AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended 31 March |
| |
|
2008 |
|
2007 |
| |
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
578.0 |
|
|
$ |
457.9 |
|
Income from discontinued operations, net of tax |
|
|
(67.9 |
) |
|
|
(20.1 |
) |
| |
Income from continuing operations |
|
|
510.1 |
|
|
|
437.8 |
|
Adjustments to reconcile income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
442.1 |
|
|
|
386.9 |
|
Deferred income taxes |
|
|
34.6 |
|
|
|
4.3 |
|
Undistributed earnings of unconsolidated affiliates |
|
|
(42.6 |
) |
|
|
(34.8 |
) |
Loss on sale of assets and investments |
|
|
1.2 |
|
|
|
1.1 |
|
Share-based compensation |
|
|
33.0 |
|
|
|
31.4 |
|
Noncurrent capital lease receivables |
|
|
(118.5 |
) |
|
|
(42.9 |
) |
Other |
|
|
(9.5 |
) |
|
|
46.9 |
|
Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Trade receivables |
|
|
(162.6 |
) |
|
|
(66.3 |
) |
Inventories |
|
|
(35.9 |
) |
|
|
(14.0 |
) |
Contracts in progress |
|
|
75.9 |
|
|
|
7.1 |
|
Prepaid expenses |
|
|
23.3 |
|
|
|
(164.7 |
) |
Payables and accrued liabilities |
|
|
(73.2 |
) |
|
|
(235.5 |
) |
Other |
|
|
(43.9 |
) |
|
|
29.5 |
|
| |
CASH PROVIDED BY OPERATING ACTIVITIES (a) |
|
|
634.0 |
|
|
|
386.8 |
|
| |
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Additions to plant and equipment (b) |
|
|
(529.5 |
) |
|
|
(488.7 |
) |
Acquisitions, less cash acquired |
|
|
(1.7 |
) |
|
|
(20.0 |
) |
Investment in and advances to unconsolidated affiliates |
|
|
— |
|
|
|
(1.5 |
) |
Proceeds from sale of assets and investments |
|
|
14.5 |
|
|
|
15.6 |
|
Proceeds from insurance settlements |
|
|
— |
|
|
|
14.9 |
|
Change in restricted cash |
|
|
(132.3 |
) |
|
|
— |
|
Other |
|
|
(4.5 |
) |
|
|
.7 |
|
| |
CASH USED FOR INVESTING ACTIVITIES |
|
|
(653.5 |
) |
|
|
(479.0 |
) |
| |
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Long-term debt proceeds |
|
|
461.6 |
|
|
|
461.3 |
|
Payments on long-term debt |
|
|
(94.7 |
) |
|
|
(48.0 |
) |
Net increase in commercial paper and short-term borrowings |
|
|
84.9 |
|
|
|
(38.4 |
) |
Dividends paid to shareholders |
|
|
(163.4 |
) |
|
|
(147.5 |
) |
Purchase of Treasury Stock |
|
|
(560.2 |
) |
|
|
(255.2 |
) |
Proceeds from stock option exercises |
|
|
41.8 |
|
|
|
103.9 |
|
Excess tax benefit from share-based compensation/other |
|
|
25.8 |
|
|
|
22.6 |
|
| |
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES |
|
|
(204.2 |
) |
|
|
98.7 |
|
| |
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Millions of dollars)
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended 31 March |
| |
|
2008 |
|
2007 |
| |
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
Cash used for operating activities |
|
|
(2.9 |
) |
|
|
(2.1 |
) |
Cash provided by (used for) investing activities |
|
|
321.5 |
|
|
|
(6.1 |
) |
Cash
provided by financing activities |
|
|
— |
|
|
|
4.8 |
|
| |
CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS |
|
|
318.6 |
|
|
|
(3.4 |
) |
| |
Effect of Exchange Rate Changes on Cash |
|
|
3.4 |
|
|
|
2.3 |
|
| |
Increase in Cash and Cash Items |
|
|
98.3 |
|
|
|
5.4 |
|
Cash and Cash Items — Beginning of Year |
|
|
40.5 |
|
|
|
31.0 |
|
| |
Cash and Cash Items — End of Period |
|
$ |
138.8 |
|
|
$ |
36.4 |
|
| |
|
|
|
| (a) |
|
Pension plan contributions in 2008 and 2007 were $118.3 and $255.9, respectively. |
| |
| (b) |
|
Excludes capital lease additions of $.7 and $.8 in 2008 and 2007, respectively. |
The accompanying notes are an integral part of these statements.
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
(Millions of dollars)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
31 March |
|
31 March |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
Revenues from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
901.6 |
|
|
$ |
784.5 |
|
|
$ |
1,798.6 |
|
|
$ |
1,524.5 |
|
Tonnage Gases |
|
|
867.2 |
|
|
|
695.8 |
|
|
|
1,658.3 |
|
|
|
1,385.3 |
|
Electronics and Performance Materials |
|
|
562.1 |
|
|
|
528.8 |
|
|
|
1,076.4 |
|
|
|
1,015.7 |
|
Equipment and Energy |
|
|
104.7 |
|
|
|
131.8 |
|
|
|
205.0 |
|
|
|
327.4 |
|
Healthcare |
|
|
169.7 |
|
|
|
157.1 |
|
|
|
340.6 |
|
|
|
312.9 |
|
| |
Segment and Consolidated Totals |
|
$ |
2,605.3 |
|
|
$ |
2,298.0 |
|
|
$ |
5,078.9 |
|
|
$ |
4,565.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
166.9 |
|
|
$ |
141.2 |
|
|
$ |
342.3 |
|
|
$ |
280.4 |
|
Tonnage Gases |
|
|
111.1 |
|
|
|
92.2 |
|
|
|
222.2 |
|
|
|
187.6 |
|
Electronics and Performance Materials |
|
|
67.6 |
|
|
|
56.5 |
|
|
|
133.6 |
|
|
|
106.3 |
|
Equipment and Energy |
|
|
10.0 |
|
|
|
16.4 |
|
|
|
19.3 |
|
|
|
43.2 |
|
Healthcare |
|
|
9.4 |
|
|
|
7.0 |
|
|
|
23.0 |
|
|
|
16.4 |
|
| |
Segment Totals |
|
|
365.0 |
|
|
|
313.3 |
|
|
|
740.4 |
|
|
|
633.9 |
|
Other (a) |
|
|
(26.8 |
) |
|
|
(4.7 |
) |
|
|
(30.2 |
) |
|
|
(7.9 |
) |
| |
Consolidated Totals |
|
$ |
338.2 |
|
|
$ |
308.6 |
|
|
$ |
710.2 |
|
|
$ |
626.0 |
|
| