gustav and Ike, and the fire at an Electronics production facility in Korea, decreased operating income by $28. | |
| • | 2007 included a gain of $37 from a settlement of a supply contract termination. |
2007 vs. 2006
Operating income of $1,375.6 increased 32%, or $333.7.
| • | Higher volumes across all segments increased operating income by $293, as discussed in the Segment Analysis that follows. | |
| • | Improved pricing, net of variable costs, increased operating income by $44, as pricing increases in Merchant Gases were partially offset by lower pricing in electronics specialty materials. | |
| • | Higher costs, principally to support growth and due to inflation, decreased operating income by $129. | |
| • | Favorable currency effects increased operating income by $41, as the U.S. dollar weakened against the Euro and the Pound Sterling. | |
| • | The global cost reduction plan resulted in a 2007 charge to operating income of $14 compared to a charge of $71 in 2006. | |
| • | The settlement of a supply contract termination in the Tonnage Gases segment increased operating income by $37. | |
| • | 2006 included a gain on sale of a chemical facility of $70. | |
| • | 2006 included an impairment of loans receivable of $66. | |
| • | 2006 included a benefit of $18 from insurance recoveries exceeding estimated business interruption and asset write-offs and other expenses related to Hurricanes Katrina and Rita. |
Equity Affiliates’ Income
2008 vs. 2007
Income from equity affiliates of $145.0 increased
$30.6, or 27%, reflecting higher income from equity
affiliates in Merchant Gases. This increase resulted
from solid underlying growth, increased nitrogen
injection volumes in Mexico, and from the benefit of
adjustments to certain affiliates.
2007 vs. 2006
Income from equity affiliates of $114.4 increased
$22.9, or 25%, due to higher income from affiliates
across most segments, primarily Asian and Latin
American affiliates in the Merchant Gases segment.
13
Selling and Administrative Expense (S&A)
| % Change from Prior Year | ||||||||
| 2008 | 2007 | |||||||
Acquisitions/divestitures |
2 | % | 1 | % | ||||
Currency |
4 | % | 3 | % | ||||
Other costs |
3 | % | 8 | % | ||||
Total S&A Change |
9 | % | 12 | % | ||||
2008 vs. 2007
S&A expense of $1,090.4 increased 9%, or $90.6. S&A as
a percent of sales declined to 10.5% from 10.9%. S&A
increased 2% from the acquisition of the Polish
industrial gas business of BOC Gazy Sp z o.o. (BOC
Gazy) in the third quarter of 2007. Currency effects,
driven by the weakening of the U.S. dollar against the
Euro, increased S&A by 4%. Underlying costs increased
S&A by 3%, as productivity gains were more than offset
by inflation and higher costs to support growth.
2007 vs. 2006
S&A expense of $999.8 increased 12%, or $108.3. S&A as
a percent of sales declined to 10.9% from 11.3%,
primarily due to the benefit of implementing SAP. The
acquisitions of BOC Gazy and Tomah3 Products
increased S&A by 1%. Unfavorable currency effects,
mainly the weakening of the U.S. dollar against the
Euro and Pound Sterling, increased S&A by 3%.
Underlying costs increased S&A by 8%, as productivity
gains were more than offset by inflation and costs to
support growth.
Research and Development (R&D)
2008 vs. 2007
R&D expense of $130.7 increased $1.7. R&D decreased
as a percent of sales to 1.3% from 1.4%.
2007 vs. 2006
R&D decreased by 8%, or $10.9, as a result of lower
spending in Equipment and Energy due to a test
program run in 2006 and the Company’s organization
simplification efforts. R&D spending declined as a
percent of sales to 1.4% from 1.8%.
Pension Settlement
A number of corporate officers and others who were
eligible for supplemental pension plan benefits retired
in fiscal years 2007 and 2008. The Company’s
supplemental pension plan provides for a lump sum
benefit payment option at the time of retirement, or
for corporate officers six months after the
participant’s retirement date.
The Company recognizes
pension settlements when payments exceed the sum of
service and interest cost components of net periodic
pension cost of the plan for the fiscal year. However,
a settlement loss is not recognized until
the time the
pension obligation is settled. Based on the timing of
when cash payments were made, the Company recognized
$10.3 for settlement losses in 2007 and an additional
$30.3 in 2008.
2007 Customer Contract Settlement
In 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. As a result, the Company
recognized a before-tax gain of $36.8 ($23.6 after-tax, or $.11 per share) in 2007.
Global Cost Reduction Plan
Results in 2007 and 2006 included charges related to
a global cost reduction plan that comprised
severance, pension costs, and asset write-downs
related to reorganization and streamlining of certain
organizations and activities in Europe, rationalizing
product offerings in Electronics, and simplifying
management structure and business practices.
The 2007 results from continuing operations included a
charge of $13.7 ($8.8 after-tax, or $.04 per share)
for the global cost reduction plan. The charge
included $6.5 for severance and pension-related costs
for the elimination of approximately 125 positions and
$7.2 for the write-down of certain investments.
Approximately one-half of the position eliminations
related to the continuation of European initiatives to
streamline certain activities. The remaining position
eliminations related to the continued cost reduction
and productivity efforts of the Company. As of 30
September 2008, the actions associated with the 2007
charge were complete.
The 2006 results from continuing operations included a
charge of $71.0 ($46.1 after-tax, or $.20 per share)
for the global cost reduction plan. This charge
included $59.5 for severance and pension-related costs
for approximately 312 position eliminations and $11.5
for asset disposals and facility closures. As of 30
September 2007, the majority of the planned actions
associated with the 2006 charge were completed, with
the exception of a small number of position
eliminations and/or associated benefit payments. These
actions were completed in the first quarter of fiscal
2008.
Cost savings from the plan realized in 2008 and
2007 were approximately $43 and $21, respectively.
Beyond 2008, the Company expects the plan to provide annualized cost savings
of $46, of which the majority are related to reduced
personnel costs. Refer to Note 3 to the Consolidated
Financial Statements for additional information on the
Global Cost Reduction Plan.
14 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
Gain on Sale of a Chemical Facility
In 2006, as part of its announced restructuring of its
PUI business, the Company sold its 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.
Impairment of Loans Receivable
In 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 PUI business.
Other (Income) Expense, Net
Items recorded to other (income) expense arise from
transactions and events not directly related to the
principal income earning activities of the Company.
The detail of other (income) expense is presented in
Note 20 to the Consolidated Financial Statements.
2008 vs. 2007
Other income of $25.8 was lower by $16.5. Other
income in 2008 included a loss of $14.7 related to
fire damage at an Electronics production facility in
Korea. Other income in 2007 included a gain of $23.7
on the sale of assets. No other items were
individually significant in comparison to the prior
year.
2007 vs. 2006
Other income of $42.3 was lower by $29.4. Other income
in 2007 included a gain of $23.7 for the sale of assets
as part of the Company’s ongoing asset management
activities, including the sale/donation of a cost-based
investment. Other income in 2006 included $56.0 from
hurricane insurance recoveries in excess of property
damage and related expenses. This net gain does not
include the estimated impact related to business
interruption. Other income in 2006 also included a gain
of $9.5 from the sale of land in Europe. No other items
were individually significant in comparison to the
prior year.
Interest Expense
| 2008 | 2007 | 2006 | ||||||||||
Interest incurred |
$ | 184.1 | $ | 175.3 | $ | 134.9 | ||||||
Less: interest capitalized |
22.1 | 12.9 | 16.5 | |||||||||
Interest Expense |
$ | 162.0 | $ | 162.4 | $ | 118.4 | ||||||
2008 vs. 2007
Interest incurred increased by $8.8. The increase
resulted from a higher average debt balance, excluding
currency effects, and the impact of a weaker U.S.
dollar on the translation of foreign currency
interest, partially offset by lower average interest
rates. Capitalized interest increased by $9.2,
primarily due to increased project levels in the
Tonnage Gases segment.
2007 vs. 2006
Interest incurred increased $40.4. 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. The Company primarily
utilized the additional debt for the share repurchase
program, the acquisition of BOC Gazy, and in funding
its pension plans.
Effective Tax Rate
The effective tax rate equals the income tax provision
divided by income from continuing operations before
taxes less minority interest. Refer to Note 17 to the
Consolidated Financial Statements for details on
factors affecting the effective tax rate.
2008 vs. 2007
The effective tax rate was 25.1% and 22.0% in 2008 and
2007, respectively. A tax benefit associated with
foreign operations and other higher credits and
adjustments from the Company’s ongoing tax planning
process are included in the 2008 effective rate. The
2007 tax rate included the settlement of tax audits and
related interest income, combined with the donation of
a portion of a cost-based investment. The net impact
was a 3.1% higher tax rate in 2008.
2007 vs. 2006
The effective tax rate was 22.0% and 26.3% in 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. In the fourth quarter of 2007, the
Company recorded a tax benefit of $11.3 from tax audit
settlements and adjustments and related interest
income. Additionally, the Company donated a portion of
a cost-based investment that resulted in a pretax loss
of $4.7 and a tax benefit of $18.3. The net impact was
a 4.3% lower tax rate in 2007.
15
Discontinued Operations
The U.S. Healthcare business, Polymer Emulsions
business, HPPC business, and Amines business have been
accounted for as discontinued operations. The results
of operations of these businesses have been removed
from the results of continuing operations for all
periods presented. Refer to Note 5 to the Consolidated
Financial Statements for additional details.
U.S. Healthcare
In July 2008, the Board of Directors authorized
management to pursue the sale of the U.S. Healthcare
business. Accordingly,
beginning in the fourth quarter of 2008, the U.S.
Healthcare business was accounted for as discontinued
operations.
For the fiscal year 2008, the Company recorded a
total charge of $329.2 ($246.2 after-tax, or $1.12
per share) related to the impairment/write-down of
the net carrying value of the U.S. Healthcare
business.
| • | In the third quarter of 2008, the Company performed an impairment analysis and recorded a charge of $314.8 ($237.0 after-tax, or $1.09 per share). The charge related to the impairment of goodwill for $294.3, intangible assets for $11.7, plant and equipment for $7.8, and other assets for $1.0. The impairment reduced the carrying amount of the U.S. Healthcare reporting unit goodwill and intangible assets to zero. | |
| • | In the fourth quarter of 2008, the Company recorded a charge of $14.4 ($9.2 after-tax, or $.04 per share), reflecting an estimate of net realizable value. |
Additional charges may be recorded in future periods dependent upon the timing and method of
ultimate disposition.
In 2007, the Company implemented several changes to
improve performance, including management changes,
product and service offering simplification, and other
measures. However, market and competitive conditions
were more challenging than anticipated and financial
results did not meet expectations. In response to the
disappointing financial results, during the third
quarter 2008 management conducted an evaluation of the
strategic alternatives for the business.
In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” and SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” the
Company determined that an interim test for impairment
was required for its U.S. Healthcare reporting unit
during the third quarter of 2008, based on the
combination of events described above. The Company
reforecast its cash flows and utilized the expected
present value of the future cash flows to calculate
fair value of the U.S. Healthcare reporting unit in
completing its SFAS No. 142 and 144 impairment tests.
The U.S. Healthcare business generated sales of $239.8,
$271.1, and $280.8, and a loss, net of tax, of $259.4,
$15.2, and $19.1 in 2008, 2007, and 2006, respectively.
Polymer Emulsions Business
In January 2008, the Company sold its interest in its
vinyl acetate ethylene (VAE) polymers joint ventures
to Wacker Chemie AG, its long-time joint venture
partner. As part of that agreement, the Company
received Wacker Chemie AG’s interest in the Elkton,
Md. and Piedmont, S.C. production facilities and their
related businesses plus cash proceeds of $258.2. The
Company recognized a gain of $89.5 ($57.7 after-tax,
or $.26 per share) in the second quarter of 2008 for
this sale, which consisted of the global VAE polymers
operations including production facilities located in
Calvert City, Ky.; South Brunswick, N.J.; Cologne,
Germany; and Ulsan, Korea; and commercial and research
capabilities in Allentown, Pa. and Burghausen,
Germany. The business produces VAE for use in
adhesives, paints and coatings, paper, and carpet
applications.
In June 2008, the Company sold its Elkton, Md. and
Piedmont, S.C. production facilities and the related
North American atmospheric emulsions and global
pressure sensitive adhesives businesses to Ashland
Inc. for $92.0. The Company recorded a gain of $30.5
($18.5 after-tax, or $.08 per share) in connection
with the sale, which included the recording of a
retained environmental obligation associated with the
Piedmont site. The expense to record the environmental
obligation was $24.0
($14.5 after-tax, or $.07 per share). The Piedmont
site is under active remediation for contamination
caused by an insolvent prior owner. Before the sale,
which triggered expense recognition, remediation costs
had been capitalized since they improved the property
as compared to its condition when originally acquired.
The sale of the Elkton and Piedmont facilities
completed the disposal of the Company’s Polymer
Emulsions business.
The Polymer Emulsion business generated sales of
$261.4, $618.6, and $587.0, and income, net of tax,
of $11.3, $38.3, and $30.1 in 2008, 2007, and 2006,
respectively.
HPPC Business
In 2008, the Company sold its HPPC business, which had
previously been reported as part of the Electronics and
Performance Materials operating segment, to KMG
Chemicals, Inc. The Company’s HPPC business consisted
of the development, manufacture, and supply of
high-purity process chemicals used in the fabrication
of integrated circuits in the United States and Europe.
The Company wrote down the assets of the HPPC business
to net realizable value as of 30 September 2007,
resulting in a loss of $15.3 ($9.3 after-tax, or $.04
per share) in the fourth quarter of 2007.
16 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
The sale closed on 31 December 2007 for cash proceeds
of $69.3 and included manufacturing facilities in the
United States and Europe. Subsequent to the sale,
certain receivables and inventories were sold to KMG
Chemicals, Inc. In the first quarter of 2008, this
business generated sales of $22.9 and income, net of
tax, of $.1. Also, the Company recorded an additional
loss of $.5 ($.3 after-tax) on the sale of the
business.
The HPPC business generated sales of $87.2 and
$97.6, and income, net of tax, of $2.2 and $3.2 in
2007 and 2006, respectively.
Amines Business
In 2006, the Company sold its Amines business to
Taminco N.V., a producer of methylamines based in
Belgium. The sales price was $211.2 in cash, with
certain liabilities assumed by the purchaser. The
Company recorded a loss of $40.0 ($23.7 after-tax, or
$.11 per share) in connection with the sale of the
Amines business and the recording of certain
environmental and contractual obligations that the
Company retained. A charge of $42.0 ($26.2 after-tax,
or $.12 per share) was recognized for environmental
obligations related to the Pace, Florida facility. In
addition, fourth quarter 2006 results also included a
charge of $8.3 ($5.2 after-tax, or $.02 per share) for
costs associated with a contract termination.
The Amines business produced methylamines and higher
amines products used globally in household,
industrial, and agricultural products. The sale of the
Amines business included the employees and certain
assets and liabilities of the production facilities in
Pace, Florida; St. Gabriel, Louisiana; and Camaçari,
Brazil.
The Amines business generated sales of $308.4 and
income, net of tax, of $5.0 in 2006.
Cumulative Effect of an Accounting Change
The Company adopted FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement
Obligations” (FIN 47), effective 30 September 2006, and
recorded an after-tax charge of $6.2 as the cumulative
effect of an accounting change in 2006. 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.
Net Income
2008 vs. 2007
Net income was $909.7, compared to $1,035.6 in 2007.
Diluted earnings per share was $4.15, compared to $4.64
in 2007. A summary table of changes in diluted earnings
per share is presented on page 12.
2007 vs. 2006
Net income was $1,035.6, compared to $723.4 in 2006. Diluted earnings per share was $4.64, compared
to $3.18 in 2006.
Segment Analysis
The Company organizes its operations into four reportable business segments: Merchant Gases,
Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Refer to the
Business Overview discussion beginning on page 10 for a description of the business segments and
Note 22 to the Consolidated Financial Statements for additional segment information.
Merchant Gases
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 4,192.7 | $ | 3,556.9 | $ | 3,002.8 | ||||||
Operating income |
789.5 | 656.4 | 517.3 | |||||||||
Equity affiliates’ income |
131.8 | 97.8 | 82.4 | |||||||||
Merchant Gases Sales
| % Change from Prior Year | ||||||||
| 2008 | 2007 | |||||||
Underlying business |
||||||||
Volume |
4 | % | 9 | % | ||||
Price |
4 | % | 2 | % | ||||
Acquisitions/divestitures |
3 | % | 2 | % | ||||
Currency |
7 | % | 5 | % | ||||
Total Merchant Gases Sales Change |
18 | % | 18 | % | ||||
2008 vs. 2007
Merchant Gases Sales
Sales of $4,192.7 increased 18%, or $635.8. Higher volumes across all regions increased sales by
4%. Volumes increased in North America due to record new signings in 2008 and continued strong
demand for liquid oxygen (LOX) and liquid nitrogen (LIN). Volume gains in Europe were primarily due
to a higher number of Healthcare patients served. In Asia, volumes were higher in generated gases,
liquid argon, and liquid helium.
Higher prices increased sales by 4% as a result of actions taken to recover higher power,
distribution, and other manufacturing costs in North America and Europe. Price increases in Asia,
implemented in the last quarter of 2008, did not have a material impact on full year results.
17
Sales increased by 3% from the full year impact of the acquisition of BOC Gazy in 2007. In
addition, sales increased 7% due to favorable currency impacts, primarily the weakening of the U.S.
dollar against the Euro.
Merchant Gases Operating Income
Operating income of $789.5 increased by 20%, or $133.1. Favorable operating income variances
resulted from improved pricing of $75, higher volumes of $60, and currency effects of $51.
Operating income declined by $49 from higher distribution costs and inflation.
Merchant Gases Equity Affiliates’ Income
Equity affiliates’ income of $131.8 increased $34.0, reflecting higher income in all regions. The
increases are due to solid underlying growth, increased nitrogen injection volumes in Mexico, and
the benefit of adjustments to certain affiliates.
2007 vs. 2006
Merchant Gases Sales
Sales of $3,556.9 increased 18%, or $554.1. Higher volumes across all regions increased sales by
9%. In North America, LOX/LIN volumes increased from higher demand across most end markets. The
prior year was negatively impacted by hurricane-related supply disruptions for hydrogen. Volumes
were higher in Europe across all businesses. Liquid bulk volumes increased due to higher demand
across most end markets. Packaged gases volumes were up due to higher demand for industrial
cylinders and new offerings in the business. In the Healthcare business, volumes benefited from the
new respiratory care contract in the U.K. LOX/LIN volumes in Asia increased due to solid demand
growth and new plants brought onstream.
Pricing increased sales by 2%. Prices for LOX/LIN improved 5% in North America, 4% in Europe, and
2% in Asia from pricing actions to recover higher power, distribution, and other manufacturing
costs.
Sales were higher by 2% from the acquisition of BOC Gazy. In addition, favorable currency impacts,
primarily the weakening of the U.S. dollar against the Euro and Pound Sterling, added 5% to sales.
Merchant Gases Operating Income
Operating income of $656.4 increased $139.1. Favorable operating income variances resulted from
higher volumes of $108; improved pricing, net of variable costs, of $71; and currency impacts of
$29. Operating income declined by $64 from higher costs to support growth and due to inflation,
partially offset by productivity improvements. Operating income also decreased by $12, as
prior
year results included hurricane insurance recoveries that exceeded estimated business interruption,
asset write-offs, and other expenses.
Merchant Gases Equity Affiliates’ Income
Merchant Gases equity affiliates’ income of $97.8 increased by $15.4, with higher income reported
by equity affiliates across all regions, primarily affiliates in Asia and Latin America.
Tonnage Gases
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 3,574.4 | $ | 2,936.7 | $ | 2,544.7 | ||||||
Operating income |
482.6 | 463.2 | 371.7 | |||||||||
Tonnage Gases Sales
| % Change from Prior Year | ||||||||
| 2008 | 2007 | |||||||
Underlying business |
||||||||
Volume |
2 | % | 17 | % | ||||
Acquisitions/divestitures |
1 | % | 1 | % | ||||
Currency |
3 | % | 2 | % | ||||
Natural gas/raw material cost pass-through |
16 | % | (5 | )% | ||||
Total Tonnage Gases Sales Change |
22 | % | 15 | % | ||||
2008 vs. 2007
Tonnage Gases Sales
Sales of $3,574.4 increased 22%, or $637.7. Higher natural gas and raw material cost pass-through
accounted for 16% of sales growth in 2008. Volume growth in the underlying business increased sales
by 4%, primarily due to new plant start-ups in Asia and Canada, offset by a decline of 2% due to
the impacts from hurricane-related business interruption.
The acquisition of BOC Gazy in the third quarter of 2007 improved sales by 1%. Sales increased 3%
from favorable currency effects, primarily the weakening of the U.S. dollar against the Euro.
Tonnage Gases Operating Income
Operating income of $482.6 increased $19.4, or 4%. Operating income increased by $20 from higher
volumes, $9 from favorable currency effects, and $30 from lower operating costs. Operating income
decreased by $11 as a result of hurricane-related impacts. Operating income in 2007 included a gain
of $37 from a customer contract settlement related to a DNT supply contract.
18 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
2007 vs. 2006
Tonnage Gases Sales
Sales of $2,936.7 increased $392.0, or 15%. 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. Prior year results were negatively impacted by
the effects of Hurricane Katrina.
Sales improved 1% from the acquisition of BOC Gazy. Currency favorably impacted sales by 2% as the
U.S. dollar weakened against the Euro and Pound Sterling. Natural gas cost contractually passed
through to customers reduced sales by 5%.
Tonnage Gases Operating Income
Operating income of $463.2 increased $91.5, or 25%. Operating income increased $64 from higher
volumes; $21 from improved variable costs, efficiencies, and higher operating bonuses; and $7 from
favorable currency effects. Operating income also included a gain of $37 from a customer contract
settlement related to a DNT supply contract. Costs increased $28 due to higher maintenance and
operating costs, costs to support growth, and inflation. Operating
income decreased by $8 as prior year results included hurricane insurance recoveries that exceeded
estimated business interruption, asset write-offs, and other expenses. Refer to Note 20 to the
Consolidated Financial Statements for further information.
Electronics and Performance Materials
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 2,209.3 | $ | 2,068.7 | $ | 1,801.0 | ||||||
Operating income |
245.9 | 229.2 | 190.0 | |||||||||
Electronics and Performance Materials Sales
| % Change from Prior Year | ||||||||
| 2008 | 2007 | |||||||
Underlying business |
||||||||
Volume |
5 | % | 14 | % | ||||
Price |
— | (2 | )% | |||||
Acquisitions/divestitures |
— | 2 | % | |||||
Currency |
2 | % | 1 | % | ||||
Total Electronics and Performance
Materials Sales Change |
7 | % | 15 | % | ||||
2008 vs. 2007
Electronics and Performance Materials Sales
Sales of $2,209.3 increased 7%, or $140.6. Underlying base business growth increased sales by 5%.
In Electronics, higher volumes in specialty materials and tonnage gases were partially offset by
lower equipment sales and softer volumes due to product rationalization. Higher volumes across Asia
and in some key market segments in North America increased sales in Performance Materials. Pricing
was flat, as improvements in Performance Materials were offset by lower pricing in electronic
specialty materials. Favorable currency effects, primarily the weakening of the U.S. dollar against
key European and Asian currencies, improved sales by 2%.
Electronics and Performance Materials Operating Income
Operating income of $245.9 increased 7%, or $16.7. Operating income increased $48 from higher
volumes, $19 from lower operating costs, and $18 from favorable currency effects, partially offset
by property damage of $15 caused by the fire at an Electronics production facility in Korea.
Operating income also declined by $51 from lower electronic specialty materials pricing, net of
variable costs.
2007 vs. 2006
Electronics and Performance Materials Sales
Sales of $2,068.7 increased 15%, or $267.7. Underlying base business increased sales by 12%. Higher
volumes across most Electronics product lines and all Performance Materials product lines improved
sales by 14%. Electronics growth was due to strong industry operating rates and equipment sales in
support of fabrication expansions. Performance Materials increases were due to growth in Asia and
Europe. Pricing decreased sales by 2%, as electronic specialty materials continued to experience
pricing pressure. Sales increased 2% from the full-year impact of
the acquisition of Tomah3 Products in 2006. Favorable currency effects, primarily the
weakening of the U.S. dollar against key European currencies, increased sales by 1%.
Electronics and Performance Materials Operating Income
Operating income of $229.2 increased 21%, or $39.2. Operating income increased $106 from higher
volumes, $6 from the full-year impact of the acquisition of Tomah3 Products in 2006, and
$6 from favorable currency effects. Lower pricing, net of variable costs, primarily from lower
electronics specialty material pricing, decreased operating income by $48. Operating income also
declined by $31 from higher costs to support growth and due to inflation.
19
Equipment and Energy
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 438.1 | $ | 585.9 | $ | 536.5 | ||||||
Operating income |
38.9 | 76.8 | 68.9 | |||||||||
2008 vs. 2007
Sales of $438.1 decreased by $147.8, primarily from lower LNG activity and a one-time
energy-related equipment sale that occurred in the prior year. Operating income of $38.9 decreased
by $37.9, primarily from lower LNG heat exchanger activity.
The sales backlog for the Equipment business at 30 September 2008 was $399, compared to $258 at 30
September 2007. It is expected that approximately $289 of the backlog will be completed during
2009.
2007 vs. 2006
Sales of $585.9 increased $49.4, primarily from a one-time energy-related equipment sale. Operating
income of $76.8 increased by $7.9, primarily from higher LNG heat exchanger activity.
The sales backlog for the Equipment business at 30 September 2007 was $258, compared to $446 at 30
September 2006, which reflected a peak level for LNG orders. The business received an order for one
new LNG heat exchanger in 2007.
Other
Other operating income includes expense and income that cannot be directly associated with the
business segments, including foreign exchange gains and losses, interest income, and costs
previously allocated to businesses now reported as discontinued operations. Also included are LIFO
inventory adjustments, as the business segments use FIFO and the LIFO pool is kept at corporate.
Corporate research and development costs are fully allocated to the business segments.
| 2008 | 2007 | 2006 | ||||||||||
Operating (loss) |
$ | (30.8 | ) | $ | (26.0 | ) | $ | (35.0 | ) | |||
2008 vs. 2007
Operating loss of $30.8 increased by $4.8. No items were individually significant in comparison to
the prior year.
2007 vs. 2006
The operating loss of $26.0 decreased by $9.0, primarily due to the Amines allocated costs that are
included in the 2006 results.
PENSION BENEFITS
The Company and certain of its subsidiaries sponsor defined benefit pension plans that cover a
substantial portion of its worldwide employees. The principal defined benefit pension plans—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. The move to defined contribution plans has not had
and is not anticipated to have a material impact on retirement program cost levels or funding in
the near term. Over the long run, however, the new defined contribution plans are expected to
reduce volatility of both expense and contributions.
The amounts recognized in the consolidated financial statements for pension benefits under the
defined benefit plans are determined on an actuarial basis utilizing numerous assumptions. The
discussion that follows provides information on the funding, significant assumptions, and expense
associated with the defined benefit plans. In addition, refer to Note 18 to the Consolidated
Financial Statements for comprehensive and detailed disclosures on the Company’s postretirement
benefits and Note 2 to the Consolidated Financial Statements for information on the adoption of
SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132R.”
For 2008, the fair market value of pension plan assets for the Company’s defined benefit plans as
of the measurement date decreased to $2,218.2 from $2,600.1, primarily due to investment losses.
The projected benefit obligation for these plans as of the measurement date was $2,731.7 and
$3,033.1 in 2008 and 2007, respectively. The decrease in the obligation was due principally to an
increase in the weighted average discount rate used to measure future benefit obligations to 7.1%
from 6.1%.
20 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
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. The
Company analyzes the liabilities and demographics of each plan, which helps guide the level of
contributions. During 2008 and 2007, the Company’s cash contributions to funded plans and benefit
payments under unfunded plans were $234.0 and $290.0, respectively, the majority of which was
voluntary.
Cash contributions and benefit payments for defined benefit plans are estimated to be
approximately $170 in 2009, the majority of which is voluntary. 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 25 for a projection
of future contributions.
Significant Assumptions
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 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 age, mortality, and turnover rates. The Company believes
the actuarial assumptions
are reasonable. However, actual results could vary materially from these actuarial assumptions 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 Citigroup Pension Discount Curve is used in determining the discount rate for each
of the U.S. Plans. The rate is used to discount the future cash flows of benefit obligations back
to the measurement date. A higher discount rate decreases the present value of the benefit
obligations and results in lower pension expense. A 50 basis point increase/decrease in the
discount rate decreases/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.
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. Lower returns on the plan assets result in higher
pension expense. A 50 basis point increase/decrease in the estimated rate of return on plan assets
decreases/increases pension expense by approximately $12 per year.
The weighted average actual compound rate of return earned on plan assets for the last ten years
was 5.9% for the U.S. and the U.K. For the last 20 years, the actual rate was 9.1%. The Company
uses a market-related valuation method for recognizing investment gains or losses. Investment gains
or losses are the difference between the expected and actual return based on the market-related
value of assets. This method recognizes investment gains or losses over a five-year period from the
year in which they occur, which reduces year-to-year volatility. Expense in future periods will be
impacted as gains or losses are recognized in the market-related value of assets over the five-year
period.
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/decrease in the expected rate of compensation increases/decreases pension
expense by approximately $12 per year.
21
Pension Expense
| 2008 | 2007 | 2006 | ||||||||||
Pension expense |
$ | 127.0 | $ | 138.5 | $ | 154.0 | ||||||
Special terminations,
settlements and curtailments (included above) |
31.5 | 12.3 | 12.9 | |||||||||
Weighted average discount rate |
6.1 | % | 5.7 | % | 5.3 | % | ||||||
Weighted average expected
rate of return on plan assets |
8.8 | % | 8.8 | % | 8.8 | % | ||||||
Weighted average rate of
compensation increase |
4.2 | % | 4.1 | % | 4.1 | % | ||||||
2008 vs. 2007
The decrease in pension expense was primarily attributable to the 40 basis point increase in the
weighted average discount rate. Expense included $31.5 in 2008 and $12.3 in 2007 for special
termination, settlement, and curtailment charges.
2007 vs. 2006
The decrease in pension expense was primarily attributable to the 40 basis point increase in the
weighted average discount rate.
Pension expense is estimated to be approximately $75 in 2009. This represents a decrease of $20.5,
net of special terminations, settlements, and curtailments. This decrease is primarily attributable
to a 100 basis point increase in the weighted average discount rate from 6.1% to 7.1% and
anticipated contributions to the defined benefit plans in 2009, partially offset by a reduction in
the asset return assumption from 8.8% to 8.3% and a decline in the market value of the plan assets.
In 2009, pension expense will include approximately $23.2 of amortization relating to actuarial
losses. Future changes in the discount rate and actual returns on plan assets different from
expected returns would impact the actuarial gains/losses and resulting amortization in years beyond
2009.
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
policy for environmental expenditures is discussed in Note 1 to the Consolidated Financial
Statements, and environmental loss contingencies are discussed in Note 19 to the Consolidated
Financial Statements.
The amounts charged to earnings from continuing operations on an after-tax basis related to
environmental matters totaled $31.0, $25.1, and $25.8, in 2008, 2007, and 2006, 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 $22 and $23 in 2009 and 2010, respectively.
Although precise amounts are difficult to determine, the Company estimates that in 2008, it spent
approximately $7 on capital projects to control pollution versus $11 in 2007. Capital expenditures
to control pollution in future years are estimated to be $8 and $7 in 2009 and 2010, respectively.
The Company accrues environmental investigatory, external legal, and 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 $82 to a
reasonably possible upper exposure of $95. The balance sheet at 30 September 2008 and 2007 included
an accrual of $82.9 and $52.2, respectively. The accrual for the environmental obligations relating
to the Pace, Florida and the Piedmont, S.C. facilities is included in these amounts. See Note 19 to
the Consolidated Financial Statements for further details on these facilities.
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 material adverse impact on its financial position or results of operations in any one year.
Some of the Company’s operations are within jurisdictions that have, or are developing, regulations
governing emissions of greenhouse gases (GHGs). These include existing and expanding coverage under
the European Union Emissions Trading Scheme; mandatory reporting and reductions at manufacturing
facilities in Alberta, Canada; and mandatory reporting and anticipated constraints on GHG emissions
in California and Ontario. In the U.S., regional initiatives have been implemented that will
regulate GHG emissions from fossil fuel-driven power
plants, and some federal legislative proposals also focus on
22 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
such power plants. As a large consumer
of electric power, the Company could be impacted by increased costs that may arise from such
regulatory controls. In addition, federal legislation has been introduced in the U.S. that would
regulate production of fluorinated gases manufactured by the Company. Increased public awareness
and concern may result in more international, U.S. federal, and/or regional requirements to reduce
or mitigate the effects of GHGs.
The Company may also incur costs related to GHG emissions from its hydrogen facilities and other
operations such as fluorinated gases production. The Company believes it will be able to mitigate
some of the potential costs through its contractual terms, but the lack of definitive legislation
or regulatory requirements prevents accurate prediction of the long-term impact on the Company. Any
legislation that limits or taxes GHG emissions from Company facilities could impact the Company’s
growth by increasing its operating costs or reducing demand for certain of its products.
Regulation of GHGs may also produce new opportunities for the Company. The Company continues to
develop technologies to help its facilities and its customers to lower energy consumption, improve
efficiency, and lower emissions. The Company is also developing a portfolio of technologies that
capture
CO2 from power and chemical plants before it reaches the atmosphere, enable cleaner transportation fuels, and facilitate alternate fuel source development.
In addition, the potential demand for clean coal and the Company’s carbon capture solutions could
increase demand for oxygen, one of the Company’s main products, and the Company’s proprietary
technology for delivering low-cost oxygen.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintained a solid financial position throughout 2008. Strong cash flow from
operations, supplemented with proceeds from borrowings, provided funding for the Company’s capital
spending and share repurchase program. The Company continues to maintain debt ratings of A/A2
(long-term) and A-1/ P-1 (short-term), respectively, by Standard & Poor’s and Moody’s and has had
consistent access to commercial paper markets despite the current credit crisis. The current credit
environment has not had, and is not expected to have, a significant adverse impact on liquidity.
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:
| 2008 | 2007 | 2006 | ||||||||||
Cash provided by (used for): |
||||||||||||
Operating activities |
$ | 1,679.6 | $ | 1,499.9 | $ | 1,347.5 | ||||||
Investing activities |
(919.8 | ) | (1,483.1 | ) | (946.7 | ) | ||||||
Financing activities |
(698.5 | ) | (14.9 | ) | (422.6 | ) | ||||||
Effect of exchange rate
changes on cash |
1.7 | 7.6 | 2.5 | |||||||||
Increase (decrease) in cash
and cash items |
$ | 63.0 | $ | 9.5 | $ | (19.3 | ) | |||||
Operating Activities
2008 vs. 2007
Net cash provided by operating activities increased $179.7, or 12%. The increase resulted
principally from a decrease in the use of cash for working capital of $167.2. Cash increased
$156.5, due to a reduction in contracts in progress due to lower equipment activity. Cash used for
payables and accrued liabilities decreased by $204.8, due mainly to an increase in customer
advances related to equipment sales and lower pension plan contributions. Partially offsetting
these favorable impacts was an increase in the use of cash for trade receivables of $97.2 and other
receivables of $77.5. The increase in trade receivables was due to higher sales, offset partially
by increased collections. The increase in other receivables resulted from the recognition of a
deferred tax asset related to the U.S. Healthcare impairment charge. The decline in net income of
$125.9 was offset by the favorable impact of adjustments to income of $138.4. Net income included a
noncash impairment charge of $314.8 related to the U.S. Healthcare business and an increase in
depreciation/amortization expense of $79.2. Net income also included a gain of $105.9 related to
the sale of discontinued operations, and adjustments to income included an increase in noncurrent
capital lease receivables of $121.8.
2007 vs. 2006
Net cash provided by operating activities increased $152.4, or 11%. This increase was primarily due
to higher earnings, partially offset by changes in working capital. Net income increased $312.2.
Adjustments to income, principally depreciation and amortization, increased cash from operating
activities by $34.9. The use of cash for working capital increased $194.7. There was an increase in
the use of cash for payables and accrued liabilities of $319.1, partially offset by a decrease in
the use of cash for trade receivables of $82.6 and inventories of $35.7. Cash used for payables and
accrued liabilities increased, due mainly to a reduction in customer advances, higher pension plan
contributions, payments for the global cost reduction plan, and the timing of payments. Customer
advances declined as projects on average were nearer completion. Generally, customer advances are
higher at the beginning of projects. The use of cash decreased for trade receivables due to the
Company’s focus on collection activities.
23
Investing Activities
2008 vs. 2007
Cash used for investing activities decreased $563.3, principally from lower acquisitions of $467.1
and proceeds from the sale of discontinued operations of $423.0, partially offset by proceeds from
the issuance of Industrial Revenue Bonds. The proceeds of the bonds must be held in escrow until
related project spending occurs. As of 30 September 2008, $181.2 was classified as a noncurrent
asset and reflected as a use of cash in investing activities. In 2007, the Company acquired BOC
Gazy from The Linde Group for 380 million Euros or $518.4. During 2008, the Company sold its
Polymer Emulsions and HPPC businesses.
2007 vs. 2006
Cash used for investing activities increased $536.4. Additions to plant and equipment decreased
$195.5. This decrease is primarily related to the $297.2 repurchase of cryogenic vessel equipment
in 2006. Acquisitions in 2007, totaling $539.1, primarily consisted of BOC Gazy from The Linde
Group for 380 million Euros or $518.4. Acquisitions in 2006 of $127.0 principally included
Tomah3 Products. Proceeds from the sale of assets and investments decreased $117.0,
principally due to the sale of the Geismar, Louisiana DNT production facility in 2006. The Company
also sold its Amines business in 2006 for $211.2. Additionally, insurance proceeds received for
property damage from hurricanes were lower by $37.4.
Capital Expenditures
Capital expenditures are detailed in the following table:
| 2008 | 2007 | 2006 | ||||||||||
Additions to plant and
equipment |
$ | 1,085.1 | $ | 1,013.2 | $ | 1,208.7 | ||||||
Acquisitions, less cash
acquired |
72.0 | 539.1 | 127.0 | |||||||||
Investments in and advances
to unconsolidated affiliates |
2.2 | .2 | 22.5 | |||||||||
Capital Expenditures on a
GAAP basis |
$ | 1,159.3 | $ | 1,552.5 | $ | 1,358.2 | ||||||
Capital lease expenditures
under |
||||||||||||
EITF No. 01-08(A) |
195.7 | 82.8 | 128.3 | |||||||||
Capital Expenditures on a
non-GAAP basis |
$ | 1,355.0 | $ | 1,635.3 | $ | 1,486.5 | ||||||
| (A) | The Company utilizes a non-GAAP measure in the computation of capital expenditures and includes spending associated with facilities accounted for as capital leases. Certain facilities that are built to service a specific customer are accounted for as capital leases in accordance with EITF No. 01-08, “Determining Whether an Arrangement Contains a Lease,” and such spending is reflected as a use of cash within cash provided by operating activities. The presentation of this non-GAAP measure is intended to enhance the usefulness of information by providing a measure which the Company’s management uses internally to evaluate and manage the Company’s expenditures. |
Capital expenditures on a GAAP basis in 2008 totaled $1,159.3, compared to $1,552.5 in 2007.
Additions to plant and equipment in 2008 increased by $71.9 compared to 2007. As in 2007, additions
to plant and equipment in 2008 were largely in support of the worldwide Merchant Gases, Tonnage
Gases, and Electronics and Performance Materials segments. Additions to plant and equipment also
included support capital of a routine, ongoing nature, including expenditures for distribution
equipment and facility improvements. In 2007, the Company acquired BOC Gazy at a cost of $518.4.
Capital expenditures on a non-GAAP basis in 2008 totaled $1,355.0, compared to $1,635.3 in 2007.
Capital lease expenditures under EITF No. 01-08 of $195.7 increased by $112.9, reflecting higher
project spending primarily in Europe and Asia. In 2007, capital lease expenditures under EITF No.
01-08 of $82.8 declined $45.5 from 2006, mainly due to the completion of a large project in 2006.
Capital expenditures, excluding acquisitions in 2009, are expected to increase $200 to $400,
reflecting a strong project workload. It is anticipated that capital expenditures will be funded
principally with cash from continuing operations. In addition, the Company intends to continue to
evaluate acquisition opportunities and investments in equity affiliates.
Financing Activities
2008 vs. 2007
Cash used for financing activities increased $683.6, due primarily to a net decrease in borrowings
of $299.5, an increase in cash used for the purchase of treasury stock of $218.2, and lower
proceeds of $115.4 from stock option exercises. Company borrowings (short- and long-term proceeds,
net of repayments) totaled $305.5 as compared to $605.0.
2007 vs. 2006
Cash used for financing activities decreased $407.7 in 2007, due primarily to the net increase in
Company borrowings (short- and long-term proceeds, net of repayments) of $605.0 as compared to
$243.6. Additionally, higher proceeds from stock option exercises of $99.9 were essentially offset
by an increase in the use of cash for the purchase of treasury stock of $92.9.
24 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
Financing and Capital Structure
Capital needs in 2008 were satisfied with cash from operations, supplemented with proceeds from
borrowings. At the end of 2008, total debt outstanding was $4.0 billion compared to
$3.7 billion. Total debt at 30 September 2008 and 2007, expressed as a percentage of the sum of
total debt, shareholders’ equity, and minority interest, was 43.4% and 39.8%, respectively.
Long-term debt proceeds of $580.1 included $300.0 from the issuance of a fixed-rate 4.15% five-year
bond and $220.0 from Industrial Revenue Bonds. Refer to Note 12 to the Consolidated Financial
Statements for additional information.
In September 2008, the Company increased the size of its multicurrency committed revolving credit
facility, maturing May 2011, from $1,200 to $1,450. Sixteen major global banks provide commitments
under this facility, and the Company is confident that funding would be available from these banks
if it were necessary to draw on the facility. As of 30 September 2008, no borrowings were
outstanding under this facility. Additional commitments of $381.4 are maintained by the Company’s
foreign subsidiaries, of which $281.8 was borrowed and outstanding at 30 September 2008. There was
$97.2 of commercial paper outstanding at 30 September 2008.
On 20 September 2007, the Board of Directors authorized the repurchase of up to $1,000 of the
Company’s outstanding common stock. This action was in addition to an existing $1,500 share
repurchase program which was approved on 16 March 2006. As of 30 September 2007, the Company
purchased 15.0 million of its outstanding shares at a cost of $1,063.4. During 2008, the Company
purchased an additional 8.7 million of its outstanding shares at a cost of $787.4. The Company has
completed the 2006 authorization and will continue to purchase shares under the 2007 authorization
at its discretion while maintaining sufficient funds for investing in its business and growth
opportunities. An additional $649.2 in share repurchase authorization remains.
The Company projects a limited need to access the long-term debt markets in 2009 due to its
projected operating cash flows and very low long-term debt maturities. The Company expects that its
strong credit rating will continue to ensure its access to the commercial paper and other
short-term debt markets.
Dividends
On 20 March 2008, the Board of Directors increased the quarterly cash dividend 16%, from 38 cents
per share to 44 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.
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 obligations of the Company as of 30 September 2008.
| Payments Due by Period | ||||||||||||||||||||||||||||
| Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | ||||||||||||||||||||||
Long-term debt obligations |
||||||||||||||||||||||||||||
Debt maturities |
$ | 3,533 | $ | 31 | $ | 468 | $ | 178 | $ | 476 | $ | 301 | $ | 2,079 | ||||||||||||||
Contractual interest |
1,541 | 155 | 142 | 126 | 112 | 96 | 910 | |||||||||||||||||||||
Capital leases |
15 | 1 | 1 | 1 | 1 | 1 | 10 | |||||||||||||||||||||
Operating leases |
238 | 50 | 41 | 32 | 26 | 21 | 68 | |||||||||||||||||||||
Pension obligations |
538 | 170 | 70 | 80 | 190 | 28 | — | |||||||||||||||||||||
Unconditional purchase obligations |
1,728 | 676 | 120 | 100 | 92 | 92 | 648 | |||||||||||||||||||||
Total Contractual Obligations |
$ | 7,593 | $ | 1,083 | $ | 842 | $ | 517 | $ | 897 | $ | 539 | $ | 3,715 | ||||||||||||||
25
Long-Term Debt Obligations
The long-term debt obligations include the maturity payments of long-term debt, including 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 slightly decrease contractual interest. The
Company had $1,274 of long-term debt subject to variable interest rates at 30 September 2008,
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 2008. Variable interest rates are primarily determined by interbank offer rates and by
U.S. short-term tax-exempt interest rates.
Leases
Refer to Note 13 to the Consolidated Financial Statements for additional information on capital and
operating leases.
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 that in total equal the
recognized liabilities. These payments are
based upon current valuation assumptions and, for the U.S., pension legislation effective in 2008.
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.
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 long-term
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 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 generally ratchets down to zero over a period of months in the
event operations are terminated. Therefore, the fixed obligation is principally included in 2009.
Purchase commitments to spend approximately $485 for additional plant and equipment are included in
the unconditional purchase obligations.
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 approximate
$7.5 billion annually, including the unconditional purchase obligations in the table.
Income Tax Liabilities
Noncurrent deferred income tax liabilities as of 30 September 2008 were $626.6. Refer to Note 17 to
the Consolidated Financial Statements. Tax liabilities related to FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109” (FIN 48), as of 30 September 2008 were $184.1. Refer to Note 2 to the
Consolidated Financial Statements. These tax liabilities were not included in the Contractual
Obligations table as it is impractical to determine a cash impact by year.
26 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain guarantee agreements as discussed in Note 19 to the
Consolidated Financial Statements. The Company is not a primary beneficiary in any material
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 primarily in the industrial gas
business. 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 Company’s policy to
minimize its cash flow exposure to adverse changes in currency 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 contracts with
customers, 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 has also entered into a number of contracts
to hedge the cash flow exposure of changes in the market price of nickel.
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 $31.9 at 30 September 2008
and $39.8 at 30 September 2007 as disclosed in Note 6 to the Consolidated Financial Statements.
These amounts represent investments accounted for by the cost method, including a publicly traded
foreign company. The Company assessed the materiality of the market risk exposure on these other
investments and determined this exposure to be immaterial.
At 30 September 2008 and 2007, the net financial instrument position was a liability of $3,629 and
$3,157, respectively. The increase in the net financial instrument position was due primarily to an
increase in the book value of long-term debt as a result of new issuances exceeding repayments.
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.
Interest Rate Risk
The Company’s debt portfolio, including swap agreements, as of 30 September 2008, primarily
comprised debt denominated in Euros (44%) and U.S. dollars (43%), including the effect of currency
swaps. This debt portfolio is composed of 49% fixed-rate debt and 51% 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.
27
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 2008 and 2007,
with all other variables held constant. A 100 basis point increase in market interest rates would
result in a decrease of $98 and $95 in the net liability position of financial instruments at 30
September 2008 and 2007, respectively. A 100 basis point decrease in market interest rates would
result in an increase of $98 and $103 in the net liability position of financial instruments at 30
September 2008 and 2007, respectively.
Based on the variable-rate debt included in the Company’s debt portfolio, including the interest
rate swap agreements, as of 30 September 2008 and 2007, a 100 basis point increase in interest
rates would result in an additional $20 and $19 in interest incurred per year at 30 September 2008
and 2007, respectively. A 100 basis point decline would lower interest incurred by $20 and $19 per
year at 30 September 2008 and 2007, respectively.
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 2008 and 2007, with all other variables held constant. A 10%
strengthening of the functional currency of an entity versus all other currencies would result in a
decrease of $356 and $366 in the net liability position of financial instruments at 30 September
2008 and 2007, respectively. A 10% weakening of the functional currency of an entity versus all
other currencies would result in an increase of $352 and $366 in the net liability position of
financial instruments at 30 September 2008 and 2007, respectively.
The primary currencies for which the Company has exchange rate exposure are the U.S. dollar versus
the Euro, and the
U.S. dollar 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/liability 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.
Commodity Price Risk
The sensitivity analysis assumes an instantaneous 50% change in the price of natural gas, oil-based
feedstocks, and nickel from their levels at 30 September 2008 and 2007, with all other variables
held constant. The impact of a 50% change in these prices would not have a significant impact on
the net liability position of financial instruments at 30 September 2008 and 2007.
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
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. However, 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 management has reviewed these
critical accounting policies and estimates and related disclosures with its audit committee.
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 2008 totaled $6,614.8, and
depreciation expense totaled $848.0 during 2008.
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. Assumptions on
the following factors,
28 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
among others, affect the determination of estimated economic useful life: wear and tear, obsolescence,
technical standards, contract life, market demand, competitive position, raw material availability,
and geographic location.
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 technology, 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.
The Company has numerous long-term customer supply contracts, particularly in the gases on-site
business within the Tonnage Gases segment. These contracts principally have initial contract terms
of 15 to 20 years. There are also long-term customer supply contracts associated with the tonnage
gases business within the Electronics and Performance Materials segment. These contracts
principally have initial terms of 10 to 15 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 production facilities within the Merchant Gases segment are principally 15
years. Customer contracts associated with products produced at these types of facilities typically
have a much shorter term. The depreciable lives of production facilities within the Electronics and
Performance Materials segment, where there is not an associated long-term supply agreement, range
from 10 to 15 years. These depreciable lives have been determined based on historical experience
combined with judgment on future assumptions such as technological advances, potential obsolescence, competitors’ actions, etc. Management
monitors its assumptions and may potentially need to adjust depreciable life as circumstances
change.
A change in the depreciable life by one year for production facilities within the Merchant Gases
and Electronics and Performance Materials segments for which there is not an associated long-term
customer supply agreement would impact annual depreciation expense as summarized below:
| Decrease Life | Increase Life | |||||||
| by 1 Year | by 1 Year | |||||||
Merchant Gases |
$19 | $(14 | ) | |||||
Electronics and
Performance Materials |
$18 | $(12 | ) | |||||
Impairment of Long-Lived Assets
Plant and Equipment
Net plant and equipment at 30 September 2008 totaled $6,614.8. 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 that 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.
During the third quarter of 2008, the Company determined an interim test for impairment was
required for its U.S. Healthcare business, and the impairment test resulted in a charge of $7.8.
Refer to Note 5 to the Consolidated Financial Statements for further detail.
As part of the actions taken in the Company’s global cost reduction plan, recognized impairment of
assets to be sold or abandoned was $7.7 in 2006. Refer to Note 3 to the Consolidated Financial
Statements for additional information.
29
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 $991.5 as of 30 September 2008. The
majority of the Company’s goodwill is assigned to reporting units within the Merchant Gases and
Electronics and Performance Materials segments. 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 that potential impairment exists. The impairment test requires the Company to
compare the fair value of business reporting units to carrying value, including assigned goodwill.
During the third quarter of 2008, the Company determined an interim test for impairment was
required for its U.S. Healthcare reporting unit, and the impairment test resulted in a charge of
$294.3. The impairment reduced the carrying amount of the U.S. Healthcare reporting unit goodwill
to zero. Refer to Note 5 to the Consolidated Financial Statements for additional information.
In the fourth quarter of 2008, the Company conducted the required annual test of goodwill for
impairment. There were no indications of impairment.
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 differ from the estimates.
Equity Investments
Investments in and advances to equity affiliates totaled $822.6 at 30 September 2008. The majority
of the Company’s investments are non-publicly traded ventures with other companies
in the industrial gas 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 that differ from estimates could result in an impairment charge.
Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax
assets and liabilities are recognized for the tax effects of temporary differences between the
financial reporting and tax bases of assets and liabilities measured using the enacted tax rate. At
30 September 2008, accrued income taxes and deferred tax liabilities amounted to $87.0 and $626.6,
respectively. Tax liabilities related to FIN 48 as of 30 September 2008 were $184.1. Current and noncurrent deferred tax assets equaled $264.4 at
30 September 2008. Income tax expense was $365.3 for the year ended 30 September 2008. 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 $15.
30 AIR PRODUCTS 2008 ANNUAL REPORT | Management’s Discussion and Analysis
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 age, 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 20 and Note 18 to the Consolidated Financial Statements.
Loss Contingencies
In the normal course of business the Company encounters contingencies, i.e., situations involving
varying degrees of uncertainty as to the outcome and effect on the Company. The Company accrues a
liability for loss contingencies when it is considered probable that a liability has been incurred
and the amount of loss 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.
Contingencies include those associated with litigation and environmental matters for which the
Company’s accounting policy is discussed in Note 1 to the Consolidated Financial Statements, and
particulars are provided in Note 19 to the Consolidated Financial Statements. Significant judgment
is required in both determining probability and whether the amount of loss associated with a
contingency can be reasonably estimated. These determinations are made based on the best available
information at the time. As additional information becomes available, the Company reassesses
probability and estimates of loss contingencies. Revisions in the estimates associated with loss
contingencies could have a significant impact on the Company’s results of operations in the period
in which an accrual for loss contingencies is recorded or adjusted. For example, due to the
inherent uncertainties related to environmental exposures, a significant increase to environmental
liabilities could occur if a new site is designated, the scope of remediation is increased,
or the Company’s proportionate share is increased. Similarly, a future charge for regulatory fines
or damage awards associated with litigation could have a significant impact on the Company’s net
income in the period in which it is recorded.
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
This document contains “forward-looking statements” within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on
management’s reasonable expectations and assumptions as of the date of this document regarding
important risk factors. Actual performance and financial results may differ materially from
projections and estimates expressed in the forward-looking statements because of many factors,
including, without limitation, continuing deterioration in economic and business conditions;
weakening demand for the Company’s products; future financial and operating performance of major
customers and industries served by the Company; unanticipated contract terminations or customer
cancellations or postponement of projects and sales; asset impairments due to economic conditions
or specific product or customer events; the impact of competitive products and pricing;
interruption in ordinary sources of supply of raw materials; the ability to recover unanticipated
increased energy and raw material costs from customers; costs and outcomes of litigation or
regulatory activities; consequences of acts of war or terrorism impacting the United States’ and
other markets; the effects of a pandemic or epidemic or a natural disaster; charges related to
current portfolio management and cost reduction actions; the success of implementing cost reduction
programs and achieving anticipated acquisition synergies; the timing, impact, and other
uncertainties of future acquisitions or divestitures; the ability to attract, hire, and retain
qualified personnel in all regions of the world where the Company operates; significant
fluctuations in interest rates and foreign currencies from that currently anticipated; the
continued availability of capital funding sources in all of the Company’s foreign operations; the
impact of new or changed environmental, healthcare, tax or other legislation and regulations in
jurisdictions in which the Company and its affiliates operate; the impact of new or changed
financial accounting standards; and the timing and rate at which tax credits can be utilized. The
Company disclaims any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statements contained in this document to reflect any change in the Company’s
assumptions, beliefs or expectations or any change in events, conditions, or circumstances upon
which any such forward-looking statements are based.
31
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 deficiencies 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 2008, the Company’s internal control over financial reporting was
effective.
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the
Company’s internal control over financial reporting, which appears herein.
|
 |
|
John E. McGlade
|
Paul E. Huck | |
Chairman, President and
|
Senior Vice President and | |
Chief Executive Officer
|
Chief Financial Officer | |
25 November 2008
|
25 November 2008 |
32 AIR PRODUCTS 2008 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
on Internal Control over Financial Reporting
To the Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
We have audited Air Products and Chemicals, Inc. and subsidiaries’ internal control over financial
reporting as of 30 September 2008, 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. and subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying “Management’s Report on
Internal Control over Financial Reporting.” Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included 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 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 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, Air Products and Chemicals, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of 30 September 2008, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
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 2008 and 2007, and the related consolidated income statements and
consolidated statements of shareholders’ equity and cash flows for each of the years in the
three-year period ended 30 September 2008, and our report dated 25 November 2008 expressed an
unqualified opinion on those consolidated financial statements.
Philadelphia, Pennsylvania
25 November 2008
25 November 2008
33
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 (the Company) as of 30 September 2008 and 2007, and the related consolidated
income statements and consolidated statements of shareholders’ equity and cash flows for each of
the years in the three-year period ended 30 September 2008. 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 2008 and 2007, and the results of their operations and their cash flows for each of
the years in the three-year period ended 30 September 2008, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes,” effective 1 October 2007; Statement of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,” as of 30 September 2007;
and FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,”
effective 30 September 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Air Products and Chemicals, Inc. and subsidiaries’ internal control over
financial reporting as of 30 September 2008, 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 25 November 2008 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Philadelphia, Pennsylvania
25 November 2008
25 November 2008
34 AIR PRODUCTS 2008 ANNUAL REPORT
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) | 2008 | 2007 | 2006 | |||||||||
Sales |
$ | 10,414.5 | $ | 9,148.2 | $ | 7,885.0 | ||||||
Cost of sales |
7,693.1 | 6,698.9 | 5,817.0 | |||||||||
Selling and administrative |
1,090.4 | 999.8 | 891.5 | |||||||||
Research and development |
130.7 | 129.0 | 139.9 | |||||||||
Pension settlement |
30.3 | 10.3 | — | |||||||||
Customer contract settlement |
— | (36.8 | ) | — | ||||||||
Global cost reduction plan |
— | 13.7 | 71.0 | |||||||||
Gain on sale of a chemical facility |
— | — | (70.4 | ) | ||||||||
Impairment of loans receivable |
— | — | 65.8 | |||||||||
Other (income) expense, net |
(25.8 | ) | (42.3 | ) | (71.7 | ) | ||||||
Operating Income |
1,495.8 | 1,375.6 | 1,041.9 | |||||||||
Equity affiliates’ income |
145.0 | 114.4 | 91.5 | |||||||||
Interest expense |
162.0 | 162.4 | 118.4 | |||||||||
Income from Continuing Operations before Taxes and Minority Interest |
1,478.8 | 1,327.6 | 1,015.0 | |||||||||
Income tax provision |
365.3 | 287.2 | 262.0 | |||||||||
Minority interest in earnings of subsidiary companies |
23.0 | 20.8 | 18.9 | |||||||||
Income from Continuing Operations |
1,090.5 | 1,019.6 | 734.1 | |||||||||
Income (Loss) from Discontinued Operations, net of tax |
(180.8 | ) | 16.0 | (4.5 | ) | |||||||
Income before Cumulative Effect of Accounting Change |
909.7 | 1,035.6 | 729.6 | |||||||||
Cumulative effect of accounting change, net of tax |
— | — | (6.2 | ) | ||||||||
Net Income |
$ | 909.7 | $ | 1,035.6 | $ | 723.4 | ||||||
Weighted Average of Common Shares Outstanding (in millions) |
212.2 | 216.2 | 221.7 | |||||||||
Weighted Average of Common Shares Outstanding Assuming Dilution (in millions) |
219.2 | 223.2 | 227.5 | |||||||||
Basic Earnings per Common Share |
||||||||||||
Income from continuing operations |
$5.14 | $4.72 | $3.31 | |||||||||
Income (loss) from discontinued operations |
(.85 | ) | .07 | (.02 | ) | |||||||
Income before cumulative effect of accounting change |
4.29 | 4.79 | 3.29 | |||||||||
Cumulative effect of accounting change |
— | — | (.03 | ) | ||||||||
Net Income |
$4.29 | $4.79 | $3.26 | |||||||||
Diluted Earnings per Common Share |
||||||||||||
Income from continuing operations |
$4.97 | $4.57 | $3.23 | |||||||||
Income (loss) from discontinued operations |
(.82 | ) | .07 | (.02 | ) | |||||||
Income before cumulative effect of accounting change |
4.15 | 4.64 | 3.21 | |||||||||
Cumulative effect of accounting change |
— | — | (.03 | ) | ||||||||
Net Income |
$4.15 | $4.64 | $3.18 | |||||||||
The accompanying notes are an integral part of these statements.
35
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| 30 September (millions of dollars, except for share data) | 2008 | 2007 | ||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash items |
$ | 103.5 | $ | 40.5 | ||||
Trade receivables, less allowances for doubtful
accounts of $28.9 in 2008 and $23.7 in 2007 |
1,575.2 | 1,512.8 | ||||||
Inventories |
503.7 | 476.7 | ||||||
Contracts in progress, less progress billings |
152.0 | 259.6 | ||||||
Prepaid expenses |
107.7 | 105.7 | ||||||
Other receivables and current assets |
349.4 | 238.9 | ||||||
Current assets of discontinued operations |
56.6 | 224.2 | ||||||
Total Current Assets |
2,848.1 | 2,858.4 | ||||||
Investment in Net Assets of and Advances to
Equity Affiliates |
822.6 | 778.1 | ||||||
Plant and Equipment, at cost |
14,988.6 | 14,438.6 | ||||||
Less accumulated depreciation |
8,373.8 | 7,909.8 | ||||||
Plant and Equipment, net |
6,614.8 | 6,528.8 | ||||||
Goodwill |
928.1 | 906.8 | ||||||
Intangible Assets, net |
289.6 | 260.5 | ||||||
Noncurrent Capital Lease Receivables |
505.3 | 326.1 | ||||||
Other Noncurrent Assets |
504.1 | 311.8 | ||||||
Noncurrent Assets of Discontinued Operations |
58.7 | 689.0 | ||||||
Total Noncurrent Assets |
9,723.2 | 9,801.1 | ||||||
Total Assets |
$ | 12,571.3 | $ | 12,659.5 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Current Liabilities |
||||||||
Payables and accrued liabilities |
$ | 1,665.6 | $ | 1,543.2 | ||||
Accrued income taxes |
87.0 | 108.6 | ||||||
Short-term borrowings |
419.3 | 593.3 | ||||||
Current portion of long-term debt |
32.1 | 99.8 | ||||||
Current liabilities of discontinued operations |
8.0 | 77.8 | ||||||
Total Current Liabilities |
2,212.0 | 2,422.7 | ||||||
Long-Term Debt |
3,515.4 | 2,974.7 | ||||||
Deferred Income and Other Noncurrent Liabilities |
1,049.2 | 872.0 | ||||||
Deferred Income Taxes |
626.6 | 705.6 | ||||||
Noncurrent Liabilities of Discontinued Operations |
1.2 | 11.6 | ||||||
Total Noncurrent Liabilities |
5,192.4 | 4,563.9 | ||||||
Total Liabilities |
7,404.4 | 6,986.6 | ||||||
Minority interest in subsidiary companies |
136.2 | 92.9 | ||||||
Minority interest of discontinued operations |
— | 84.4 | ||||||
Total Minority Interest |
136.2 | 177.3 | ||||||
Commitments and Contingencies—See Note 19 |
||||||||
Shareholders’ Equity |
||||||||
Common stock (par value $1 per share; issued 2008
and 2007—249,455,584 shares) |
249.4 | 249.4 | ||||||
Capital in excess of par value |
811.7 | 759.5 | ||||||
Retained earnings |
6,990.2 | 6,458.5 | ||||||
Accumulated other comprehensive income (loss) |
(549.3 | ) | (142.9 | ) | ||||
Treasury stock, at cost (2008—40,120,957 shares;
2007—34,099,899 shares) |
(2,471.3 | ) | (1,828.9 | ) | ||||
Total Shareholders’ Equity |
5,030.7 | 5,495.6 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 12,571.3 | $ | 12,659.5 | ||||
The accompanying notes are an integral part of these statements.
36 AIR PRODUCTS 2008 ANNUAL REPORT | The Consolidated Financial Statements
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended 30 September (millions of dollars) | 2008 | 2007 | 2006 | |||||||||
Operating Activities |
||||||||||||
Net income |
$ | 909.7 | $ | 1,035.6 | $ | 723.4 | ||||||
Adjustments to reconcile income to cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
869.0 | 789.8 | 704.7 | |||||||||
Impairment of long-lived assets of discontinued operations |
314.8 | — | — | |||||||||
(Gain) loss on sale of discontinued operations |
(105.9 | ) | 15.3 | 40.0 | ||||||||
Deferred income taxes |
36.9 | 13.7 | 6.6 | |||||||||
Undistributed earnings of unconsolidated affiliates |
(77.8 | ) | (59.5 | ) | (37.8 | ) | ||||||
Loss (gain) on sale of assets and investments |
.3 | (27.6 | ) | (9.3 | ) | |||||||
Gain on sale of a chemical facility |
— | — | (70.4 | ) | ||||||||
Impairment of loans receivable |
— | — | 65.8 | |||||||||
Share-based compensation |
61.4 | 70.9 | 76.2 | |||||||||
Noncurrent capital lease receivables |
(192.6 | ) | (70.8 | ) | (126.7 | ) | ||||||
Pension and other postretirement costs |
139.0 | 150.3 | 166.6 | |||||||||
Other |
(85.2 | ) | (60.6 | ) | (29.1 | ) | ||||||
Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures: |
||||||||||||
Trade receivables |
(97.4 | ) | (.2 | ) | (82.8 | ) | ||||||
Inventories |
(34.9 | ) | (6.0 | ) | (41.7 | ) | ||||||
Contracts in progress |
95.2 | (61.3 | ) | (63.0 | ) | |||||||
Other receivables |
(120.6 | ) | (43.1 | ) | (70.0 | ) | ||||||
Payables and accrued liabilities |
(14.7 | ) | (219.5 | ) | 99.6 | |||||||
Other |
(17.6 | ) | (27.1 | ) | (4.6 | ) | ||||||
Cash Provided by Operating Activities |
1,679.6 | 1,499.9 | 1,347.5 | |||||||||
Investing Activities |
||||||||||||
Additions to plant and equipment |
(1,085.1 | ) | (1,013.2 | ) | (1,208.7 | ) | ||||||
Acquisitions, less cash acquired |
(72.0 | ) | (539.1 | ) | (127.0 | ) | ||||||
Investment in and advances to unconsolidated affiliates |
(2.2 | ) | (.2 | ) | (22.5 | ) | ||||||
Proceeds from sale of assets and investments |
19.6 | 97.2 | 214.2 | |||||||||
Proceeds from sale of discontinued operations |
423.0 | — | 211.2 | |||||||||
Proceeds from insurance settlements |
— | 14.9 | 52.3 | |||||||||
Change in restricted cash |
(183.6 | ) | — | — | ||||||||
Other |
(19.5 | ) | (42.7 | ) | (66.2 | ) | ||||||
Cash Used for Investing Activities |
(919.8 | ) | (1,483.1 | ) | (946.7 | ) | ||||||
Financing Activities |
||||||||||||
Long-term debt proceeds |
580.1 | 855.9 | 290.7 | |||||||||
Payments on long-term debt |
(95.7 | ) | (429.4 | ) | (157.0 | ) | ||||||
Net (decrease) increase in commercial paper and short-term borrowings |
(178.9 | ) | 178.5 | 109.9 | ||||||||
Dividends paid to shareholders |
(349.3 | ) | (312.0 | ) | (293.6 | ) | ||||||
Purchase of treasury stock |
(793.4 | ) | (575.2 | ) | (482.3 | ) | ||||||
Proceeds from stock option exercises |
87.4 | 202.8 | 102.9 | |||||||||
Excess tax benefit from share-based compensation/other |
51.3 | 64.5 | 6.8 | |||||||||
Cash Used for Financing Activities |
(698.5 | ) | (14.9 | ) | (422.6 | ) | ||||||
Effect of Exchange Rate Changes on Cash |
1.7 | 7.6 | 2.5 | |||||||||
Increase (Decrease) in Cash and Cash Items |
63.0 | 9.5 | (19.3 | ) | ||||||||
Cash and Cash Items—Beginning of Year |
40.5 | 31.0 | 50.3 | |||||||||
Cash and Cash Items—End of Year |
$ | 103.5 | $ | 40.5 | $ | 31.0 | ||||||
The accompanying notes are an integral part of these statements.
37
Air Products and Chemicals, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Number of | Accumulated | |||||||||||||||||||||||||||
| Common | Capital in | Other | ||||||||||||||||||||||||||
| (millions of dollars, | Shares | Common | Excess of | Retained | Comprehensive | Treasury | ||||||||||||||||||||||
| except for share data) | Outstanding | Stock | Par Value | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||||||
Balance 30 September 2005 |
221,898,233 | $249.4 | $ | 573.6 | $ | 5,317.2 | $(433.2 | ) | $ | (1,161.5 | ) | $ | 4,545.5 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
723.4 | 723.4 | ||||||||||||||||||||||||||
Net gain on derivatives, net of
tax of $1.1 |
2.0 | 2.0 | ||||||||||||||||||||||||||
Translation adjustments, net of
tax
benefit of $(15.7) |
133.9 | 133.9 | ||||||||||||||||||||||||||
Net change in unrealized holding
gains,
net of tax of $ .2 |
.5 | .5 | ||||||||||||||||||||||||||
Change in minimum pension
liability,
net of tax of $42.1 |
75.1 | 75.1 | ||||||||||||||||||||||||||
Comprehensive income |
934.9 | |||||||||||||||||||||||||||
Purchase of treasury shares |
(7,658,000 | ) | (496.1 | ) | (496.1 | ) | ||||||||||||||||||||||
Share-based compensation
expense |
69.3 | 69.3 | ||||||||||||||||||||||||||
Issuance of treasury shares for
stock option
and award plans |
3,010,339 | (23.7 | ) | 127.9 | 104.2 | |||||||||||||||||||||||
Tax benefit of stock option and
award plans |
33.3 | 33.3 | ||||||||||||||||||||||||||
Cash dividends ($1.34 per share) |
(296.1 | ) | (296.1 | ) | ||||||||||||||||||||||||
Reclassification to permanent
equity/other |
30.0 | (1.0 | ) | 29.0 | ||||||||||||||||||||||||
Balance 30 September 2006 |
217,250,572 | $249.4 | $ | 682.5 | $ | 5,743.5 | $(221.7 | ) | $ | (1,529.7 | ) | $ | 4,924.0 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
1,035.6 | 1,035.6 | ||||||||||||||||||||||||||
Net gain on derivatives, net of
tax of $3.7 |
8.2 | 8.2 | ||||||||||||||||||||||||||
Translation adjustments, net of
tax
benefit of $(45.8) |
272.8 | 272.8 | ||||||||||||||||||||||||||
Unrealized holding gains, net of
tax of $4.2 |
8.1 | 8.1 | ||||||||||||||||||||||||||
Reclassification adjustment for
realized
gains included in net
income, net of tax
of $20.1 |
(36.6 | ) | (36.6 | ) | ||||||||||||||||||||||||
Change in minimum pension
liability, net of
tax of $83.4 |
159.3 | 159.3 | ||||||||||||||||||||||||||
Comprehensive income |
1,447.4 | |||||||||||||||||||||||||||
Adjustment to initially apply SFAS
No. 158,
net of tax benefit of
$(169.6) |
(333.0 | ) | (333.0 | ) | ||||||||||||||||||||||||
Purchase of treasury shares |
(7,328,482 | ) | (567.3 | ) | (567.3 | ) | ||||||||||||||||||||||
Share-based compensation
expense |
66.6 | 66.6 | ||||||||||||||||||||||||||
Issuance of treasury shares for
stock option
and award plans |
5,433,595 | (70.3 | ) | 268.1 | 197.8 | |||||||||||||||||||||||
Tax benefit of stock option and
award plans |
80.7 | 80.7 | ||||||||||||||||||||||||||
Cash dividends ($1.48 per share) |
(319.8 | ) | (319.8 | ) | ||||||||||||||||||||||||
Other |
(.8 | ) | (.8 | ) | ||||||||||||||||||||||||
Balance 30 September 2007 |
215,355,685 | $249.4 | $ | 759.5 | $ | 6,458.5 | $(142.9 | ) | $ | (1,828.9 | ) | $ | 5,495.6 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
909.7 | 909.7 | ||||||||||||||||||||||||||
Net loss on derivatives, net of tax
benefit
of $(11.0) |
(23.7 | ) | (23.7 | ) | ||||||||||||||||||||||||
Translation adjustments, net of
tax of $7.9 |
(186.3 | ) | (186.3 | ) | ||||||||||||||||||||||||
Reclassification adjustment for
currency
translation
adjustment realized in net
income |
(53.7 | ) | (53.7 | ) | ||||||||||||||||||||||||
Unrealized holding loss, net of
tax benefit
of $(2.4) |
(4.5 | ) | (4.5 | ) | ||||||||||||||||||||||||
Retirement benefit plans, net of
tax benefit
of $(67.5) |
(138.2 | ) | (138.2 | ) | ||||||||||||||||||||||||
Comprehensive income |
503.3 | |||||||||||||||||||||||||||
Purchase of treasury shares |
(8,676,029 | ) | (787.4 | ) | (787.4 | ) | ||||||||||||||||||||||
Share-based compensation
expense |
62.5 | 62.5 | ||||||||||||||||||||||||||
Issuance of treasury shares for
stock option
and award plans |
2,654,971 | (74.2 | ) | 145.0 | 70.8 | |||||||||||||||||||||||
Tax benefit of stock option and
award plans |
63.9 | 63.9 | ||||||||||||||||||||||||||
Cash dividends ($1.70 per share) |
(359.6 | ) | (359.6 | ) | ||||||||||||||||||||||||
Adoption of FIN 48/other |
(18.4 | ) | (18.4 | ) | ||||||||||||||||||||||||
Balance 30 September 2008 |
209,334,627 | $249.4 | $ | 811.7 | $ | 6,990.2 | $(549.3 | ) | $ | (2,471.3 | ) | $ | 5,030.7 | |||||||||||||||
The accompanying notes are an integral part of these statements.
38 AIR PRODUCTS 2008 ANNUAL REPORT | The Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(Millions of dollars, except for share data)
1.
|
Major Accounting Policies | 39 | ||||
2.
|
New Accounting Standards | 44 | ||||
3.
|
Global Cost Reduction Plan | 46 | ||||
4.
|
Acquisitions | 47 | ||||
5.
|
Discontinued Operations | 47 | ||||
6.
|
Financial Instruments | 50 | ||||
7.
|
Inventories | 52 | ||||
8.
|
Summarized Financial Information of Equity Affiliates | 52 | ||||
9.
|
Plant and Equipment | 52 | ||||
10.
|
Goodwill | 53 | ||||
11.
|
Intangible Assets | 53 | ||||
12.
|
Debt | 53 | ||||
13.
|
Leases | 54 | ||||
14.
|
Capital Stock | 55 | ||||
15.
|
Share-Based Compensation | 55 | ||||
16.
|
Earnings per Share | 57 | ||||
17.
|
Income Taxes | 58 | ||||
18.
|
Retirement Benefits | 59 | ||||
19.
|
Commitments and Contingencies | 62 | ||||
20.
|
Supplemental Information | 65 | ||||
21.
|
Summary by Quarter (unaudited) | 67 | ||||
22.
|
Business Segment and Geographic Information | 68 |
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 (FASB) Interpretation No. 46R (FIN 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 46R, is considered a
primary beneficiary of that entity. The primary beneficiary is required to consolidate the variable
interest entity. The Company has determined that it is not a primary beneficiary in any material
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 product 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 liquefied natural gas
(LNG) heat exchangers and large air separation units, are recognized primarily 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.
Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific
transactional taxes imposed on revenue-producing transactions are presented on a net basis and
excluded from sales in the consolidated income statements. The Company records a liability until
remitted to the respective taxing authority.
Certain contracts associated with facilities that are built to service a specific customer are
accounted for as leases in accordance with Emerging Issues Task Force (EITF) Issue No. 01-08,
“Determining Whether an Arrangement Contains a Lease.” In cases where operating-lease treatment is
necessary, there is no difference in revenue recognition over the life of the contract as compared
to accounting for the contract as product sales. In cases where capital-lease treatment is
necessary, the timing of revenue and expense recognition is impacted. Revenue and expense is
recognized up front for the sale of equipment component of the contract as compared to revenue
recognition over the life of the arrangement under contracts not qualifying as capital leases.
Additionally, a portion of the revenue representing interest income from the financing component of
the lease receivable is reflected as sales over the life of the contract.
If an arrangement involves multiple deliverables, the delivered items are considered separate units
of accounting if the items have value on a stand-alone basis and there is objective
39
and reliable evidence of their fair values. Revenues from the arrangement are allocated to the
separate units of accounting based on their relative fair values.
Cost of Sales
Cost of sales predominantly represents the cost of tangible products sold. These costs include
labor, raw materials, plant engineering and purchasing department overhead, power, depreciation,
production supplies and materials packaging costs, and maintenance costs. Costs incurred for
shipping and handling are also included in 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 economic useful life. The principal lives for
major classes of plant and equipment are summarized in the table below:
| Principal | ||
| Estimated | ||
| Useful Lives | ||
Buildings
|
30 years | |
Production facilities(1) |
||
Merchant Gases
|
15 years | |
Tonnage Gases
|
15 to 20 years | |
Electronics and Performance Materials
|
10 to 15 years | |
Distribution equipment(2)
|
5 to 25 years | |
Other machinery and equipment
|
10 to 25 years | |
| (1) | Depreciable lives of production facilities related to long-term customer supply contracts associated with the gases tonnage business are matched to the contract lives. | |
| (2) | The depreciable lives for various types of distribution equipment are: 10 to 25 years for cylinders, depending on the nature and properties of the product; 20 years for tanks; 7.5 years for customer stations; 5 to 15 years for tractors and trailers. |
Selling and Administrative
The principal components of selling and administrative expenses are salaries, advertising, and
promotional costs.
Postemployment Benefits
The Company has substantive ongoing severance arrangements. Termination benefits provided to
employees as part of the global cost reduction plan (discussed in Note 3) are consistent with
termination benefits in previous, similar arrangements. Because the Company’s plan met the
definition of an ongoing benefit arrangement, it was accounted for in accordance with Statement of
Financial Accounting Standards (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 are met when management, with the appropriate level of authority, approves and commits to
its plan of action for termination; the plan identifies
the employees to be terminated and their related benefits; and the plan is 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.
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.
The Company has also entered into a number of contracts to hedge the cash flow exposure of changes
in the market price of nickel.
Major financial institutions are counterparties to all of these derivative 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 unrecognized firm commitment (fair
value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability (cash flow hedge), or (3) a hedge of a
net investment in a foreign operation.
Changes in the fair value of a derivative that is designated as and meets all the required criteria
for a fair value hedge, along with the gain or loss on the hedged asset or liability that is
attributable to the hedged risk, are recorded in current period earnings.
40 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
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, foreign currency debt, or other foreign currency
liabilities that are designated as and meet 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.
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 earnings as they occur.
Environmental Expenditures
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. 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. The Company expenses environmental costs related to existing conditions resulting from
past or current operations and from which no current or future benefit is discernible.
The measurement of environmental liabilities is based on an 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 liability 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,
post-remediation monitoring costs, and outside legal fees. 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 do not take into account any claims for
recoveries from insurance or other parties and are not discounted.
As assessments and remediation progress at individual sites, the amount of projected cost is
reviewed periodically, and the liability 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 inherent uncertainties in evaluating environmental exposures. Refer to Note 19 for additional
information on the Company’s environmental loss contingencies.
The accruals for environmental liabilities are reflected in the consolidated balance sheet,
primarily as part of other noncurrent liabilities, and will be paid over a period of up to 30
years.
41
Litigation
In the normal course of business, the Company is 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 includes estimates of potential damages and other directly related
costs expected to be incurred.
Share-Based Compensation
The Company has various share-based compensation programs, which include stock options, deferred
stock units, and restricted stock. Refer to Note 15. The Company expenses the grant-date fair value
of these awards over the vesting period during which employees perform related services.
Effective 1 October 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(SFAS No. 123R), and related interpretations and began expensing the grant-date fair value of
employee stock options. The Company adopted SFAS No. 123R using the modified prospective transition
method and did not restate prior periods. Under this transition method, compensation cost
associated with employee stock options recognized in 2006 included amortization related to the
remaining unvested portion of stock option awards granted prior to 1 October 2005 and amortization
related to new awards granted on or after 1 October 2005. Prior to 1 October 2005, the Company
applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations in accounting for its stock option plans. Accordingly, no
compensation expense was recognized in net income for employee stock options.
Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax
assets and liabilities 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.
Effective 1 October 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes
– an interpretation of FASB Statement No. 109”. Under FIN 48, the Company recognizes the benefit of an income tax position when it is more likely than not, based on the technical merits, that it will be sustained upon examination. See Note 2 for additional information relating to the
adoption of FIN 48 and required disclosures.
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. A provision for customer defaults is made
on a general formula basis when it is determined that 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. The allowances also include
amounts for certain customers where a risk of default has been specifically identified. Provisions
to the allowances for doubtful accounts recorded as expense were $10.1, $6.6, and $8.7 in 2008,
2007, and 2006, 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 Company utilizes the last-in, first-out (LIFO) method for determining the cost of inventories
in the Merchant Gases, Tonnage Gases, and Electronics and Performance Materials segments in the
United States. Inventories for these segments outside of the United States are accounted for on the
first-in, first-out (FIFO) method, as the LIFO method is not generally permitted in the foreign
jurisdictions where these segments operate. The inventories of the Equipment and Energy segment on
a worldwide basis, as well as all other inventories, are accounted for on the FIFO basis.
At the business segment level, inventories are recorded at FIFO, and the LIFO pool is kept at
corporate.
Equity Investments
The equity method of accounting is used when the Company has a 20% or greater interest in other
companies and exercises significant influence but does not have operating control. 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
42 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
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 $22.1,
$12.9, and $16.5 in 2008, 2007, and 2006, respectively.
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 Tonnage 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 totaled $41.3 and $37.5 at 30
September 2008 and 2007, respectively. The Company adopted FIN 47, “Accounting for Conditional
Asset Retirement Obligations,” effective 30 September 2006 as discussed in Note 2.
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,
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 indicates that potential
impairment exists.
Intangible Assets
Intangible assets with determinable lives primarily consist of customer relationships, noncompete
covenants, and purchased patents and technology. The Company has 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 five to twenty-five 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.
43
Retirement Benefits
The cost of retiree benefits is recognized over the employees’ service period. The Company is
required to use actuarial methods and assumptions in the valuation of defined 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 in earnings 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.
2006 Adjustments
In the fourth quarter of 2006, adjustments were recorded which related to prior periods.
| • | The U.S. Healthcare business, which is now reported as a discontinued operation as discussed in Note 5, recorded an adjustment to reduce its inventories to actual based on physical counts, of which $7.0 ($4.4 after-tax) related to prior periods. | |
| • | In 2006, the Company sold its Amines business, which included its Pace, Florida, facility. The Amines business is also accounted for as a discontinued operation as discussed in Note 5. A liability was recognized for retained environmental obligations related to the Pace facility, of which $34.6 ( $21.6 after-tax) related to prior periods. | |
| • | The results were favorably impacted by a $20.0 benefit recorded to income taxes related to adjustments of current and deferred tax assets and liabilities related to prior periods. | |
| • | The results benefited from a favorable adjustment of $4.2 ($2.6 after-tax) related to the over-accrual of accounts payable related to prior periods. |
The Company did not consider the effect of the above adjustments to be material to its financial
position, results of operations, or liquidity.
2. NEW ACCOUNTING STANDARDS
New Standards to Be Implemented
Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles in the
United States. This Statement will become effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The
Company does not anticipate a material impact on its consolidated financial statements from the
adoption of SFAS No. 162.
Disclosures about Derivatives and Hedging
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures
about how and why an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for, and how they affect an entity’s financial position, financial
performance, and cash flows. The Statement is effective for financial statements issued for fiscal
years and interim periods beginning after 15 November 2008, with early application encouraged. The
Company is currently evaluating the effect of SFAS No. 161.
Business Combinations and Noncontrolling Interests
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” and No.
160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.”
SFAS No. 141R requires the acquiring entity in a business combination to recognize at full fair
value all the assets acquired and liabilities assumed in the transaction, establishes the
acquisition-date fair value as the measurement objective for all assets acquired and liabilities
assumed, and requires the acquirer to disclose information needed to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 160 requires entities to report
noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial
statements. These Statements are effective for fiscal years beginning after 15 December 2008 and
are to be applied prospectively, except for the presentation and disclosure requirements of SFAS
No. 160 which are applied retrospectively for all periods presented. The Company is currently
evaluating the effect of these Statements.
Fair Value Option
In February 2007, the FASB issued 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. The Company will
adopt SFAS No. 159 as of 1 October 2008 and will not elect to measure any items at fair value under
the Statement.
44 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the 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. In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis, to fiscal years beginning after 15 November 2008. The
Company does not anticipate a material impact on its consolidated financial statements from the
adoption of SFAS No. 157.
Standards Implemented
Uncertainty in Income Taxes
In July 2006, the FASB issued FIN 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.
The Company adopted FIN 48 on 1 October 2007. Upon adoption, the Company recognized a $25.1
increase to its liability for uncertain tax positions. This increase was recorded as an adjustment
to beginning retained earnings for $13.3 and goodwill for $11.8.
At 30 September 2008, the Company had $184.1 of unrecognized tax benefits, including $22.6 for the
payment of interest and penalties. Interest and penalties of $3.1 were recognized in 2008. The
Company classifies interest and penalties related to unrecognized tax benefits as a component of
income tax expense. At 30 September 2008, $111.8 of the liability for unrecognized tax benefits, if
recognized, would impact the effective tax rate.
The Company is currently under examination in a number of tax jurisdictions. The Company is
currently undergoing an IRS audit for its 2005 and 2006 tax years. This audit may be resolved in
the next twelve months. As a result, it is reasonably possible that a change in the unrecognized
tax benefits may occur during the next twelve months. However, quantification of an estimated range
cannot be made at this time.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
Unrecognized Tax Benefits, 1 October 2007 |
$ | 116.5 | ||
Additions for tax positions of the current year |
58.3 | |||
Additions for tax positions of prior years |
20.1 | |||
Reductions for tax positions of prior years |
(5.2 | ) | ||
Settlements |
(4.6 | ) | ||
Statute of limitations expiration |
(3.4 | ) | ||
Foreign currency translation |
2.4 | |||
Balance at 30 September 2008 |
$ | 184.1 | ||
The Company remains subject to examination in the following major tax jurisdictions for the years
indicated below.
| Major Tax Jurisdiction | Open Tax Fiscal Years | |||
North America |
||||
United States |
2005–2007 | |||
Canada |
2006–2007 | |||
Europe |
||||
United Kingdom |
2005–2007 | |||
Germany |
2006–2007 | |||
Netherlands |
2005–2007 | |||
Poland |
2002–2007 | |||
Spain |
2003–2007 | |||
Asia |
||||
Taiwan |
2002–2007 | |||
Korea |
2003–2007 | |||
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. SFAS No.
158 also requires plan assets and obligations to be measured as of the balance sheet date. This
Statement does not allow prior periods to be restated.
The requirement to recognize the funded status of benefit plans and the related disclosure
requirements were effective for the Company as of 30 September 2007. Upon adoption of the
recognition provisions of SFAS No. 158, the Company recorded an increase in other noncurrent
liabilities of $372.3, a decrease in other noncurrent assets of $130.3, a decrease in deferred
income taxes of $169.6, and a $333.0 decrease in accumulated other comprehensive income in
shareholders’ equity.
The requirement to measure plan assets and benefit obligations as of fiscal year end is effective
for fiscal years ending after 15 December 2008. Accordingly, as of the beginning of fiscal year
2009, the Company will change the measurement date for
45
the plan assets and benefit obligations of its U.K. and Belgium plans from 30 June to 30 September.
As a result of this change in measurement date, the Company will record an estimated after-tax $8
reduction to retained earnings on 1 October 2008.
Refer to Note 18 for disclosures related to the Company’s pension and other postretirement
benefits.
Asset Retirement Obligations
The Company adopted FIN 47, “Accounting for Conditional Asset Retirement Obligations,” effective 30
September 2006, and recorded an after-tax charge of $6.2 as the cumulative effect of an accounting
change. 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. On 30 September 2006, the Company recognized transition amounts for existing
asset retirement obligation liabilities, associated capitalizable costs, and accumulated
depreciation.
3. GLOBAL COST REDUCTION PLAN
The 2007 results from continuing operations included a charge of $13.7 ($8.8 after-tax, or $.04 per
share) for the global cost reduction plan. The charge included $6.5 for severance and
pension-related costs for the elimination of approximately 125 positions and $7.2 for the
write-down of certain investments. Approximately one-half of the position eliminations related to
continuation of European initiatives to streamline certain activities. The remaining position
eliminations related to the continued cost reduction and productivity efforts of the Company.
As of 30 September 2008, the actions associated with the 2007 charge were complete.
The charge recorded in 2007 was excluded from segment operating profit. The table below displays
how this charge related to the businesses at the segment level.
| Severance and | Asset | |||||||||||
| Other Benefits | Impairments | Total | ||||||||||
Merchant Gases |
$ | 3.6 | $ | .4 | $ | 4.0 | ||||||
Tonnage Gases |
.4 | — | .4 | |||||||||
Electronics and
Performance
Materials |
2.3 | 3.8 | 6.1 | |||||||||
Equipment and
Energy |
.2 | .3 | .5 | |||||||||
Other |
— | 2.7 | 2.7 | |||||||||
2007 Charge |
$ | 6.5 | $ | 7.2 | $ | 13.7 | ||||||
The 2006 results from continuing operations included a charge of $71.0 ($46.1 after-tax, or $.20
per share) for the global cost reduction plan. This charge included $59.5 for severance and
pension-related costs for approximately 312 position eliminations and $11.5 for asset disposals and
facility closures. As of 30 September 2007, the majority of the planned actions associated with the
2006 charge were completed, with the exception of a small number of position eliminations and/or
associated benefit payments. These actions were completed in the first quarter of fiscal 2008.
Details of the charge taken in 2006 are provided below.
Several cost reduction initiatives in Europe resulted in the elimination of about two-thirds of the
312 positions at a cost of $37.6. The Company reorganized and streamlined certain
organizations/activities in Europe to focus on improving effectiveness and efficiency.
Additionally, in anticipation of the sale of a small business, which occurred in the first quarter
of 2007, a charge of $1.4 was recognized to write down the assets to net realizable value.
The Company completed a strategy review of its Electronics business in 2006 and decided to
rationalize some products and assets, reflecting a simpler portfolio. A charge of $10.1 was
recognized, principally for an asset disposal and the write-down of certain investments/assets.
Additionally, a charge of $3.8 was recognized for severance and pension-related costs.
In addition to the Europe and Electronics initiatives, the Company implemented cost reduction and
productivity-related efforts to simplify its management structure and business practices. A charge
of $18.1 for severance and related pension costs was recognized for these efforts.
The charge recorded in 2006 was excluded from segment operating profit. The table below displays
how this charge related to the businesses at the segment level.
| Severance and | Asset | |||||||||||
| Other Benefits | Impairments | Total | ||||||||||
Merchant Gases |
$ | 48.2 | $ | 1.4 | $ | 49.6 | ||||||
Tonnage Gases |
2.9 | — | 2.9 | |||||||||
Electronics and
Performance
Materials |
7.2 | 10.1 | 17.3 | |||||||||
Equipment and
Energy |
.9 | — | .9 | |||||||||
Other |
.3 | — | .3 | |||||||||
2006 Charge |
$ | 59.5 | $ | 11.5 | $ | 71.0 | ||||||
46 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
The following table summarizes changes to the carrying amount of the accrual for the global cost
reduction plan:
| Severance and | Asset | |||||||||||
| Other Benefits | Impairments | Total | ||||||||||
2006 Charge |
$ | 59.5 | $ | 11.5 | $ | 71.0 | ||||||
Noncash Expenses |
(13.0 | ) | (11.5 | ) | (24.5 | ) | ||||||
Cash Expenditures |
(1.1 | ) | — | (1.1 | ) | |||||||
30 September 2006 |
45.4 | — | 45.4 | |||||||||
2007 Charge |
6.5 | 7.2 | 13.7 | |||||||||
Noncash Expenses |
(1.2 | ) | (7.2 | ) | (8.4 | ) | ||||||
Cash Expenditures |
(42.3 | ) | — | (42.3 | ) | |||||||
30 September 2007 |
8.4 | — | 8.4 | |||||||||
Cash Expenditures |
(8.4 | ) | — | (8.4 | ) | |||||||
30 September 2008 |
$ | — | $ | — | $ | — | ||||||
4. ACQUISITIONS
BOC Gazy in 2007
On 30 April 2007, a Spanish affiliate of the Company acquired 98.1% of the Polish industrial gas
business of BOC Gazy Sp z o.o. (BOC Gazy) from The Linde Group. During the fourth quarter of 2007,
this affiliate increased its ownership percentage to 99.9%. The total acquisition cost, less cash
acquired, was 380 million Euros or $518.4. The results of operations for BOC Gazy were included in
the Company’s consolidated income statement after the acquisition date. The purchase price
allocation, including the recognition of deferred taxes, was completed in 2008 with assigned values
for plant and equipment equal to $170.0, identified intangibles of $176.9, and goodwill of $190.7
(which is tax-deductible for Spanish tax reporting purposes).
With this acquisition, the Company obtained a significant market position in Central Europe’s
industrial gases market. The BOC Gazy business had sales of $82.5 for the five months ended 30
September 2007. The business had 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.
Tomah3 Products in 2006
On 31 March 2006, the Company acquired Tomah3 Products of Milton, Wisconsin, in a cash
transaction valued at $120.5. Goodwill recognized in this transaction amounted to $73.1 and was not
deductible for tax purposes. Identified intangibles included in this transaction amounted to $24.1.
Results for 2006 included sales of $39.8 for the six months ended 30 September 2006.
Tomah3 Products produces specialty surfactants and processing aids primarily for the
institutional and industrial cleaning, mining, and oil field industries, among others.
5. DISCONTINUED OPERATIONS
The U.S. Healthcare business, Polymer Emulsions business, High Purity Process Chemicals (HPPC)
business, and Amines business have been accounted for as discontinued operations. The results of
operations of these businesses have been removed from the results of continuing operations for all
periods presented. The assets and liabilities of discontinued operations have been reclassified and
are segregated in the consolidated balance sheets.
U.S. Healthcare
In July 2008, the Board of Directors authorized management to pursue the sale of the U.S.
Healthcare business. Accordingly, beginning in the fourth quarter of 2008, the U.S. Healthcare
business was accounted for as discontinued operations.
For the fiscal year 2008, the Company recorded a total charge of $329.2 ($246.2 after-tax, or $1.12
per share) related to the impairment/write-down of the net carrying value of the U.S. Healthcare
business.
| • | In the third quarter of 2008, the Company performed an impairment analysis and recorded a charge of $314.8 ($237.0 after-tax, or $1.09 per share). The charge related to the impairment of goodwill for $294.3, intangible assets for $11.7, plant and equipment for $7.8, and other assets for $1.0. The impairment reduced the carrying amount of the U.S. Healthcare reporting unit goodwill and intangible assets to zero. | |
| • | In the fourth quarter of 2008, the Company recorded a charge of $14.4 ($9.2 after-tax, or $.04 per share), reflecting an estimate of net realizable value. |
Additional charges may be recorded in future periods dependent upon the timing and method of
ultimate disposition.
In 2007, the Company implemented several changes to improve performance, including management
changes, product and service offering simplification, and other measures. However, market and
competitive conditions were more challenging than anticipated and financial results did not meet
expectations. In response to the disappointing financial results, during the third quarter 2008
management conducted an evaluation of the strategic alternatives for the business.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company determined that an
interim test for impairment was required for its U.S. Healthcare reporting unit during the third
quarter of 2008, based on the combination of events described
47
above. The Company reforecast its cash flows and utilized the expected present value of the future
cash flows to calculate fair value of the U.S. Healthcare reporting unit in completing its SFAS No.
142 and 144 impairment tests.
The operating results of the U.S. Healthcare business classified as discontinued operations are
summarized below:
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 239.8 | $ | 271.1 | $ | 280.8 | ||||||
Income (loss) before taxes |
$ | (350.6 | ) | $ | (24.4 | ) | $ | (30.6 | ) | |||
Income tax (benefit) provision |
(91.2 | ) | (9.2 | ) | (11.5 | ) | ||||||
Income (loss) from operations
of discontinued operations |
(259.4 | ) | (15.2 | ) | (19.1 | ) | ||||||
Gain (loss) on sale of business
and write-down to estimated net realizable value, net of tax |
(8.7 | ) | — | — | ||||||||
Income (Loss) from
Discontinued Operations,
net of tax |
$ | (268.1 | ) | $ | (15.2 | ) | $ | (19.1 | ) | |||
Details of balance sheet items for the U.S. Healthcare business are summarized below:
| 30 September | 2008 | 2007 | ||||||
Trade receivables, less allowances |
$ | 47.7 | $ | 65.7 | ||||
Inventories |
7.2 | 9.9 | ||||||
Prepaid expenses |
1.4 | 2.5 | ||||||
Other receivables |
.2 | 1.2 | ||||||
Total Current Assets |
$ | 56.5 | $ | 79.3 | ||||
Plant and equipment, net |
$ | 58.7 | $ | 74.9 | ||||
Goodwill |
— | 293.1 | ||||||
Intangible assets, net |
— | 15.7 | ||||||
Other noncurrent assets |
— | .7 | ||||||
Total Noncurrent Assets |
$ | 58.7 | $ | 384.4 | ||||
Payables and accrued liabilities |
$ | 6.8 | $ | 7.7 | ||||
Current portion long-term debt |
1.0 | 1.3 | ||||||
Total Current Liabilities |
$ | 7.8 | $ | 9.0 | ||||
Long-term debt |
$ | 1.2 | $ | 1.8 | ||||
Total Noncurrent Liabilities |
$ | 1.2 | $ | 1.8 | ||||
Polymer Emulsions Business
On 31 January 2008, the Company closed on the sale of its interest in its vinyl acetate ethylene
(VAE) polymers joint ventures to Wacker Chemie AG, its long-time joint venture partner. As part of
that agreement, the Company received Wacker Chemie AG’s interest in the Elkton, Md., and Piedmont,
S.C., production facilities and their related businesses plus cash proceeds of $258.2. The Company
recognized a gain of $89.5 ($57.7 after-tax, or $.26 per share) in the second quarter of 2008 for this sale, which consisted
of the global VAE polymers operations including production facilities located in Calvert City, Ky.;
South Brunswick, N.J.; Cologne, Germany; and Ulsan, Korea; and commercial and research capabilities
in Allentown, Pa., and Burghausen, Germany. The business produces VAE for use in adhesives, paints
and coatings, paper, and carpet applications.
On 30 June 2008, the Company sold its Elkton, Md., and Piedmont, S.C., production facilities and
the related North American atmospheric emulsions and global pressure sensitive adhesives businesses
to Ashland Inc. for $92.0. The Company recorded a gain of $30.5 ($18.5 after-tax, or $.08 per
share) in connection with the sale, which included the recording of a retained environmental
obligation associated with the Piedmont site. The expense to record the environmental obligation
was $24.0 ($14.5 after-tax, or $.07 per share). The Piedmont site is under active remediation for
contamination caused by an insolvent prior owner. Before the sale, which triggered expense
recognition, remediation costs had been capitalized since they improved the property as compared to
its condition when originally acquired. The sale of the Elkton and Piedmont facilities completed
the disposal of the Company’s Polymer Emulsions business.
The operating results of the Polymer Emulsions business classified as discontinued operations are
summarized below:
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 261.4 | $ | 618.6 | $ | 587.0 | ||||||
Income before taxes |
$ | 17.7 | $ | 61.4 | $ | 48.7 | ||||||
Income tax provision |
6.4 | 23.1 | 18.6 | |||||||||
Income from operations of
discontinued operations |
11.3 | 38.3 | 30.1 | |||||||||
Gain on sale of business,
net of tax |
76.2 | — | — | |||||||||
Income from Discontinued
Operations, net of tax |
$ | 87.5 | $ | 38.3 | $ | 30.1 | ||||||
Details of balance sheet items for the Polymer Emulsions business are summarized below:
| 30 September | 2008 | 2007 | ||||||
Cash and cash items |
$ | — | $ | 1.8 | ||||
Trade receivables, less allowances |
— | 78.5 | ||||||
Inventories |
— | 30.1 | ||||||
Prepaid expenses |
— | 1.3 | ||||||
Other receivables |
— | 4.7 | ||||||
Total Current Assets |
$ | — | $ | 116.4 | ||||
Investment in net assets of and
advances to equity affiliates |
$ | — | $ | 67.9 | ||||
Plant and equipment, net |
— | 166.3 | ||||||
Goodwill |
— | 29.7 | ||||||
Other noncurrent assets |
— | .9 | ||||||
Total Noncurrent Assets |
$ | — | $ | 264.8 | ||||
48 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
| 30 September | 2008 | 2007 | ||||||
Payables and accrued liabilities |
$ | — | $ | 53.4 | ||||
Accrued income taxes |
— | 2.2 | ||||||
Short-term borrowings |
— | 6.3 | ||||||
Total Current Liabilities |
$ | — | $ | 61.9 | ||||
Deferred income taxes |
$ | — | $ | 6.9 | ||||
Other noncurrent liabilities |
— | 2.9 | ||||||
Total Noncurrent Liabilities |
$ | — | $ | 9.8 | ||||
Minority Interest |
$ | — | $ | 84.4 | ||||
Cumulative Translation Adjustments |
$ | — | $ | 45.9 | ||||
HPPC Business
In September 2007, the Company’s Board of Directors approved the sale of its HPPC business, which
had previously been reported as part of the Electronics and Performance Materials operating
segment. The Company’s HPPC business consisted of the development, manufacture, and supply of
high-purity process chemicals used in the fabrication of integrated circuits in the United States
and Europe. The Company wrote down the assets of the HPPC business to net realizable value as of
30 September 2007, resulting in a loss of $15.3
($ 9.3 after-tax, or $.04 per share) in the fourth quarter of 2007.
In October 2007, the Company executed an agreement of sale with KMG Chemicals, Inc. The sale
closed on 31 December 2007 for cash proceeds of $69.3 and included manufacturing facilities in the
United States and Europe. Subsequent to the sale, certain receivables and inventories were sold to
KMG Chemicals, Inc.
The operating results of the HPPC business classified as discontinued operations are summarized
below:
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 22.9 | $ | 87.2 | $ | 97.6 | ||||||
Income before taxes |
$ | .1 | $ | 3.7 | $ | 5.3 | ||||||
Income tax provision |
— | 1.5 | 2.1 | |||||||||
Income from operations
of discontinued operations |
.1 | 2.2 | 3.2 | |||||||||
Loss on sale of business, net of tax |
(.3 | ) | (9.3 | ) | — | |||||||
Income (Loss) from
Discontinued Operations,
net of tax |
$ | (.2 | ) | $ | (7.1 | ) | $ | 3.2 | ||||
Assets and liabilities of the discontinued HPPC
business are summarized below:
| 30 September | 2008 | 2007 | ||||||
Trade receivables, less allowances |
$ | .1 | $ | 13.1 | ||||
Inventories |
— | 15.4 | ||||||
Prepaid expenses |
— | — | ||||||
Total Current Assets |
$ | .1 | $ | 28.5 | ||||
Plant and equipment, net |
$ | — | $ | 33.5 | ||||
Goodwill |
— | 5.4 | ||||||
Other noncurrent assets |
— | .9 | ||||||
Total Noncurrent Assets |
$ | — | $ | 39.8 | ||||
Payables and accrued liabilities |
$ | .2 | $ | 6.9 | ||||
Total Current Liabilities |
$ | .2 | $ | 6.9 | ||||
Amines Business
On 29 September 2006, the Company sold its Amines business to Taminco N.V. The sales price was
$211.2 in cash, with certain liabilities assumed by the purchaser. The Company recorded a loss of
$40.0 ($23.7 after-tax, or $.11 per share) in connection with the sale of the Amines business and
the recording of certain environmental and contractual obligations that the Company retained. A
charge of $42.0 ($26.2 after-tax, or $.12 per share) was recognized for environmental obligations
related to the Pace, Florida, facility, of which $34.6 pertained to prior years (see Note 1). In
addition, 2006 fourth quarter results included a charge of $8.3 ($5.2 after-tax, or $.02 per share)
for costs associated with a contract termination.
The Amines business produced methylamines and higher amines products used globally in household,
industrial, and agricultural products. The sale of the Amines business included the employees and
certain assets and liabilities of the production facilities located in Pace, Florida; St. Gabriel,
Louisiana; and Camaçari, Brazil.
The operating results of the Amines business classified as discontinued operations are summarized
below:
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | — | $ | — | $ | 308.4 | ||||||
Income before taxes |
$ | — | $ | — | $ | 8.0 | ||||||
Income tax provision |
— | — | 3.0 | |||||||||
Income from operations of
discontinued operations |
— | — | 5.0 | |||||||||
Loss on sale of Amines business
and environmental/contractual obligations, net of tax |
— | — | (23.7 | ) | ||||||||
Income (Loss) from
Discontinued Operations,
net of tax |
$ | — | $ | — | $ | (18.7 | ) | |||||
49
Total Discontinued Operations
| 2008 | 2007 | 2006 | ||||||||||
Sales |
$ | 524.1 | $ | 976.9 | $ | 1,273.8 | ||||||
Income (loss) before taxes |
$ | (332.8 | ) | $ | 40.7 | $ | 31.4 | |||||
Income tax (benefit) provision |
(84.8 | ) | 15.4 | 12.2 | ||||||||
Income (loss) from operations of
discontinued operations |
(248.0 | ) | 25.3 | 19.2 | ||||||||
Gain (loss) on sale of businesses,
environmental/contractual obligations, and write-down to net realizable value, net of tax |
67.2 | (9.3 | ) | (23.7 | ) | |||||||
Income (Loss) from
Discontinued Operations, net of tax |
$ | (180.8 | ) | $ | 16.0 | $ | (4.5 | ) | ||||
6. FINANCIAL INSTRUMENTS
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.
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 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 also enters into 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 character-
50 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
istics of the instrument. The contracts are used to hedge intercompany and third-party borrowing
transactions and certain net investments in foreign operations.
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
and changes in the market price of nickel.
Fair Value Hedges
For the years ended 30 September 2008 and 2007, 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 2008 and 2007 as a
result of a hedged firm commitment no longer qualifying as a fair value hedge was not material.
Cash Flow Hedges
For the years ended 30 September 2008 and 2007, 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
2008 and 2007. The amount in other comprehensive income expected to be reclassified into earnings
in 2009 is also not material.
As of 30 September 2008, 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.
Hedges of Net Investments in Foreign Operations
For the years ended 30 September 2008 and 2007, net (gains) losses related to hedges of net
investments in foreign operations of $(72.5) and $218.5, respectively, were included in accumulated
other comprehensive income within shareholders’ equity.
Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the Company’s financial instruments as
of 30 September 2008 and 2007:
| 2008 | 2008 | 2007 | 2007 | |||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| 30 September | Value | Value | Value | Value | ||||||||||||
Assets |
||||||||||||||||
Other investments |
$ | 31.9 | $ | 31.9 | $ | 39.8 | $ | 39.8 | ||||||||
Interest rate swap
agreements |
.9 | .9 | — | — | ||||||||||||
Cross currency interest
rate swap contracts |
1.2 | 1.2 | — | — | ||||||||||||
Currency option
contracts |
1.7 | 1.7 | — | — | ||||||||||||
Commodity swap
contracts |
4.8 | 4.8 | 2.5 | 2.5 | ||||||||||||
Liabilities |
||||||||||||||||
Interest rate swap
agreements |
$ | — | $ | — | $ | 4.1 | $ | 4.1 | ||||||||
Cross currency interest
rate swap contracts |
— | — | 8.0 | 8.0 | ||||||||||||
Forward exchange
contracts |
56.0 | 56.0 | 38.7 | 38.7 | ||||||||||||
Long-term debt,
including current
portion |
3,547.5 | 3,581.5 | 3,074.5 | 3,109.0 | ||||||||||||
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.
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 are recorded to cost of sales; hedges of
sales
51
transactions are 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 | 2008 | 2007 | ||||||
Inventories at FIFO Cost |
||||||||
Finished goods |
$ | 365.1 | $ | 328.7 | ||||
Work in process |
22.4 | 23.4 | ||||||
Raw materials and supplies |
183.5 | 178.7 | ||||||
| 571.0 | 530.8 | |||||||
Less excess of FIFO cost over LIFO cost |
(67.3 | ) | (54.1 | ) | ||||
| $ | 503.7 | $ | 476.7 | |||||
Inventories valued using the LIFO method comprised 35.8% and 37.0% of consolidated inventories
before LIFO adjustment at 30 September 2008 and 2007, respectively. Liquidation of prior years’
LIFO inventory layers in 2008, 2007, and 2006 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. (20%);
DuPont Air Products Nanomaterials, LLC (50%);
Europoort Utility Partners V.O.F. (50%);
Helap S.A. (50%);
High-Tech Gases (Beijing) Co., Ltd. (50%);
Bangkok Cogeneration Company Limited (49%);
Bangkok Industrial Gases Company Ltd. (49%);
Daido Air Products Electronics, Inc. (20%);
DuPont Air Products Nanomaterials, LLC (50%);
Europoort Utility Partners V.O.F. (50%);
Helap S.A. (50%);
High-Tech Gases (Beijing) Co., Ltd. (50%);
INFRA Group (40%);
INOX Air Products Limited (INOX) (49%);
Island Pipeline Gas (33%);
Kulim Industrial Gases Sdn. Bhd (50%);
Sapio Produzione Idrogeno Ossigeno S.r.l. (49%);
SembCorp Air Products (HyCO) Pte. Ltd. (40%);
Stockton CoGen Company (50%);
Tecnologia en Nitrogeno S. de R.L. de C.V. (50%);
Tyczka Industrie-Gases GmbH (50%);
WuXi Hi-Tech Gas Co., Ltd. (50%);
and principally, other industrial gas producers.
INOX Air Products Limited (INOX) (49%);
Island Pipeline Gas (33%);
Kulim Industrial Gases Sdn. Bhd (50%);
Sapio Produzione Idrogeno Ossigeno S.r.l. (49%);
SembCorp Air Products (HyCO) Pte. Ltd. (40%);
Stockton CoGen Company (50%);
Tecnologia en Nitrogeno S. de R.L. de C.V. (50%);
Tyczka Industrie-Gases GmbH (50%);
WuXi Hi-Tech Gas Co., Ltd. (50%);
and principally, other industrial gas producers.
| 2008 | 2007 | |||||||
Current assets |
$ | 1,133.6 | $ | 946.7 | ||||
Noncurrent assets |
1,877.9 | 1,840.5 | ||||||
Current liabilities |
598.3 | 599.8 | ||||||
Noncurrent liabilities |
694.3 | 606.7 | ||||||
Net sales |
2,256.5 | 2,016.1 | ||||||
Sales less cost of sales |
886.0 | 741.4 | ||||||
Net income |
306.4 | 250.4 | ||||||
Dividends received from equity affiliates were $65.3, $54.8, and $53.7 in 2008, 2007, and 2006,
respectively.
The investment in net assets of and advances to equity affiliates as of 30 September 2008 and 2007
included investment in foreign affiliates of $785.8 and $743.7, respectively.
As of 30 September 2008 and 2007, the amount of investment in companies accounted for by the equity
method included goodwill in the amount of $63.4 and $61.3, respectively.
9. PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost, are as follows:
| 30 September | 2008 | 2007 | ||||||
Land |
$ | 170.0 | $ | 178.7 | ||||
Buildings |
873.4 | 860.5 | ||||||
Production facilities |
||||||||
Merchant Gases |
3,195.8 | 3,186.6 | ||||||
Tonnage Gases |
4,944.6 | 4,469.6 | ||||||
Electronics and Performance Materials |
1,502.7 | 1,503.0 | ||||||
Equipment and Energy |
193.1 | 203.5 | ||||||
Total production facilities |
9,836.2 | 9,362.7 | ||||||
Distribution equipment |
2,622.4 | 2,478.3 | ||||||
Other machinery and equipment |
877.3 | 887.0 | ||||||
Construction in progress |
609.3 | 671.4 | ||||||
| $ | 14,988.6 | $ | 14,438.6 | |||||
Depreciation expense was $848.0, $770.1, and $692.4 in 2008, 2007, and 2006, respectively.
52 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
10. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment are as follows:
| Acquisitions | Currency | |||||||||||||||||||
| FIN | and | Translation | ||||||||||||||||||
| 30 September | 2007 | 48 | Adjustments | and Other | 2008 | |||||||||||||||
Merchant Gases |
$ | 577.6 | $ | 11.8 | $ | 33.2 | $ | 3.9 | $ | 626.5 | ||||||||||
Tonnage Gases |
21.1 | — | — | (3.1 | ) | 18.0 | ||||||||||||||
Electronics and
Performance |
||||||||||||||||||||
Materials |
308.1 | — | .5 | (25.0 | ) | 283.6 | ||||||||||||||
| $ | 906.8 | $ | 11.8 | $ | 33.7 | $ | (24.2 | ) | $ | 928.1 | ||||||||||
The 2008 increase in goodwill in the Merchant Gases segment was related to the adoption of FIN 48
and the acquisition of Cryoservice Limited.
| Acquisitions | Currency | |||||||||||||||||||
| and | Translation | |||||||||||||||||||
| 30 September | 2006 | Adjustments | and Other | 2007 | ||||||||||||||||
Merchant Gases |
$ | 353.9 | $ | 176.1 | $ | 47.6 | $ | 577.6 | ||||||||||||
Tonnage Gases |
10.3 | 10.6 | .2 | 21.1 | ||||||||||||||||
Electronics and
Performance |
||||||||||||||||||||
Materials |
300.2 | .3 | 7.6 | 308.1 | ||||||||||||||||
| $ | 664.4 | $ | 187.0 | $ | 55.4 | $ | 906.8 | |||||||||||||
The 2007 increase in goodwill in the Merchant Gases and Tonnage Gases segments was related to the
acquisition of BOC Gazy.
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 indicates that potential
impairment exists.
| • | During the third quarter of 2008, the Company determined an interim test for impairment was required for its U.S. Healthcare reporting unit, and the impairment test resulted in a charge of $294.3. The U.S. Healthcare business is now reported as discontinued operations as discussed in Note 5. | |
| • | In the fourth quarter of 2008, the Company conducted the required annual test of goodwill for impairment. There were no indications of impairment. |
11. INTANGIBLE ASSETS
The tables below provide details of acquired intangible assets at the end of 2008 and 2007:
| Currency | ||||||||||||||||
| Accumulated | Translation | |||||||||||||||
| 30 September 2008 | Gross | Amortization | and Other | Net | ||||||||||||
Customer
relationships |
$ | 248.3 | $ | (36.7 | ) | $ | 7.3 | $ | 218.9 | |||||||
Patents and
technology |
106.9 | (69.1 | ) | — | 37.8 | |||||||||||
Noncompete
covenants |
6.1 | (6.4 | ) | 3.1 | 2.8 | |||||||||||
Other |
50.5 | (21.1 | ) | .7 | 30.1 | |||||||||||
| $ | 411.8 | $ | (133.3 | ) | $ | 11.1 | $ | 289.6 | ||||||||
| Currency | ||||||||||||||||
| Accumulated | Translation | |||||||||||||||
| 30 September 2007 | Gross | Amortization | and Other | Net | ||||||||||||
Customer
relationships |
$ | 230.9 | $ | (43.6 | ) | $ | 8.6 | $ | 195.9 | |||||||
Patents and
technology |
103.4 | (64.6 | ) | .3 | 39.1 | |||||||||||
Noncompete
covenants |
3.6 | (5.5 | ) | 3.9 | 2.0 | |||||||||||
Other |
42.4 | (19.1 | ) | .2 | 23.5 | |||||||||||
| $ | 380.3 | $ | (132.8 | ) | $ | 13.0 | $ | 260.5 | ||||||||
Amortization expense for intangible assets was $21.0, $19.7, and $12.3 in 2008, 2007, and 2006,
respectively.
Projected annual amortization expense for intangible assets as of 30 September 2008 is as follows:
2009 |
$ | 20.4 | ||
2010 |
20.0 | |||
2011 |
18.7 | |||
2012 |
17.6 | |||
2013 |
17.3 | |||
Thereafter |
195.6 | |||
| $ | 289.6 | |||
12. DEBT
The tables below summarize the Company’s outstanding debt at the end of 2008 and 2007.
Total Debt
| 30 September | 2008 | 2007 | ||||||
Short-term borrowings |
$ | 419.3 | $ | 593.3 | ||||
Current portion of long-term debt |
32.1 | 99.8 | ||||||
Long-term debt |
3,515.4 | 2,974.7 | ||||||
Total Debt |
$ | 3,966.8 | $ | 3,667.8 | ||||
53
Short-Term Borrowings
| 30 September | 2008 | 2007 | ||||||
Bank obligations |
$ | 322.1 | $ | 259.3 | ||||
Commercial paper |
97.2 | 334.0 | ||||||
| $ | 419.3 | $ | 593.3 | |||||
The weighted average interest rate of short-term borrowings outstanding as of 30 September 2008
and 2007 was 4.7% and 5.1%, respectively.
Long-Term Debt
| 30 September | Maturities | 2008 | 2007 | |||||||||
Payable in U.S. Dollars: |
||||||||||||
Debentures: (effective rate) |
||||||||||||
8.75% (8.95%) |
2021 | $ | 18.4 | $ | 18.4 | |||||||
Medium-term Notes: |
||||||||||||
Weighted average rate |
||||||||||||
Series D 6.8% |
2011 to 2016 | 63.1 | 104.0 | |||||||||
Series E 7.6% |
2026 | 17.2 | 17.4 | |||||||||
Series F 6.2% |
2010 | 50.0 | 50.0 | |||||||||
Series G 4.1% |
2011 | 125.0 | 125.0 | |||||||||
Note 4.15% |
2013 | 300.0 | — | |||||||||
Other: |
||||||||||||
Variable-rate industrial
revenue bonds 4.4% |
2021 to 2043 | 743.3 | 523.3 | |||||||||
Other 2.2% |
2009 to 2021 | 65.7 | 111.6 | |||||||||
Less: Unamortized discount |
(16.0 | ) | (18.9 | ) | ||||||||
Payable in Other Currencies: |
||||||||||||
Eurobonds 5.09%
(floating rate) |
2010 | 352.0 | 355.5 | |||||||||
Eurobonds 4.25% |
2012 | 422.5 | 426.7 | |||||||||
Eurobonds 3.75% |
2014 | 422.5 | 426.7 | |||||||||
Eurobonds 3.875% |
2015 | 422.5 | 426.7 | |||||||||
Eurobonds 4.625% |
2017 | 422.5 | 426.7 | |||||||||
Other 4.9% |
2009 to 2014 | 125.7 | 72.3 | |||||||||
Capital Lease Obligations: |
||||||||||||
United States 5.1% |
2009 to 2018 | 7.0 | 8.7 | |||||||||
Foreign 7.5% |
2018 | 6.1 | .4 | |||||||||
| $ | 3,547.5 | $ | 3,074.5 | |||||||||
Less Current Portion |
(32.1 | ) | (99.8 | ) | ||||||||
| $ | 3,515.4 | $ | 2,974.7 | |||||||||
Maturities of long-term debt in each of the next five years are as follows: $32.1 in 2009, $469.1
in 2010, $178.8 in 2011, $477.4 in 2012, and $302.3 in 2013.
On 6 February 2008, the Company issued a $300.0 medium-term fixed-rate 4.15% note which matures on
1 February 2013.
During fiscal 2008, the Company issued Industrial Revenue Bonds of $220.0, the proceeds of which
are held in escrow until related project spending occurs. As of 30 September 2008, proceeds of
$181.2 were held in escrow and classified as a noncurrent asset.
On 3 July 2007, the Company issued a Euro 250.0 million
($340.1) floating rate Eurobond (initial interest rate of 4.315%) which matures on 2 July 2010. A
portion of the proceeds were used to repay a Euro 153.5 million fixed 6.5% Eurobond. 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.
On 12 March 2007, the Company issued Euro 300.0 million
($395.1) of 4.625% Eurobonds maturing 15 March 2017, the proceeds of which were used to fund a
portion of the acquisition of BOC Gazy.
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 its
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 provides a source of liquidity and is used to
support the issuance of commercial paper. The Company’s total multicurrency revolving facility,
maturing in May 2011, amounted to $1,450 at 30 September 2008. On 22 September 2008, the Company
increased the size of its revolving facility from $1,200 to $1,450 with no changes in the terms
and conditions of the arrangement. No borrowings were outstanding under this commitment at the end
of 2008. Additional commitments totaling $381.4 are maintained by the Company’s foreign
subsidiaries, of which $281.8 was borrowed and outstanding at 30 September 2008.
13. LEASES
Lessee Accounting
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 $29.2 and $39.5 at the end of 2008 and
2007, respectively. Related amounts of accumulated depreciation are $17.1 and $23.9, 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 $97.2 in 2008, $110.2 in 2007, and $105.6 in 2006.
54 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
At 30 September 2008, minimum payments due under leases are as follows:
| Capital | Operating | |||||||
| Leases | Leases | |||||||
2009 |
$ | 1.2 | $ | 49.7 | ||||
2010 |
1.0 | 41.0 | ||||||
2011 |
.9 | 32.1 | ||||||
2012 |
.9 | 25.7 | ||||||
2013 |
.9 | 21.5 | ||||||
Thereafter |
10.1 | 68.1 | ||||||
| $ | 15.0 | $ | 238.1 | |||||
The present value of the above future capital lease payments is included in the liability section
of the balance sheet. At the end of 2008, $.9 was classified as current and $12.2 as long-term.
Lessor Accounting
As discussed under Revenue Recognition in Note 1, certain contracts associated with facilities that
are built to service a specific customer are accounted for as leases in accordance with EITF Issue
No. 01-08, “Determining Whether an Agreement Contains a Lease.”
Lease receivables, net, were included in the Company’s consolidated balance sheets as follows:
| 30 September | 2008 | 2007 | ||||||
Trade receivables |
$ | 1.0 | $ | .6 | ||||
Other receivables and current assets |
24.2 | 17.8 | ||||||
Noncurrent capital lease receivables |
505.3 | 326.1 | ||||||
Lease receivables are reflected net of unearned interest income of $138.6 in 2008 and $118.8 in
2007.
Lease payments to be collected over the next five years are as follows: $58.4 in 2009, $63.3 in
2010, $78.8 in 2011, $78.3 in 2012, and $76.6 in 2013.
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 2008, and 300 million shares of common stock with a
par value of $1 per share.
On 20 September 2007, the Board of Directors authorized the repurchase of up to $1,000 of the
Company’s outstanding common stock. This action was in addition to an existing $1,500 share
repurchase program which was approved on 16 March 2006. The Company began the original share
repurchase program in the third quarter of 2006 pursuant to Rules 10b5-1
and 10b-18 under the Securities Exchange Act of 1934, as amended, through a 10b5-1 written
repurchase plan established with several brokers.
As of 30 September 2007, the Company had purchased 15.0 million of its outstanding shares at a cost
of $1,063.4. During fiscal year 2008, the Company purchased an additional 8.7 million of its
outstanding shares at a cost of $787.4. The Company has completed the 2006 authorization and will
continue to purchase shares under the 2007 authorization at its discretion while maintaining
sufficient funds for investing in its businesses and growth opportunities. An additional $649.2 in
share repurchase authorization remains.
15. SHARE-BASED COMPENSATION
The Company has various share-based compensation programs, which include stock options, deferred
stock units, and restricted stock. Under all programs, the terms of the awards are fixed at the
grant date. The Company issues shares from treasury stock upon the exercise of stock options, the
payout of deferred stock units, and the issuance
of restricted stock awards. As of 30 September 2008, 5.8 million shares were available for future
grant under the Company’s Long-Term Incentive Plan, which is shareholder approved.
Share-based compensation cost recognized in the income statement is summarized below:
| 2008 | 2007 | |||||||
Cost of sales |
$ | 8.7 | $ | 9.5 | ||||
Selling and administrative |
47.0 | 57.0 | ||||||
Research and development |
5.7 | 4.4 | ||||||
Before-Tax Share-Based
Compensation Cost |
61.4 | 70.9 | ||||||
Income tax benefit |
(23.6 | ) | (27.3 | ) | ||||
After-Tax Share-Based
Compensation Cost |
$ | 37.8 | $ | 43.6 | ||||
The amount of share-based compensation cost capitalized in 2008 and 2007 was not material.
Total before-tax share-based compensation cost by type of program was as follows:
| 2008 | 2007 | |||||||
Stock options |
$ | 36.5 | $ | 36.0 | ||||
Deferred stock units |
22.6 | 30.2 | ||||||
Restricted stock |
2.3 | 4.7 | ||||||
Before-Tax Share-Based
Compensation Cost |
$ | 61.4 | $ | 70.9 | ||||
55
Stock Options
The Company has granted awards of options to purchase common stock to executives, selected
employees, and outside directors. The exercise price of stock options equals the market price of
the Company’s stock on the date of the grant. Options generally vest incrementally over three
years, and remain exercisable for ten years from the date of grant. Options have not been issued
to directors since 2005. Options outstanding with directors are exercisable six months after the
grant date.
The fair value of options granted was estimated using a lattice-based option valuation model that
used the assumptions noted in the table below. Expected volatility and expected dividend yield are
based on actual historical experience of the Company’s stock and dividends over the historical
period equal to the option term. The expected life represents the period of time that options
granted are expected to be outstanding based on an analysis of Company-specific historical
exercise data. The range given below results from certain groups of employees exhibiting different
behavior. Separate groups of employees that have similar historical exercise behavior were
considered separately for valuation purposes. The risk-free rate is based on the U.S. Treasury
Strips with terms equal to the expected time of exercise as of the grant date.
| 2008 | 2007 | 2006 | ||||||||||
Expected volatility |
30.4 | % | 30.6 | % | 30.6 | % | ||||||
Expected dividend yield |
2.1 | % | 2.1 | % | 2.1 | % | ||||||
Expected life (in years) |
6.8–8.0 | 7.0–9.0 | 7.0–9.0 | |||||||||
Risk-free interest rate |
4.5%–4.6 | % | 4.5%–4.7 | % | 4.3%–5.1 | % | ||||||
The weighted-average grant-date fair value of options granted during 2008 and 2007 was $31.84 and
$22.45 per option, respectively.
A summary of stock option activity is presented below:
| Weighted | ||||||||
| Shares | Average | |||||||
| Stock Options | (000) | Exercise Price | ||||||
Outstanding at
30 September 2007 |
18,622 | $ | 44.95 | |||||
Granted |
1,207 | 98.85 | ||||||
Exercised |
(2,204 | ) | 37.46 | |||||
Forfeited |
(88 | ) | 68.71 | |||||
Outstanding at
30 September 2008 |
17,537 | $ | 49.48 | |||||
Exercisable at
30 September 2008 |
14,679 | $ | 44.18 | |||||
| Weighted | ||||||||
| Average | ||||||||
| Remaining | Aggregate | |||||||
| Contractual | Intrinsic | |||||||
| Stock Options | Terms (in years) | Value | ||||||
Outstanding at
30 September 2008 |
4.8 | $ | 333 | |||||
Exercisable at
30 September 2008 |
4.2 | $ | 357 | |||||
The aggregate intrinsic value represents the difference between the Company’s closing stock price
of $68.49 as of 30 September 2008 and the exercise price multiplied by the number of options
outstanding as of that date.
The total intrinsic value of stock options exercised during 2008, 2007, and 2006 was $138.0,
$218.8, and $83.6, respectively.
Compensation cost is generally recognized over the stated vesting period consistent with the terms
of the arrangement (i.e., either on a straight-line or graded-vesting basis). For awards granted
on or after 1 October 2005, expense recognition is accelerated for retirement-eligible individuals
who would meet the requirements for vesting of awards upon their retirement.
As of 30 September 2008, there was $9.2 of unrecognized compensation cost related to nonvested
stock options, which is expected to be recognized over a weighted-average period of 1.2 years.
Cash received from option exercises during 2008 was $87.4, generating a total tax benefit of
$52.2. The excess tax benefit (i.e., the tax deduction in excess of that which would have been
recognized had SFAS No. 123R been applied in previous periods) was $41.2 in 2008.
Deferred Stock Units and Restricted Stock
The grant-date fair value of deferred stock units and restricted stock is estimated on the date of
grant based on the market price of the stock, and compensation cost is generally amortized to
expense on a straight-line basis over the vesting period during which employees perform related
services. For awards granted on or after 1 October 2005, expense recognition is accelerated for
retirement-eligible individuals who would meet the requirements for vesting of awards upon their
retirement.
Deferred Stock Units
The Company has granted deferred stock units to executives, selected employees, and outside
directors. These deferred stock units entitle the recipient to one share of common stock upon
vesting, which is conditioned on continued employment during the deferral period and may also be
conditioned on earn-out against certain performance targets. The deferral period for some units
ends after death, disability, or retirement.
56 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
However, for a portion of the performance-based deferred stock units, the deferral period ends at
the end of the performance period (one to three years) or up to two years thereafter. Certain of
the performance-based deferred stock units provide for one-half of the earned shares to be paid in
cash at the end of the performance period. Additionally, the Company has granted deferred stock
units, subject to a three- or four-year deferral period, to selected employees. Deferred stock
units issued to directors are paid after service on the Board of Directors ends at the time elected
by the director (not to exceed 10 years after service ends).
| Weighted | ||||||||
| Average | ||||||||
| Shares | Grant-Date | |||||||
| Deferred Stock Units | (000) | Fair Value | ||||||
Outstanding at
30 September 2007 |
2,283 | $ | 50.90 | |||||
Granted |
283 | 100.62 | ||||||
Paid out |
(726 | ) | 48.33 | |||||
Forfeited |
(123 | ) | 63.41 | |||||
Outstanding at
30 September 2008 |
1,717 | $ | 58.94 | |||||
Cash payments made for performance-based deferred stock units were $8.3 in 2008. As of 30 September
2008, there was $30.8 of unrecognized compensation cost related to deferred stock units. The cost
is expected to be recognized over a weighted-average period of 2.3 years.
Restricted Stock
The Company has issued shares of restricted stock to certain officers. Participants are entitled to
cash dividends and to vote their respective shares. Shares granted prior to 2007 are subject to
forfeiture if employment is terminated other than due to death, disability, or retirement. Shares
granted since 2007 vest in four years or upon earlier retirement, death, or disability. The shares
are nontransferable while subject to forfeiture.
| Weighted | ||||||||
| Average | ||||||||
| Shares | Grant-Date | |||||||
| Restricted Stock | (000) | Fair Value | ||||||
Outstanding at
30 September 2007 |
169 | $ | 56.81 | |||||
Granted |
26 | 96.44 | ||||||
Vested |
(110 | ) | 55.85 | |||||
Forfeited |
— | — | ||||||
Outstanding at
30 September 2008 |
85 | $ | 70.12 | |||||
As of 30 September 2008, there was $1.8 of unrecognized compensation cost related to restricted
stock awards. The cost is expected to be recognized over a weighted-average period of 4.1 years.
16. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share (EPS) is as follows:
| 30 September | 2008 | 2007 | 2006 | |||||||||
Numerator |
||||||||||||
Used in basic and diluted EPS |
||||||||||||
Income from continuing
operations |
$ | 1,090.5 | $ | 1,019.6 | $ | 734.1 | ||||||
Income (loss) from
discontinued operations,
net of tax |
(180.8 | ) | 16.0 | (4.5 | ) | |||||||
Income before cumulative
effect of accounting change |
909.7 | 1,035.6 | 729.6 | |||||||||
Cumulative effect of
accounting change, net of tax |
— | — | (6.2 | ) | ||||||||
Net Income |
$ | 909.7 | $ | 1,035.6 | $ | 723.4 | ||||||
Denominator (in millions) |
||||||||||||
Weighted average number of
common shares used in basic EPS |
212.2 | 216.2 | 221.7 | |||||||||
Effect of dilutive securities: |
||||||||||||
Employee stock options |
5.9 | 5.8 | 4.9 | |||||||||
Other award plans |
1.1 | 1.2 | .9 | |||||||||
| 7.0 | 7.0 | 5.8 | ||||||||||
Weighted average number of
common shares and dilutive potential common shares used in diluted EPS |
219.2 | 223.2 | 227.5 | |||||||||
Basic EPS |
||||||||||||
Income from continuing
operations |
$ | 5.14 | $ | 4.72 | $ | 3.31 | ||||||
Income (loss) from
discontinued operations |
(.85 | ) | .07 | (.02 | ) | |||||||
Income before cumulative
effect of accounting change |
4.29 | 4.79 | 3.29 | |||||||||
Cumulative effect of
accounting change |
— | — | (.03 | ) | ||||||||
Net Income |
$ | 4.29 | $ | 4.79 | $ | 3.26 | ||||||
Diluted EPS |
||||||||||||
Income from continuing
operations |
$ | 4.97 | $ | 4.57 | $ | 3.23 | ||||||
Income (loss) from
discontinued operations |
(.82 | ) | .07 | (.02 | ) | |||||||
Income before cumulative
effect of accounting change |
4.15 | 4.64 | 3.21 | |||||||||
Cumulative effect of
accounting change |
— | — | (.03 | ) | ||||||||
Net Income |
$ | 4.15 | $ | 4.64 | $ | 3.18 | ||||||
Diluted EPS reflects the potential dilution that could occur if stock options or other share-based
awards were exercised or converted into common stock. The dilutive effect is computed using the
treasury stock method, which assumes all share-based awards are exercised and the hypothetical
proceeds from exercise are used by the Company to purchase common stock at the average market price
during the period. The incremental
57
\
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 1.2
million shares, .8 million shares, and 1.2 million shares were antidilutive and therefore excluded
from the computation of diluted earnings per share for 2008, 2007, and 2006, respectively.
17. INCOME TAXES
The following table shows the components of the
provision for income taxes:
| 2008 | 2007 | 2006 | ||||||||||
Federal |
||||||||||||
Current |
$ | 131.7 | $ | 94.0 | $ | 122.0 | ||||||
Deferred |
3.1 | (19.0 | ) | 4.4 | ||||||||
| 134.8 | 75.0 | 126.4 | ||||||||||
State |
||||||||||||
Current |
2.8 | 10.5 | 12.1 | |||||||||
Deferred |
11.0 | 7.2 | 1.6 | |||||||||
| 13.8 | 17.7 | 13.7 | ||||||||||
Foreign |
||||||||||||
Current |
193.9 | 169.0 | 121.3 | |||||||||
Deferred |
22.8 | 25.5 | .6 | |||||||||
| 216.7 | 194.5 | 121.9 | ||||||||||
| $ | 365.3 | $ | 287.2 | $ | 262.0 | |||||||
The significant components of deferred tax assets and
liabilities are as follows:
| 30 September | 2008 | 2007 | ||||||
Gross Deferred Tax Assets |
||||||||
Pension and other compensation accruals |
$ | 383.2 | $ | 323.3 | ||||
Tax loss carryforwards |
91.1 | 74.4 | ||||||
Tax credits |
65.2 | 3.3 | ||||||
Reserves and accruals |
30.0 | 19.2 | ||||||
Unremitted earnings of foreign entities |
6.9 | — | ||||||
U.S. Healthcare impairment |
64.8 | — | ||||||
Other |
114.8 | 98.1 | ||||||
Currency losses |
83.0 | 83.7 | ||||||
Valuation allowance |
(60.7 | ) | (32.5 | ) | ||||
Deferred Tax Assets |
778.3 | 569.5 | ||||||
Gross Deferred Tax Liabilities |
||||||||
Plant and equipment |
887.0 | 882.9 | ||||||
Employee benefit plans |
89.2 | 67.3 | ||||||
Investment in partnerships |
9.4 | 10.2 | ||||||
Unrealized gain on cost investment |
4.6 | 6.9 | ||||||
Unremitted earnings of foreign entities |
— | 9.7 | ||||||
Intangible assets |
30.0 | 62.2 | ||||||
Other |
120.3 | 110.9 | ||||||
Deferred Tax Liabilities |
1,140.5 | 1,150.1 | ||||||
Net Deferred Income Tax Liability |
$ | 362.2 | $ | 580.6 | ||||
Net current deferred tax assets of $193.3 and net noncurrent deferred tax assets of $71.1 were
included in other receivables and current assets and other noncurrent assets at 30 September 2008,
respectively. Net current deferred tax assets of $78.0 and net noncurrent deferred tax assets of
$47.0 were included in other receivables and current assets and other noncurrent assets at 30
September 2007, respectively.
Federal, foreign, and state loss carryforwards as of 30 September 2008 were $89.5, $138.7, and
$248.8, respectively. The federal capital losses expire in 2013. The foreign losses have expiration
periods beginning in 2020. State operating loss carryforwards have expiration periods that range
between 2009 and 2027.
The valuation allowance as of 30 September 2008 primarily relates to the tax loss carryforwards
referenced above. If events warrant the reversal of the $60.7 valuation allowance, it would result
in a reduction of tax expense. The Company believes it is more likely than not that future earnings
will be sufficient to utilize the Company’s deferred tax asset, net of existing valuation
allowance, at 30 September 2008.
Major differences between the United States federal statutory tax rate and the effective tax rate
are:
| (percent of income before taxes) | 2008 | 2007 | 2006 | |||||||||
U.S. federal statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal
benefit |
.8 | 1.2 | .9 | |||||||||
Income from equity affiliates |
(3.4 | ) | (2.8 | ) | (3.2 | ) | ||||||
Foreign taxes and credits |
(6.3 | ) | (4.4 | ) | (3.7 | ) | ||||||
Export tax benefit and
domestic production |
(.6 | ) | (.8 | ) | (.7 | ) | ||||||
Repatriation |
— | — | (1.6 | ) | ||||||||
Tax audit settlements and
adjustments |
— | (2.6 | ) | (1.9 | ) | |||||||
Donation of investments |
— | (1.2 | ) | — | ||||||||
Other |
(.4 | ) | (2.4 | ) | 1.5 | |||||||
Effective Tax Rate after
Minority Interest |
25.1 | % | 22.0 | % | 26.3 | % | ||||||
Minority interest |
(.4 | ) | (.4 | ) | (.5 | ) | ||||||
Effective Tax Rate |
24.7 | % | 21.6 | % | 25.8 | % | ||||||
In the fourth quarter of 2007, the Company recorded a tax benefit of $11.3, primarily from tax
audit settlements and adjustments and related interest income. In June 2007, the Company settled
tax audits through fiscal year 2004 with the Internal Revenue Service. This audit settlement
resulted in a tax benefit of $27.5 in the third quarter of 2007. For 2007, tax audit settlements
and adjustments totaled $38.8.
In the fourth quarter of 2007, a charge related to the Company’s annual reconciliation and analysis
of its current and deferred tax assets and liabilities was recorded and is included in tax audit
settlements and adjustments in the above table.
58 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
In the fourth quarter of 2006, the Company recorded a
tax benefit of $20.0 related to its reconciliation
and analysis of its current and deferred tax assets
and liabilities. The adjustment pertains to prior
years (See Note 1) and is included in tax audit
settlements and adjustments in the previous table.
The following table summarizes the income of U.S. and
foreign operations, before taxes and minority
interest:
| 2008 | 2007 | 2006 | ||||||||||
Income from continuing
operations: |
||||||||||||
United States |
$ | 479.5 | $ | 583.1 | $ | 486.9 | ||||||
Foreign |
854.3 | 630.1 | 436.6 | |||||||||
Income from equity affiliates |
145.0 | 114.4 | 91.5 | |||||||||
| $ | 1,478.8 | $ | 1,327.6 | $ | 1,015.0 | |||||||
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 consolidated balance sheet and
amounted to $2,775.5 at the end of 2008. An estimated
$606.1 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
The Company and certain of its subsidiaries sponsor
defined benefit pension plans and defined contribution
plans that cover a substantial portion of its worldwide
employees. The principal defined benefit pension plans
are the U.S. Salaried Pension Plan and the U.K. Pension
Plan. These plans were closed to new participants in
2005 and were replaced with defined contribution plans.
The principal defined contribution plan is the
Retirement Savings Plan, in which a substantial portion
of the U.S. employees participate; a similar plan is
offered to U.K. employees. The Company also provides
other postretirement benefits consisting primarily of
healthcare benefits to U.S. retirees who meet age and
service requirements.
At 30 September 2007, the Company adopted the provision
of SFAS No. 158 which requires recognition of the
overfunded or underfunded projected benefit obligation
(PBO) as an asset or liability in the consolidated
balance sheet. Refer to Note 2 for a discussion on the
impact of adopting SFAS No. 158.
Defined Benefit Pension Plans
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:
| 2008 | 2007 | 2006 | ||||||||||
Service cost |
$ | 77.7 | $ | 81.6 | $ | 78.9 | ||||||
Interest cost |
180.9 | 168.3 | 147.7 | |||||||||
Expected return on plan assets |
(206.8 | ) | (188.1 | ) | (157.1 | ) | ||||||
Amortization: |
||||||||||||
Prior service cost |
3.2 | 4.2 | 3.1 | |||||||||
Transition |
.1 | .1 | .1 | |||||||||
Actuarial loss |
37.9 | 57.5 | 65.5 | |||||||||
Settlements and curtailments |
30.3 | 10.3 | .2 | |||||||||
Special termination benefits |
1.2 | 2.0 | 12.7 | |||||||||
Other |
2.5 | 2.6 | 2.9 | |||||||||
Net Periodic Pension Cost |
$ | 127.0 | $ | 138.5 | $ | 154.0 | ||||||
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:
| 2008 | 2007 | 2006 | ||||||||||
Discount rate |
6.1 | % | 5.7 | % | 5.3 | % | ||||||
Expected return on plan assets |
8.8 | % | 8.8 | % | 8.8 | % | ||||||
Rate of compensation increase |
4.2 | % | 4.1 | % | 4.1 | % | ||||||
The decrease in net periodic pension cost from 2007
to 2008 was primarily attributable to the increase in
the discount rate.
A number of corporate officers and others who were
eligible for supplemental pension plan benefits
retired in fiscal years 2007 and 2008. The Company’s
supplemental pension plan provides for a lump sum
benefit payment option at the time of retirement, or
for corporate officers six months after the
participant’s retirement date. The Company recognizes
pension settlements when payments exceed the sum of
service and interest cost components of net periodic
pension cost of the plan for the fiscal year. However,
a settlement loss may not be recognized until the time
the pension obligation is settled. Based on the timing
of when cash payments were made, the Company
recognized $10.3 for settlement losses in 2007 and an
additional $30.3 in 2008.
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 sets forth the weighted average
assumptions used in the calculation of the PBO:
| 2008 | 2007 | |||||||
Discount rate |
7.1 | % | 6.1 | % | ||||
Rate of compensation increase |
4.3 | % | 4.2 | % | ||||
59
The following table reflects the change in the PBO
and the change in the fair value of plan assets
based on the plan year measurement date, as well as
the amounts recognized in the balance sheet. The
Company used a measurement date of 30 September for
all plans except for plans in the U.K. and Belgium.
These plans were measured as of 30 June.
| 2008 | 2007 | |||||||
Change in Pension Benefit Obligation |
||||||||
Obligation at beginning of year |
$ | 3,033.1 | $ | 2,933.1 | ||||
Service cost |
77.7 | 81.6 | ||||||
Interest cost |
180.9 | 168.3 | ||||||
Amendments |
1.3 | 1.8 | ||||||
Actuarial gain |
(275.8 | ) | (136.5 | ) | ||||
Special termination benefits,
settlements, and curtailments |
15.5 | (.9 | ) | |||||
Participant contributions |
4.6 | 7.4 | ||||||
Benefits paid |
(174.8 | ) | (124.6 | ) | ||||
Currency translation/other |
(130.8 | ) | 102.9 | |||||
Obligation at End of Year |
$ | 2,731.7 | $ | 3,033.1 | ||||
Change in Plan Assets |
||||||||
Fair value at beginning of year |
$ | 2,600.1 | $ | 2,052.0 | ||||
Actual return on plan assets |
(333.0 | ) | 301.9 | |||||
Company contributions |
231.4 | 288.1 | ||||||
Participant contributions |
4.6 | 7.4 | ||||||
Benefits paid |
(174.8 | ) | (124.6 | ) | ||||
Currency translation/other |
(110.1 | ) | 75.3 | |||||
Fair Value at End of Year |
$ | 2,218.2 | $ | 2,600.1 | ||||
Funded Status at End of Year |
$ | (513.5 | ) | $ | (433.0 | ) | ||
Employer contributions for U.K. and
Belgium after the measurement date |
2.6 | 1.9 | ||||||
Net Amount Recognized |
$ | (510.9 | ) | $ | (431.1 | ) | ||
Amounts Recognized |
||||||||
Noncurrent assets |
$ | 26.6 | $ | 43.7 | ||||
Accrued liabilities |
(123.5 | ) | (92.0 | ) | ||||
Noncurrent liabilities |
(414.0 | ) | (382.8 | ) | ||||
Net Amount Recognized |
$ | (510.9 | ) | $ | (431.1 | ) | ||
The changes in plan assets and benefit obligation
that have been recognized in accumulated other
comprehensive income (AOCI) on a pretax basis during
2008 consist of the following:
Net actuarial loss arising during
the period |
$ | 277.2 | ||
Amortization of net actuarial loss |
(68.2 | ) | ||
Prior service cost arising during
the period |
1.1 | |||
Amortization of prior service cost |
(3.2 | ) | ||
Amortization of net transition liability |
(.1 | ) | ||
Total Recognized in AOCI |
$ | 206.8 | ||
The net actuarial loss represents the actual changes in
the estimated obligation and plan assets that have not
yet been recognized in the income statement and are
included in AOCI. Actuarial losses arising during 2008
are primarily attributable to lower than expected
actual returns on plan assets, partially offset by
higher discount rates. 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.
The components recognized in AOCI on a pretax basis
as of 30 September consisted of:
| 2008 | 2007 | |||||||
Net actuarial loss |
$ | 720.1 | $ | 511.1 | ||||
Prior service cost |
27.6 | 29.7 | ||||||
Net transition liability |
.4 | .5 | ||||||
Total Recognized in AOCI |
$ | 748.1 | $ | 541.3 | ||||
The amount of AOCI at 30 September 2008 that is
expected to be recognized as a component of net
periodic pension cost during fiscal year 2009 is as
follows:
Net actuarial loss |
$ | 23.2 | ||
Prior service cost |
3.9 | |||
Net transition liability |
.1 | |||
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 by Company
policy 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:
| 2008 | 2008 | 2007 | ||||||||||||||
| Target | Actual | Actual | ||||||||||||||
| Asset Category | Allocation | Allocation | Allocation | |||||||||||||
Equity securities |
63–70 | % | 64 | % | 69 | % | ||||||||||
Debt securities |
25–31 | 28 | 26 | |||||||||||||
Real estate/other |
1–8 | 6 | 4 | |||||||||||||
Cash |
0–3 | 2 | 1 | |||||||||||||
Total |
100 | % | 100 | % | ||||||||||||
The Company employs a mix of active and passive
investment strategies. Over a full market cycle, the
total return on plan assets is expected to exceed that
of a passive strategy tracking index returns in each
asset category.
60 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
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.
The Company anticipates contributing approximately
$170 to the defined benefit pension plans in 2009.
Projected benefit payments, which reflect expected
future service, are as follows:
2009 |
$ | 124.7 | ||
2010 |
130.9 | |||
2011 |
138.5 | |||
2012 |
150.0 | |||
2013 |
158.4 | |||
2014–2018 |
964.8 | |||
These estimated benefit payments are based on
assumptions about future events. Actual benefit
payments may vary significantly from these
estimates.
The accumulated benefit obligation (ABO) is the
actuarial present value of benefits attributed to
employee service rendered to a particular date, based
on current salaries. The ABO for all defined benefit
pension plans was $2,268.3 and $2,481.2 at the end of
2008 and 2007, respectively.
The following table provides information on
pension plans where the ABO exceeds the value of
plan assets:
| 2008 | 2007 | |||||||
PBO |
$ | 1,186.0 | $ | 310.3 | ||||
ABO |
980.3 | 252.1 | ||||||
Plan assets |
731.8 | 38.7 | ||||||
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 2008 were $95.8 and $137.3,
respectively.
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 5,746,677
as of 30 September 2008.
The Company matches a portion of the participants’
contributions to the RSP and other various worldwide
defined contribution plans. The Company’s contributions
to the RSP include a Company core contribution for
eligible employees (not
participating in the defined benefit pension plans),
with the core contribution based on a percentage of
pay, and the percentage is based on years of service.
For the RSP, the Company also makes matching
contributions on overall employee contributions as a
percentage of the employee contribution and includes an
enhanced contribution for eligible employees (not
participating in the defined benefit pension plans).
Worldwide contributions expensed to income in 2008,
2007, and 2006 were $30.1, $28.6, and $25.9,
respectively.
Other Postretirement Benefits
The Company provides other postretirement benefits
consisting primarily of healthcare benefits to certain
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:
| 2008 | 2007 | 2006 | ||||||||||
Service cost |
$ | 5.9 | $ | 5.9 | $ | 6.3 | ||||||
Interest cost |
5.8 | 5.4 | 5.1 | |||||||||
Amortization: |
||||||||||||
Prior service cost |
(1.4 | ) | (1.8 | ) | (2.3 | ) | ||||||
Actuarial loss |
1.7 | 2.3 | 3.5 | |||||||||
Net Periodic
Postretirement Cost |
$ | 12.0 | $ | 11.8 | $ | 12.6 | ||||||
The Company calculates net periodic postretirement
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 postretirement cost for 2008, 2007, and
2006 was 5.7%, 5.3%, and 4.8%, respectively.
The Company measures the other postretirement benefits
as of 30 September. The discount rate assumption used
in the calculation of the accumulated postretirement
benefit obligation was 7.4% and 5.7% for 2008 and
2007, respectively.
61
The following table reflects the change in the
accumulated postretirement benefit obligation and the
amounts recognized in the consolidated balance sheet:
| 2008 | 2007 | |||||||
Obligation at Beginning of Year |
$ | 107.2 | $ | 111.2 | ||||
Service cost |
5.9 | 5.9 | ||||||
Interest cost |
5.8 | 5.4 | ||||||
Actuarial gain |
(10.1 | ) | (5.0 | ) | ||||
Benefits paid |
(10.0 | ) | (10.3 | ) | ||||
Obligation at End of Year |
$ | 98.8 | $ | 107.2 | ||||
Amounts Recognized |
||||||||
Accrued liabilities |
$ | 11.3 | $ | 11.7 | ||||
Noncurrent liabilities |
87.5 | 95.5 | ||||||
The changes in benefit obligation that have been
recognized in accumulated other comprehensive income
(AOCI) on a pretax basis during 2008 for the Company’s
other postretirement benefit plans consist of the
following:
Net actuarial gain arising during the period |
$ | (10.1 | ) | |
Amortization of net actuarial loss |
(1.7 | ) | ||
Amortization of prior service credit |
1.4 | |||
Total Recognized in AOCI |
$ | (10.4 | ) | |
The components recognized in AOCI on a pretax basis as of
30 September consisted of:
| 2008 | 2007 | |||||||
Net actuarial loss |
$ | 12.0 | $ | 23.8 | ||||
Prior service credit |
(1.5 | ) | (2.9 | ) | ||||
Amount Recognized in AOCI |
$ | 10.5 | $ | 20.9 | ||||
Of the 30 September 2008 actuarial loss and prior
service credit, it is estimated that $.3 and
$(1.4), respectively, will be amortized into net
periodic postretirement cost over fiscal year 2009.
The assumed healthcare trend rates are as follows:
| 2008 | 2007 | |||||||
Healthcare trend rate |
10.0 | % | 10.0 | % | ||||
Ultimate trend rate |
5.0 | % | 5.0 | % | ||||
Year the ultimate trend rate is reached |
2013 | 2012 | ||||||
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 percentage point
change in the assumed healthcare cost trend rate on
net periodic postretirement cost and the obligation
is not material.
Projected benefit payments are as follows:
2009 |
$ | 11.8 | ||
2010 |
12.2 | |||
2011 |
12.7 | |||
2012 |
12.8 | |||
2013 |
12.6 | |||
2014–2018 |
61.0 | |||
These estimated benefit payments are based on
assumptions about future events. Actual benefit
payments may vary significantly from these
estimates.
19. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various legal proceedings,
including competition, environmental, health, safety,
product liability, and insurance matters. During the
third quarter of 2008, a unit of the Brazilian
Ministry of Justice issued a report (previously issued
in January 2007, and then withdrawn) on its
investigation of the Company’s Brazilian subsidiary,
Air Products Brazil Ltda., and several other Brazilian
industrial gas companies. The report recommended that
the Brazilian Administrative Council for Economic
Defense impose sanctions on Air Products Brazil Ltda.
and the other industrial gas companies for alleged
anticompetitive 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
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 31 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. The
Company continually monitors these sites for which it
has environmental exposure.
62 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
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 consistent with the policy set forth in Note
1. The consolidated balance sheet at 30 September 2008
and 2007 included an accrual of $82.9 and $52.2,
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 $82 to a reasonably possible upper exposure
of $95 as of 30 September 2008.
Actual costs to be incurred at identified sites in
future periods may vary from the estimates, given
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
is designated, the scope of remediation is increased, a
different remediation alternative is identified, or a
significant increase in the Company’s proportionate
share occurs. While the Company does not expect that
any sums it may have to pay in connection with
environmental exposures 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.
Pace
At 30 September 2008, $39.3 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. Since 30 September 2006,
there has been no change to the estimated exposure
range related to the Pace facility.
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 on-site disposal cell. Several groundwater
recovery systems have been installed to contain and
remove contamination from groundwater. The Company
completed 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 1990s might be suitable to more
quickly and effectively remove groundwater
contaminants. Based on our assessment results, the
Company recently completed a focused feasibility study
to identify new approaches to more effectively remove
contaminants and will begin to seek the necessary
approvals from the FDEP to implement those new
approaches.
Piedmont
At 30 September 2008, $23.7 of the environmental
accrual was related to the Piedmont site.
On 30 June 2008, the Company sold its Elkton, Md., and
Piedmont, S.C., production facilities and the related
North American atmospheric emulsions and global
pressure sensitive adhesives businesses. In connection
with the sale, the Company recognized a liability for
retained environmental obligations associated with
remediation activities at the Piedmont site. This site
is under active remediation for contamination caused by
an insolvent prior owner. Before the sale, which
triggered expense recognition, remediation costs had
been capitalized since they improved the property as
compared to its condition when originally acquired. The
Company is required by the South Carolina Department of
Health and Environmental Control to address both
contaminated soil and groundwater. Numerous areas of
soil contamination have been addressed, and
contaminated groundwater is being recovered and
treated. At 30 June 2008, the Company estimated that it
would take until 2015 to complete source area
remediation and another 15 years thereafter to complete
groundwater recovery, with costs through completion
estimated to be $24. The Company recognized a pretax
expense in the third quarter of 2008 of $24.0 as a
component of income from discontinued operations and
recorded an environmental liability of $24.0 in
continuing operations on the consolidated balance
sheet. There has been no change to the estimated
exposure.
63
Guarantees and Warranties
The Company is a party to certain guarantee
agreements, including 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.
The Company has guaranteed repayment of some additional
borrowings of certain foreign equity affiliates. At 30
September 2008, these guarantees have terms in the
range of one to seven years, with maximum potential
payments of $23.
The Company has entered into an equity support
agreement and operations guarantee related to an air
separation facility constructed in Trinidad for a
venture in which the Company, through equity
affiliates, owns 50%. At 30 September 2008, maximum
potential payments under joint and several
guarantees were $84. Exposures under the guarantee
decline over time and are completely extinguished by
2024.
To date, no equity contributions or payments have been
required since the inception of these guarantees. The
fair value of the above guarantees is not material.
The Company, in the normal course of business
operations, has issued product warranties in its
Equipment business. 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 financial statements.
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.
Put Option Agreements
The Company has entered into put option agreements with
certain affiliated companies as discussed below. The
Company accounts for the put options as contingent
liabilities to purchase an asset. Since the inception
of these agreements and through 30 September 2008, the
Company determined that it was not certain that these
options would be exercised by the other shareholders.
In 2008, the Company entered into a put option
agreement as part of the purchase of an additional
interest in CryoServices Limited, a cryogenic and
specialty gases company in the U.K. The Company
increased its ownership from 25% to 72%. Put options
were issued which gave the other shareholders the
right to require the Company to purchase their shares
of CryoServices Limited. The options are effective
from January
2010 through January 2078 and are exercisable only
within a twenty-day option period each year. The
option price is based
on the lower of a multiple of earnings formula or 396
Pound Sterling per share, escalated up to 5% each
year. The estimated U.S. dollar price of purchasing
the remaining stock based on the exchange rate at 30
September 2008 would be approximately $50.
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 revised 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 exchange
rate at 30 September 2008 would have been
approximately $69.
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., renamed Air
Products San Fu Company, Ltd. (San Fu), an industrial
gas company in Taiwan. Currently, the Company has an
ownership interest of 74% in San Fu. 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. The
estimated U.S. dollar price of purchasing the stock
owned by other shareholders based on the exchange rate
at 30 September 2008 would be approximately $225.
Purchase Obligations
The Company is obligated to make future payments
under unconditional purchase obligations as
summarized below:
2009 |
$ | 675.8 | ||
2010 |
120.4 | |||
2011 |
100.1 | |||
2012 |
91.5 | |||
2013 |
92.1 | |||
Thereafter |
648.3 | |||
Total |
$ | 1,728.2 | ||
| 64 | AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements |
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.
Purchase commitments to spend approximately $485 for
additional plant and equipment are included in the
unconditional purchase obligations.
20. SUPPLEMENTAL INFORMATION
Other Receivables and Current Assets
| 30 September | 2008 | 2007 | ||||||
Deferred tax assets |
$ | 193.3 | $ | 78.0 | ||||
Other receivables |
131.7 | 142.4 | ||||||
Current capital lease receivables |
24.2 | 17.8 | ||||||
Other current assets |
.2 | .7 | ||||||
| $ | 349.4 | $ | 238.9 | |||||
Other Noncurrent Assets
| 30 September | 2008 | 2007 | ||||||
Restricted cash |
$ | 214.1 | $ | 27.7 | ||||
Derivative instruments |
25.8 | 8.1 | ||||||
Other long-term receivables |
10.8 | 36.4 | ||||||
Cost investments |
31.9 | 39.8 | ||||||
Deferred tax assets |
71.1 | 47.0 | ||||||
Prepaid pension benefit cost |
26.6 | 43.7 | ||||||
Other deferred charges |
123.8 | 109.1 | ||||||
| $ | 504.1 | $ | 311.8 | |||||
Payables and Accrued Liabilities
| 30 September | 2008 | 2007 | ||||||
Trade creditors |
$ | 755.2 | $ | 779.6 | ||||
Customer advances |
122.0 | 90.2 | ||||||
Accrued payroll and employee benefits |
203.7 | 182.4 | ||||||
Pension benefits |
123.5 | 92.0 | ||||||
Dividends payable |
92.1 | 81.8 | ||||||
Outstanding payments in excess
of certain cash balances |
56.1 | 54.1 | ||||||
Accrued interest expense |
64.9 | 62.5 | ||||||
Derivative instruments |
81.9 | 27.6 | ||||||
Global cost reduction plan accrual |
— | 8.4 | ||||||
Miscellaneous |
166.2 | 164.6 | ||||||
| $ | 1,665.6 | $ | 1,543.2 | |||||
Deferred Income and Other Noncurrent
Liabilities
| 30 September | 2008 | 2007 | ||||||
Pension benefits |
$ | 414.0 | $ | 382.8 | ||||
Postretirement benefits |
87.5 | 95.5 | ||||||
Other employee benefits |
91.9 | 102.7 | ||||||
FIN 48 tax contingencies |
152.8 | — | ||||||
Advance payments |
99.0 | 122.3 | ||||||
Environmental liabilities |
81.0 | 47.1 | ||||||
Derivative instruments |
33.7 | 49.7 | ||||||
Miscellaneous |
89.3 | 71.9 | ||||||
| $ | 1,049.2 | $ | 872.0 | |||||
Accumulated Other Comprehensive Income
(Loss)
| 30 September | 2008 | 2007 | ||||||
Gain (loss) on derivatives |
$ | (19.9 | ) | $ | 3.8 | |||
Cumulative translation adjustments, net
of reclassification adjustment |
(28.3 | ) | 211.7 | |||||
Unrealized holding gain on investment,
net of reclassification adjustment for realized gains |
8.1 | 12.6 | ||||||
Retirement benefit plans |
(509.2 | ) | (371.0 | ) | ||||
| $ | (549.3 | ) | $ | (142.9 | ) | |||
In 2008, the Company completed the sale of its Polymer
Emulsions business as discussed in Note 5. Accordingly,
the related foreign currency translation results of
this business totaling $53.7 were reclassified from
other comprehensive income to earnings. In 2007, $36.6
of an unrealized gain on an investment was realized as
a result of the donation and sale of a cost-based
investment. In 2008, a net loss of $68.2 for the
defined benefit pension plans was amortized from other
comprehensive income to net periodic pension expense.
Other amounts reclassified from other comprehensive
income into earnings in 2008 and 2007 were not
material.
Other (Income) Expense, Net
| 2008 | 2007 | 2006 | ||||||||||
Technology and royalty income |
$ | (18.6 | ) | $ | (15.9 | ) | $ | (14.1 | ) | |||
Interest income |
(8.2 | ) | (8.2 | ) | (8.1 | ) | ||||||
Foreign exchange |
(3.6 | ) | 4.5 | 2.0 | ||||||||
Gain on sale of assets
and investments |
(6.5 | ) | (23.7 | ) | (12.8 | ) | ||||||
Amortization of intangibles |
9.8 | 11.2 | 11.1 | |||||||||
Property damage and related
expenses, net of insurance recoveries |
13.5 | (.4 | ) | (56.5 | ) | |||||||
Miscellaneous |
(12.2 | ) | (9.8 | ) | 6.7 | |||||||
| $ | (25.8 | ) | $ | (42.3 | ) | $ | (71.7 | ) | ||||
65
Loss from Property Damage
In the fourth quarter of 2008, a fire at the Company’s Ulsan,
Korea nitrogen trifluoride (NF3) production facility required the
plant to be shut down. The Company has been able to
continue supplying
NF3 to its customers. The Company anticipates
bringing the Ulsan plant back online beginning in January 2009.
Other (income) expense in 2008 included a net loss of $14.7
($10.7 after-tax, or $.05 per share) related to
property damage. The net book value of the damaged
property was written off and a receivable was recorded
for expected property damage insurance recoveries.
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.
Insurance recoveries for property damages and business
interruption are recognized when claims are settled.
Insurance recoveries of $73.3 were recognized in 2006.
Other (income) expense included a net gain of $56.0 for
insurance recoveries, net of property damage and other
expenses. This net gain does not include the estimated
impact of costs related to business interruption.
During 2006, the Company collected insurance proceeds
of $67.0.
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.
Additional Income Statement Information
2007 Customer Contract Settlement
In 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. As a result, the Company
recognized a before-tax gain of $36.8
($ 23.6 after-tax, or $.11 per share) in 2007.
2007 Donation/Sale of Cost Investment
The Company has a cost-basis investment in a publicly
traded foreign company which has been classified as
an available-for-sale investment, with holding gains
and losses recorded to other comprehensive income,
net of income tax. On 19 September 2007, the Company
donated 65% of its investment to a tax-exempt
charitable organization and sold 15% of
its investment for cash. The Company deducted the fair
value of the donation in its fiscal 2007 income tax
returns. As a result of the donation, the Company
recognized a tax benefit of $18.3 in the fourth quarter
of 2007 and pretax expense of $4.7 for the carrying
value of the investment. As a result of the sale, the
Company recognized a pretax gain of $9.7. In
combination, the donation and sale had a favorable net
impact of $5.0 on operating income, $19.8 on net
income, and $.09 on earnings per share.
2006 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 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.
2006 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. In
November 2007, the Company canceled all of the
outstanding debt and accrued interest due from the
supplier under the loan agreements.
Additional Cash Flow Information
Cash paid for interest and taxes was as follows:
| 2008 | 2007 | 2006 | ||||||||||
Interest
(net of amounts capitalized) |
$ | 159.5 | $ | 141.3 | $ | 107.6 | ||||||
Taxes (net of refunds) |
237.2 | 248.7 | 278.5 | |||||||||
66 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
21. SUMMARY BY QUARTER (Unaudited)
These tables summarize the unaudited results of operations for each quarter of 2008 and 2007:
| 2008 | First | Second | Third | Fourth | Total | |||||||||||||||
Sales |
$ | 2,407.4 | $ | 2,542.7 | $ | 2,749.7 | $ | 2,714.7 | $ | 10,414.5 | ||||||||||
Operating income(A) |
380.4 | 348.6 | 393.7 | 373.1 | 1,495.8 | |||||||||||||||
Income from continuing operations(A) |
262.3 | 259.8 | 295.0 | 273.4 | 1,090.5 | |||||||||||||||
Income (loss) from discontinued operations(B) |
1.4 | 54.5 | (224.9 | ) | (11.8 | ) | (180.8 | ) | ||||||||||||
Net income(A)(B) |
263.7 | 314.3 | 70.1 | 261.6 | 909.7 | |||||||||||||||
Basic earnings per common share |
||||||||||||||||||||
Income from continuing operations |
1.22 | 1.22 | 1.40 | 1.30 | 5.14 | |||||||||||||||
Income (loss) from discontinued operations |
.01 | .26 | (1.07 | ) | (.06 | ) | (.85 | ) | ||||||||||||
Net income |
1.23 | 1.48 | .33 | 1.24 | 4.29 | |||||||||||||||
Diluted earnings per common share |
||||||||||||||||||||
Income from continuing operations(A) |
1.18 | 1.18 | 1.35 | 1.26 | 4.97 | |||||||||||||||
Income (loss) from discontinued operations(B) |
.01 | .25 | (1.03 | ) | (.05 | ) | (.82 | ) | ||||||||||||
Net income(A)(B) |
1.19 | 1.43 | .32 | 1.21 | 4.15 | |||||||||||||||
Dividends declared per common share |
.38 | .44 | .44 | .44 | 1.70 | |||||||||||||||
Market price per common share: high |
105.02 | 98.80 | 106.06 | 100.14 | ||||||||||||||||
low |
92.05 | 80.73 | 92.20 | 65.05 | ||||||||||||||||
| (A) | 2008 included charges for pension settlements of $30.3 ($18.9 after-tax, or $.09 per share) which were reflected in each of the quarters as follows: First $1.4, Second $26.3, Third $1.0, Fourth $1.6. |
| Fourth quarter included a net loss of $14.7 ($10.7 after-tax, or $.05 per share) related to property damage at an NF3 production facility in Korea. | |
| (B) | Second quarter included a gain of $89.5 ($57.7 after-tax, or $.26 per share) for the sale of the Company’s interest in its VAE polymers joint ventures to Wacker Chemie AG. |
| Third quarter included an impairment charge of $314.8 ($237.0 after-tax, or $1.09 per share) related to the U.S. Healthcare business and a gain of $30.5 ($18.5 after-tax, or $.08 per share) in connection with the sale of the Elkton and Piedmont facilities which completed the disposal of the Company’s Polymer Emulsions business. | |
| Fourth quarter included a charge of $14.4 ($9.2 after-tax, or $.04 per share) for the write-down of the U.S. Healthcare business to net realizable value. |
| 2007 | First | Second | Third | Fourth | Total | |||||||||||||||
Sales |
$ | 2,198.3 | $ | 2,229.7 | $ | 2,348.9 | $ | 2,371.3 | $ | 9,148.2 | ||||||||||
Operating income(A) |
321.6 | 313.6 | 360.0 | 380.4 | 1,375.6 | |||||||||||||||
Income from continuing operations(A)(B) |
223.6 | 220.0 | 280.4 | 295.6 | 1,019.6 | |||||||||||||||
Income (loss) from discontinued operations(C) |
6.7 | 7.6 | 4.5 | (2.8 | ) | 16.0 | ||||||||||||||
Net income(A)(B)(C) |
230.3 | 227.6 | 284.9 | 292.8 | 1,035.6 | |||||||||||||||
Basic earnings per common share |
||||||||||||||||||||
Income from continuing operations |
1.03 | 1.02 | 1.30 | 1.37 | 4.72 | |||||||||||||||
Income (loss) from discontinued operations |
.03 | .03 | .02 | (.01 | ) | .07 | ||||||||||||||
Net income |
1.06 | 1.05 | 1.32 | 1.36 | 4.79 | |||||||||||||||
Diluted earnings per common share |
||||||||||||||||||||
Income from continuing operations(A)(B) |
1.00 | .99 | 1.26 | 1.32 | 4.57 | |||||||||||||||
Income (loss) from discontinued operations(C) |
.03 | .03 | .02 | (.01 | ) | .07 | ||||||||||||||
Net income(A)(B)(C) |
1.03 | 1.02 | 1.28 | 1.31 | 4.64 | |||||||||||||||
Dividends declared per common share |
.34 | .38 | .38 | .38 | 1.48 | |||||||||||||||
Market price per common share: high |
72.45 | 78.63 | 82.74 | 98.51 | ||||||||||||||||
low |
66.19 | 68.58 | 73.30 | 77.26 | ||||||||||||||||
| (A) | Fourth quarter included a gain of $36.8 ($23.6 after-tax, or $.11 per share) for a customer contract settlement, a charge of $10.3 ($6.4 after-tax, or $.03 per share) from a pension settlement, a charge of $13.7 ($8.8 after-tax, or $.04 per share) for the global cost reduction plan, and a gain of $5.0 ($19.8 after-tax, or $.09 per share) from the donation and sale of a cost-basis investment. |
| (B) | Third quarter included a tax benefit of $27.5, or $.12 per share, from audit settlements. |
| Fourth quarter included a tax benefit of $11.3, or $.05 per share, from tax audit settlements and adjustments. | |
| (C) | Fourth quarter included a loss of $15.3 ($9.3 after-tax, or $.04 per share) for the write-down of the assets of the HPPC business to net realizable value. |
67
22. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company’s segments are organized based on
differences in product and/or type of customer. The
Company has four business segments consisting of
Merchant Gases, Tonnage Gases, Electronics and
Performance Materials, and Equipment and Energy.
Previously, the Company reported results for a
Healthcare segment and a Chemicals segment [which
consisted of the Polymer Emulsions business and the
Polyurethane Intermediates (PUI) business]. Beginning
with the first quarter of 2008, the Polymer Emulsions
business was accounted for as discontinued operations,
and the PUI business was reported as
part of the Tonnage Gases segment. Beginning with the
fourth quarter of 2008, the U.S. Healthcare business
was accounted for as discontinued operations, and the
Europe Healthcare business was reported as part of the
Merchant Gases segment. Prior period information has
been restated. Refer to Note 5 for information on
discontinued operations.
Merchant Gases
The Merchant Gases segment sells industrial gases such
as oxygen, nitrogen and argon (primarily recovered by
the cryogenic distillation of air), hydrogen and helium
(purchased or refined from crude helium), and medical
and specialty gases, along with certain services and
equipment, throughout the world to customers in many
industries, including those in metals, glass, chemical
processing, food processing, healthcare, medical gases,
steel, general manufacturing, and petroleum and natural
gas industries. There are four principal types of
products: liquid bulk, packaged gases, small on-sites,
and healthcare products. Most merchant product is
delivered via bulk supply, in liquid or gaseous form,
by tanker or tube trailer. Smaller quantities of
industrial, specialty, and medical gases are delivered
in cylinders and dewars as “packaged gases,” or through
small on-site gas generation plants (cryogenic or
noncryogenic generators). Through its healthcare
business, the Company offers respiratory therapies,
home medical equipment, and infusion services.
Electricity is the largest cost component in the
production of atmospheric gases. The Company mitigates
energy prices through pricing formulas and surcharges.
Merchant Gases competes worldwide against global and
regional industrial gas companies. Competition in
industrial gases is based primarily on price,
reliability of supply, and the development of
industrial gas applications. Competition in the
healthcare business involves regulatory compliance,
price, quality, service, and reliability of supply.
Tonnage Gases
The Tonnage Gases segment supplies industrial gases,
including hydrogen, carbon monoxide, syngas, nitrogen,
and oxygen, via large on-site facilities or pipeline
systems, principally to customers in the petroleum
refining, chemical, and metallurgical industries. The
Tonnage Gases segment also includes the Company’s PUI
business. The PUI business markets toluene diamine to
customers under long-term contracts. For large-volume,
or “tonnage” industrial gas users, the Company either
constructs a gas plant adjacent to or near the
customer’s facility—hence the term “on-site”—or
delivers product through a pipeline from a nearby
location. The Company is the world’s largest provider
of hydrogen, which is used by refiners to lower the
sulfur content of gasoline and diesel fuels to reduce
smog and ozone depletion. Electricity is the largest
cost component in the production of atmospheric gases,
and natural gas is the principal raw material for
hydrogen, carbon monoxide, and syngas production. The
Company mitigates energy and natural gas price changes
through its long-term cost pass-through type contracts.
Tonnage Gases competes against global industrial gas
companies, as well as regional sellers. Competition is
based primarily on price, reliability of supply, the
development of applications that use industrial gases
and, in some cases, provision of other services or
products such as power and steam generation.
Electronics and Performance Materials
The Electronics and Performance Materials segment
employs applications technology to provide solutions to
a broad range of global industries through expertise in
chemical synthesis, analytical technology, process
engineering, and surface science. This segment provides
specialty and tonnage gases, specialty chemicals,
services, and equipment to the electronics industry for
the manufacture of silicon and compound semiconductors,
LCD and other displays, and photovoltaic devices. The
segment also provides performance chemical solutions
for the coatings, inks, adhesives, civil engineering,
personal care, institutional and industrial cleaning,
mining, oil field, polyurethane, and other industries.
The Electronics and Performance Materials segment faces
competition on a product-by-product basis against
competitors ranging from niche suppliers with a single
product to larger and more vertically integrated
companies. Competition is principally conducted on the
basis of product performance, reliability of product
supply, global infrastructure, technical innovation,
service, quality, and price.
68 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
Equipment and Energy
The Equipment and Energy segment designs and
manufactures cryogenic and gas processing equipment for
air separation, hydrocarbon recovery and purification,
natural gas liquefaction (LNG), and helium
distribution, and serves energy markets in a variety of
ways. Equipment is sold worldwide to customers in a
variety of industries, including chemical and
petrochemical manufacturing, oil and gas recovery and
processing, and steel and primary metals processing.
Energy markets are served through the Company’s
operation and partial ownership of cogeneration and
flue gas treatment facilities. The Company is
developing technologies to continue to serve energy
markets in the future, including gasification and
alternative energy technologies. Equipment and Energy
competes with a great number of firms for all of its
offerings except LNG heat exchangers, for which there
are fewer competitors due to the limited market size
and proprietary technologies. Competition is based
primarily on technological performance, service,
technical know-how, price, and performance guarantees.
Other
Other operating income includes other expense and
income which cannot be directly associated with the
business segments, including foreign exchange gains and
losses, interest income, and costs previously allocated
to businesses now reported as
discontinued operations. Also included are LIFO
inventory adjustments, as the business segments use
FIFO and the LIFO pool is kept at corporate. Corporate
research and development costs are fully allocated to
the business segments.
Other assets include cash, restricted cash, deferred
tax assets, pension assets, financial instruments, and
corporate assets previously allocated to businesses
now reported as discontinued operations.
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.
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.
Long-lived assets include investment in net assets
of and advances to equity affiliates, net plant and
equipment, goodwill, and net intangible assets.
Business Segments
Business segment information is shown below:
| 2008 | 2007 | 2006 | ||||||||||
Revenue from External
Customers |
||||||||||||
Merchant Gases |
$ | 4,192.7 | $ | 3,556.9 | $ | 3,002.8 | ||||||
Tonnage Gases |
3,574.4 | 2,936.7 | 2,544.7 | |||||||||
Electronics and Performance
Materials |
2,209.3 | 2,068.7 | 1,801.0 | |||||||||
Equipment and Energy |
438.1 | 585.9 | 536.5 | |||||||||
Segment and Consolidated
Totals |
$ | 10,414.5 | $ | 9,148.2 | $ | 7,885.0 | ||||||
| 2008 | 2007 | 2006 | ||||||||||
Operating Income |
||||||||||||
Merchant Gases(A) |
$ | 789.5 | $ | 656.4 | $ | 517.3 | ||||||
Tonnage Gases(A) |
482.6 | 463.2 | 371.7 | |||||||||
Electronics
and Performance Materials(A) |
245.9 | 229.2 | 190.0 | |||||||||
Equipment and Energy |
38.9 | 76.8 | 68.9 | |||||||||
Segment Total |
1,556.9 | 1,425.6 | 1,147.9 | |||||||||
Pension settlement |
(30.3 | ) | (10.3 | ) | — | |||||||
Global cost reduction plan(B) |
— | (13.7 | ) | (71.0 | ) | |||||||
Other |
(30.8 | ) | (26.0 | ) | (35.0 | ) | ||||||
Consolidated Total |
$ | 1,495.8 | $ | 1,375.6 | $ | 1,041.9 | ||||||
| (A) | The impact of the hurricanes in 2006 from insurance recoveries recognized, net of property damage and other expenses, has been allocated to the business segments as follows: Tonnage Gases $31.0, Merchant Gases $23.5, and Electronics and Performance Materials $1.5. |
| (B) | Information about how this charge related to the businesses at the segment level is discussed in Note 3. |
| 2008 | 2007 | 2006 | ||||||||||
Depreciation and Amortization |
||||||||||||
Merchant Gases |
$ | 370.2 | $ | 332.0 | $ | 320.5 | ||||||
Tonnage Gases |
278.9 | 271.0 | 211.9 | |||||||||
Electronics and Performance
Materials |
208.0 | 171.7 | 159.4 | |||||||||
Equipment and Energy |
11.8 | 14.1 | 12.9 | |||||||||
Segment Total |
868.9 | 788.8 | 704.7 | |||||||||
Other |
.1 | 1.0 | — | |||||||||
Consolidated Total |
$ | 869.0 | $ | 789.8 | $ | 704.7 | ||||||
| 2008 | 2007 | 2006 | ||||||||||
Equity Affiliates’ Income |
||||||||||||
Merchant Gases |
$ | 131.8 | $ | 97.8 | $ | 82.4 | ||||||
Other segments |
13.2 | 16.6 | 9.1 | |||||||||
Segment and Consolidated
Totals |
$ | 145.0 | $ | 114.4 | $ | 91.5 | ||||||
69
| 2008 | 2007 | 2006 | ||||||||||
Total Assets |
||||||||||||
Merchant Gases |
$ | 5,565.9 | $ | 5,081.7 | $ | 4,197.2 | ||||||
Tonnage Gases |
3,397.8 | 3,387.7 | 3,085.3 | |||||||||
Electronics and Performance
Materials |
2,388.8 | 2,481.2 | 2,293.0 | |||||||||
Equipment and Energy |
328.3 | 393.2 | 330.1 | |||||||||
Segment Total |
11,680.8 | 11,343.8 | 9,905.6 | |||||||||
Other |
775.2 | 402.5 | 339.8 | |||||||||
Discontinued operations |
115.3 | 913.2 | 935.3 | |||||||||
Consolidated Total |
$ | 12,571.3 | $ | 12,659.5 | $ | 11,180.7 | ||||||
| 2008 | 2007 | 2006 | ||||||||||
Investment in and Advances
to Equity Affiliates |
||||||||||||
Merchant Gases |
$ | 684.3 | $ | 642.3 | $ | 538.7 | ||||||
Other segments |
138.3 | 135.8 | 129.7 | |||||||||
Segment and Consolidated
Totals |
$ | 822.6 | $ | 778.1 | $ | 668.4 | ||||||
| 2008 | 2007 | 2006 | ||||||||||
Identifiable Assets |
||||||||||||
Merchant Gases |
$ | 4,881.6 | $ | 4,439.4 | $ | 3,658.5 | ||||||
Tonnage Gases |
3,335.4 | 3,328.4 | 3,028.6 | |||||||||
Electronics and Performance
Materials |
2,341.0 | 2,435.3 | 2,245.7 | |||||||||
Equipment and Energy |
300.2 | 362.6 | 304.4 | |||||||||
Segment Total |
10,858.2 | 10,565.7 | 9,237.2 | |||||||||
Other |
775.2 | 402.5 | 339.8 | |||||||||
Discontinued operations |
115.3 | 845.3 | 875.4 | |||||||||
Consolidated Total |
$ | 11,748.7 | $ | 11,813.5 | $ | 10,452.4 | ||||||
| 2008 | 2007 | 2006 | ||||||||||
Expenditures for Long-lived
Assets |
||||||||||||
Merchant Gases |
$ | 593.0 | $ | 888.6 | $ | 579.5 | ||||||
Tonnage Gases |
387.9 | 435.9 | 534.4 | |||||||||
Electronics and Performance
Materials |
198.8 | 210.5 | 200.0 | |||||||||
Equipment and Energy |
2.3 | 9.9 | 39.6 | |||||||||
Segment Total |
1,182.0 | 1,544.9 | 1,353.5 | |||||||||
Other |
1.7 | 1.6 | 3.1 | |||||||||
Consolidated Total |
$ | 1,183.7 | $ | 1,546.5 | $ | 1,356.6 | ||||||
Geographic Information
Geographic information is presented below:
| 2008 | 2007 | 2006 | ||||||||||
Revenues from External
Customers |
||||||||||||
United States |
$ | 4,845.1 | $ | 4,487.6 | $ | 4,245.5 | ||||||
Canada |
241.2 | 185.1 | 108.0 | |||||||||
Europe |
3,448.0 | 2,873.5 | 2,323.1 | |||||||||
Asia |
1,661.3 | 1,436.9 | 1,088.3 | |||||||||
Latin America |
218.9 | 165.1 | 120.1 | |||||||||
| $ | 10,414.5 | $ | 9,148.2 | $ | 7,885.0 | |||||||
| 2008 | 2007 | 2006 | ||||||||||
Long-lived Assets |
||||||||||||
United States |
$ | 3,017.0 | $ | 3,007.4 | $ | 3,130.9 | ||||||
Canada |
441.9 | 442.5 | 228.7 | |||||||||
Europe |
3,048.6 | 2,949.5 | 2,099.6 | |||||||||
Asia |
1,815.3 | 1,769.7 | 1,574.3 | |||||||||
Latin America |
255.0 | 224.1 | 210.2 | |||||||||
All other |
77.3 | 81.0 | 42.8 | |||||||||
| $ | 8,655.1 | $ | 8,474.2 | $ | 7,286.5 | |||||||
Geographic information is based on country of origin.
Included in United States revenues are export sales to
unconsolidated customers of $629.1 in 2008, $677.3 in
2007, and $709.4 in 2006. The Europe segment operates
principally in Belgium, France, Germany, the
Netherlands, Poland, the U.K., and Spain. The Asia
segment operates principally in China, Japan, Korea,
and Taiwan.
70 AIR PRODUCTS 2008 ANNUAL REPORT | Notes to the Consolidated Financial Statements
Five-Year Summary of Selected Financial Data
| (millions of dollars, except per share) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Operating Results |
||||||||||||||||||||
Sales |
$ | 10,415 | $ | 9,148 | $ | 7,885 | $ | 6,822 | $ | 6,163 | ||||||||||
Cost of sales |
7,693 | 6,699 | 5,817 | 4,974 | 4,456 | |||||||||||||||
Selling and administrative |
1,090 | 1,000 | 892 | 841 | 799 | |||||||||||||||
Research and development |
131 | 129 | 140 | 121 | 108 | |||||||||||||||
Global cost reduction plan |
— | 14 | 71 | — | — | |||||||||||||||
Operating income |
1,496 | 1,376 | 1,042 | 922 | 837 | |||||||||||||||
Equity affiliates’ income |
145 | 114 | 92 | 91 | 79 | |||||||||||||||
Interest expense |
162 | 162 | 118 | 109 | 120 | |||||||||||||||
Income tax provision |
365 | 287 | 262 | 231 | 209 | |||||||||||||||
Income from continuing operations |
1,091 | 1,020 | 734 | 659 | 575 | |||||||||||||||
Net income |
910 | 1,036 | 723 | 712 | 604 | |||||||||||||||
Basic earnings per common share |
||||||||||||||||||||
Income from continuing operations |
5.14 | 4.72 | 3.31 | 2.92 | 2.57 | |||||||||||||||
Net income |
4.29 | 4.79 | 3.26 | 3.15 | 2.70 | |||||||||||||||
Diluted earnings per common share |
||||||||||||||||||||
Income from continuing operations |
4.97 | 4.57 | 3.23 | 2.85 | 2.51 | |||||||||||||||
Net income |
4.15 | 4.64 | 3.18 | 3.08 | 2.64 | |||||||||||||||
Year-End Financial Position |
||||||||||||||||||||
Plant and equipment, at cost |
$ | 14,989 | $ | 14,439 | $ | 12,910 | $ | 11,915 | $ | 11,253 | ||||||||||
Total assets |
12,571 | 12,660 | 11,181 | 10,409 | 10,040 | |||||||||||||||
Working capital |
636 | 436 | 289 | 471 | 711 | |||||||||||||||
Total debt(A) |
3,967 | 3,668 | 2,846 | 2,490 | 2,385 | |||||||||||||||
Shareholders’ equity |
5,031 | 5,496 | 4,924 | 4,546 | 4,420 | |||||||||||||||
Financial Ratios |
||||||||||||||||||||
Return on average shareholders’ equity(B) |
20.1 | % | 19.5 | % | 15.1 | % | 14.2 | % | 14.0 | % | ||||||||||
Operating margin |
14.4 | % | 15.0 | % | 13.2 | % | 13.5 | % | 13.6 | % | ||||||||||
Selling and administrative as a percentage of sales |
10.5 | % | 10.9 | % | 11.3 | % | 12.3 | % | 13.0 | % | ||||||||||
Total debt to
sum of total debt, shareholders’ equity and minority interest(A) |
43.4 | % | 39.8 | % | 36.3 | % | 34.8 | % | 34.6 | % | ||||||||||
Other Data |
||||||||||||||||||||
Depreciation and amortization |
$ | 869 | $ | 790 | $ | 705 | $ | 656 | $ | 662 | ||||||||||
Capital expenditures on a GAAP basis(C) |
1,159 | 1,553 | 1,358 | 928 | 704 | |||||||||||||||
Capital expenditures on a non-GAAP basis(D) |
1,355 | 1,635 | 1,487 | 984 | 748 | |||||||||||||||
Cash provided by operating activities |
1,680 | 1,500 | 1,348 | 1,304 | 1,098 | |||||||||||||||
Dividends declared per common share |
1.70 | 1.48 | 1.34 | 1.25 | 1.04 | |||||||||||||||
Market price range per common share |
106–65 | 99–66 | 70–53 | 66–52 | 56–44 | |||||||||||||||
Weighted average common shares outstanding
(in millions) |
212 | 216 | 222 | 226 | 224 | |||||||||||||||
Weighted average common shares outstanding
assuming dilution (in millions) |
219 | 223 | 228 | 231 | 229 | |||||||||||||||
Book value per common share at year-end |
$ | 24.03 | $ | 25.52 | $ | 22.67 | $ | 20.49 | $ | 19.57 | ||||||||||
Shareholders at year-end |
8,900 | 9,300 | 9,900 | 10,300 | 10,700 | |||||||||||||||
Employees at year-end(E) |
21,100 | 22,100 | 20,700 | 20,200 | 19,900 | |||||||||||||||
| (A) | Total debt includes long-term debt, current portion of long-term debt, and short-term borrowings as of the end of the year. Calculation based on continuing operations. |
| (B) | Calculated using income and equity from continuing operations. |
| (C) | Capital expenditures on a GAAP basis 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. |
| (D) | The Company utilizes a non-GAAP measure in the computation of capital expenditures and includes spending associated with facilities accounted for as capital leases. Certain facilities which are built to service a specific customer are accounted for as capital leases in accordance with EITF No. 01-08, “Determining Whether an Arrangement Contains a Lease,” and such spending is reflected as a use of cash within cash provided by operating activities. The presentation of this non-GAAP measure is intended to enhance the usefulness of information by providing a measure which the Company’s management uses internally to evaluate and manage the Company’s capital expenditures. |
| (E) | Includes full- and part-time employees from continuing and discontinued operations. |
71
Exhibit 21
Subsidiaries of Air Products and Chemicals, Inc.
The following is a list of the Company’s consolidating subsidiaries, as of 30 September 2008,
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. This list does not include equity affiliate investments and cost investments.
UNITED STATES
All companies are incorporated in the State of Delaware unless otherwise indicated.
Registrant — Air Products and Chemicals, Inc.
AHS Seating and Mobility Georgia, Inc. (Georgia)
APMTG Helium LLC
Air Products Didcot LLC
Air Products (Rozenburg), Inc.
Air Products Asia, Inc.
Air Products Caribbean Holdings, Inc.
Air Products China, Inc.
Air Products Electronics, LLC
Air Products Energy Enterprises, L.P.
Air Products Energy Holdings, Inc.
Air Products Europe, Inc.
Air Products Healthcare Southeast, LLC
Air Products Helium, Inc.
Air Products HyCal Company, L.P. (California)
Air Products Hydrogen Company, Inc.
Air Products International Corporation
Air Products LLC
Air Products Manufacturing Corporation
Air Products Performance Manufacturing, Inc.
Air Products Seating and Mobility, Inc.
Air Products Trinidad Services, Inc.
American Homecare Supply IV Georgia, LLC
American Homecare Supply Mid-Atlantic, LLC
American Homecare Supply New York, LLC
American Homecare Supply West Virginia, Inc.
American Homecare Supply, LLC
AmHealth Group, LLC
APCI Ref-Fuel Company
APCI (U.K.), Inc.
Collins I.V. Care, LLC
Denmark’s, LLC
DependiCare Home Health, LLC
Ducolake, Inc. (Indiana)
East Coast Oxygen Co.
Genox Homecare, LLC
Goar, Allison and Associates, Inc. (Texas)
Harvest Energy Technology, Inc. (California)
Laurel Mountain Medical Supply, LLC
Lakeway Medical Rentals, LLC
Middletown Oxygen Company, Inc.
Mosso’s Medical Supply Company, LLC
Nightingale Medical of Indiana, LLC (Indiana)
Olin — DNT Limited Partnership
Prodair Corporation
Pure Air Holdings Corp.
Pure Air on the Lake (I), Inc.
Pure Air on the Lake (IV), Inc.
SCWC Corp.
Skychain LLC
Stockton CoGen (I), Inc.
Ultra Care, LLC
AHS Seating and Mobility Georgia, Inc. (Georgia)
APMTG Helium LLC
Air Products Didcot LLC
Air Products (Rozenburg), Inc.
Air Products Asia, Inc.
Air Products Caribbean Holdings, Inc.
Air Products China, Inc.
Air Products Electronics, LLC
Air Products Energy Enterprises, L.P.
Air Products Energy Holdings, Inc.
Air Products Europe, Inc.
Air Products Healthcare Southeast, LLC
Air Products Helium, Inc.
Air Products HyCal Company, L.P. (California)
Air Products Hydrogen Company, Inc.
Air Products International Corporation
Air Products LLC
Air Products Manufacturing Corporation
Air Products Performance Manufacturing, Inc.
Air Products Seating and Mobility, Inc.
Air Products Trinidad Services, Inc.
American Homecare Supply IV Georgia, LLC
American Homecare Supply Mid-Atlantic, LLC
American Homecare Supply New York, LLC
American Homecare Supply West Virginia, Inc.
American Homecare Supply, LLC
AmHealth Group, LLC
APCI Ref-Fuel Company
APCI (U.K.), Inc.
Collins I.V. Care, LLC
Denmark’s, LLC
DependiCare Home Health, LLC
Ducolake, Inc. (Indiana)
East Coast Oxygen Co.
Genox Homecare, LLC
Goar, Allison and Associates, Inc. (Texas)
Harvest Energy Technology, Inc. (California)
Laurel Mountain Medical Supply, LLC
Lakeway Medical Rentals, LLC
Middletown Oxygen Company, Inc.
Mosso’s Medical Supply Company, LLC
Nightingale Medical of Indiana, LLC (Indiana)
Olin — DNT Limited Partnership
Prodair Corporation
Pure Air Holdings Corp.
Pure Air on the Lake (I), Inc.
Pure Air on the Lake (IV), Inc.
SCWC Corp.
Skychain LLC
Stockton CoGen (I), Inc.
Ultra Care, LLC
ARGENTINA
Terapias Medicas Domiciliarias, S.A.
AUSTRIA
Air Products Gesellschaft mbH
BELGIUM
Air Products S.A.
Air Products Management S.A.
Napro S.A.
Medigaz, S.A.
Air Products Management S.A.
Napro S.A.
Medigaz, S.A.
BERMUDA
Asia Industrial Gas Company Ltd.
BRAZIL
Air Products Brasil Ltda.
CANADA
Air Products Canada Ltd./Prodair Canada Ltee
CHINA
Air Products and Chemicals (Beijing) Distribution Co., Ltd.
Air Products and Chemicals (Changxing) Co., Ltd.
Air Products and Chemicals (Changzhou) Co., Ltd.
Air Products and Chemicals (Chengdu) Co., Ltd.
Air Products and Chemicals (Chongqing) Co., Ltd.
Air Products and Chemicals (China) Investment Co. Ltd.
Air Products and Chemicals (Fujian) Co., Ltd.
Air Products and Chemicals (Guangzhou) Co., Ltd.
Air Products and Chemicals (Fuzhou) Co., Ltd.
Air Products and Chemicals (Nanjing) Co., Ltd.
Air Products and Chemicals (Ningbo) Co., Ltd.
Air Products and Chemicals (Putian) Co., Ltd.
Air Products and Chemicals (Shanghai) Co. Ltd.
Air Products and Chemicals (Tangshan) Co., Ltd.
Air Products and Chemicals (Tianjin) Co., Ltd.
Air Products and Chemicals (Zhuhai) Co., Ltd.
Air Products and Chemicals (Zibo) Co., Ltd.
Air Products and Chemicals (Kunshan) Gases Co., Ltd.
Air Products and Chemicals (Nanjing) Gases Co., Ltd.
Air Products and Chemicals (Shenzhen) Gases Co., Ltd.
Air Products and Chemicals (Zhengzhou) Hi-Tech Co., Ltd.
Air Products and Chemicals (Nanjing) Specialty Amines Co., Ltd.
Air Products and Chemicals (Shanghai) Electronics Gases Co., Ltd.
Air Products and Chemicals (Shanghai) Gases Co., Ltd.
Air Products and Chemicals (Shanghai) On-Site Gases Co., Ltd.
Air Products and Chemicals (Shanghai) Systems Co. Ltd.
Air Products and Chemicals (Shenzhen) Co., Ltd.
Air Products and Chemicals (Tongxiang) Co., Ltd.
Air Products and Chemicals (Zhangjiagang) Co., Ltd.
Air Products (Shanghai) Co., Ltd.
Beijing AP BAIF Gas Industry Co., Ltd.
Chun Wang Industrial Gases (H.K.) Limited
Permea China, Ltd.
Air Products and Chemicals (Changxing) Co., Ltd.
Air Products and Chemicals (Changzhou) Co., Ltd.
Air Products and Chemicals (Chengdu) Co., Ltd.
Air Products and Chemicals (Chongqing) Co., Ltd.
Air Products and Chemicals (China) Investment Co. Ltd.
Air Products and Chemicals (Fujian) Co., Ltd.
Air Products and Chemicals (Guangzhou) Co., Ltd.
Air Products and Chemicals (Fuzhou) Co., Ltd.
Air Products and Chemicals (Nanjing) Co., Ltd.
Air Products and Chemicals (Ningbo) Co., Ltd.
Air Products and Chemicals (Putian) Co., Ltd.
Air Products and Chemicals (Shanghai) Co. Ltd.
Air Products and Chemicals (Tangshan) Co., Ltd.
Air Products and Chemicals (Tianjin) Co., Ltd.
Air Products and Chemicals (Zhuhai) Co., Ltd.
Air Products and Chemicals (Zibo) Co., Ltd.
Air Products and Chemicals (Kunshan) Gases Co., Ltd.
Air Products and Chemicals (Nanjing) Gases Co., Ltd.
Air Products and Chemicals (Shenzhen) Gases Co., Ltd.
Air Products and Chemicals (Zhengzhou) Hi-Tech Co., Ltd.
Air Products and Chemicals (Nanjing) Specialty Amines Co., Ltd.
Air Products and Chemicals (Shanghai) Electronics Gases Co., Ltd.
Air Products and Chemicals (Shanghai) Gases Co., Ltd.
Air Products and Chemicals (Shanghai) On-Site Gases Co., Ltd.
Air Products and Chemicals (Shanghai) Systems Co. Ltd.
Air Products and Chemicals (Shenzhen) Co., Ltd.
Air Products and Chemicals (Tongxiang) Co., Ltd.
Air Products and Chemicals (Zhangjiagang) Co., Ltd.
Air Products (Shanghai) Co., Ltd.
Beijing AP BAIF Gas Industry Co., Ltd.
Chun Wang Industrial Gases (H.K.) Limited
Permea China, Ltd.
CZECH REPUBLIC
Air Products spol s.r.o.
FRANCE
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
Lida SAS
Domisante SAS
Union Mobiliere Industrielle 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
Lida SAS
Domisante SAS
Union Mobiliere Industrielle S.A.R.L.
GERMANY
Air Products GmbH
Air Products Medical GmbH
Air Products Powders GmbH
Air Products Medical 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.
JAPAN
Air Products Japan, Inc.
KOREA
Air Products Korea Electronics, Inc.
Air Products ACT Korea Limited
Air Products HYT Inc.
Han Mi Specialty Gases Co. Ltd.
Shinil Cryogenic Materials, Ltd.
Air Products ACT Korea Limited
Air Products HYT Inc.
Han Mi Specialty Gases Co. Ltd.
Shinil Cryogenic Materials, Ltd.
MALAYSIA
Air Products Malaysia Sdn Bhd
Air Products Shared Services Sdn. Bhd
Air Products Shared Services Sdn. Bhd
MEXICO
Air Products and Chemicals de Mexico, S.A. de C.V.
Air Products Infra Nitrogeno, S. de R.L. de C.V.
Air Products Infra Nitrogeno, S. de R.L. de C.V.
THE NETHERLANDS
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 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.
POLAND
Air Products Sp. z.o.o.
Roboprojekt Sp. z.o.o
Roboprojekt Sp. z.o.o
PORTUGAL
Gases Industriais, S.A.R.L.
ROMANIA
Air Products Hidrogen S.R.L.
RUSSIA
Air Products O.O.O.
SINGAPORE
Air Products and Chemicals (S) 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 Services Europe, S.A.
Air Products Sud Europa, S.L.
Matgas 2000 A.I.E.
Oxigenol, S.A.
Sociedad Espanola de Carburos Metalicos S.A.
Air Products Investments Espana, S.L.
Air Products Services Europe, S.A.
Air Products Sud Europa, S.L.
Matgas 2000 A.I.E.
Oxigenol, S.A.
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
Blue Ocean Industrial Gases Co., Ltd.
Air Products San Fu Co., Ltd.
Air Products Electronics Taiwan Limited
Air Products Taiwan Co., Ltd.
Air Products Taiwan Holdings, LLC
Blue Ocean Industrial Gases Co., Ltd.
THAILAND
Air Products Asia (Technology Center) Ltd.
TRINIDAD AND TOBAGO
Air Products Unlimited
UNITED KINGDOM
Air Products (BR) Limited
Air Products (Chemicals) Public Limited Company
Air Products (GB) Limited
Air Products Group Limited
Air Products PLC
Air Products (UK) Limited
Air Products Yanbu Limited
Anchor Chemical (UK) Limited
Anchor Chemical International Limited
Ancomer Limited
Cryomed Limited
Cryoservice Limited
Prodair Services Limited
Protexeon Limited
Air Products (Chemicals) Teesside Limited
Air Products (Chemicals) Public Limited Company
Air Products (GB) Limited
Air Products Group Limited
Air Products PLC
Air Products (UK) Limited
Air Products Yanbu Limited
Anchor Chemical (UK) Limited
Anchor Chemical International Limited
Ancomer Limited
Cryomed Limited
Cryoservice Limited
Prodair Services Limited
Protexeon Limited
Air Products (Chemicals) Teesside Limited
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
To the Board of Directors of
Air Products and Chemicals, Inc.:
Air Products and Chemicals, Inc.:
We consent to the incorporation by reference in the Registration Statements (No. 333-54224,
333-56292, 333-73105, 333-81358, 333-95317, 333-100210, 333-103809, 333-113881, 333-113882,
333-121262, 333-123477, 333-132599, 333-141336, 333-141337, 333-141338, 333-149813) on Form S-8 and
in the Registration Statements (No. 333-33851 and 333-111792) on Form S-3 of Air Products and
Chemicals, Inc. (the Company) of our reports dated 25 November 2008, with respect to the
consolidated balance sheets of Air Products and Chemicals, Inc. and subsidiaries as of 30 September
2008 and 2007, and the related consolidated income statements and consolidated statements of
shareholders’ equity and cash flows for each of the years in the three-year period ended 30
September 2008, the related financial statement schedule, and the effectiveness of internal control
over financial reporting as of 30 September 2008, which reports appear or are incorporated by
reference in the 30 September 2008 Annual Report on Form 10-K of Air Products and Chemicals, Inc.
Our reports refer to the Company’s adoption of Financial Accounting Standards Board (FASB)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” effective 1 October 2007,
Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans,” as of 30 September 2007, and FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations,” effective 30 September 2006.
/s/ KPMG LLP
Philadelphia, Pennsylvania
25 November 2008
25 November 2008
Exhibit 24
POWER OF ATTORNEY
Know All Men By These Presents, that each person
whose signature appears below constitutes and appoints John E. McGlade or Paul E. Huck
or Stephen J. Jones, 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 2008 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 | 20 November 2008 | ||
/s/ William L. Davis, III
|
Director | 20 November 2008 | ||
/s/ Michael J. Donahue
|
Director | 20 November 2008 | ||
/s/ Ursula O. Fairbairn
|
Director | 20 November 2008 | ||
/s/ W. Douglas Ford
|
Director | 20 November 2008 | ||
/s/ Edward E. Hagenlocker
|
Director | 20 November 2008 | ||
/s/ Evert Henkes
|
Director | 20 November 2008 |
| Signature | Title | Date | ||
/s/ John E. McGlade
|
Director and Chairman | 20 November 2008 | ||
/s/ Margaret G. McGlynn
|
Director | 20 November 2008 | ||
/s/ Charles H. Noski
|
Director | 20 November 2008 | ||
/s/ Lawrence S. Smith
|
Director | 20 November 2008 |
2
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION
I, John E. McGlade, 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: 26 November 2008
| /s/ John E. McGlade | ||||
| John E. McGlade | ||||
| President and Chief Executive Officer | ||||
2
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: 26 November 2008
| /s/ Paul E. Huck | ||||
| Paul E. Huck | ||||
| Senior Vice President and Chief Financial Officer | ||||
2
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, 2008, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), we, John E. McGlade, President and Chief Executive
Officer of the Company, and Paul E. Huck, Senior 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: 26 November 2008 | /s/ John E. McGlade | |||
| John E. McGlade | ||||
| President and Chief Executive Officer | ||||
| /s/ Paul E. Huck | ||||
| Paul E. Huck | ||||
| Senior Vice President and Chief Financial Officer |
||||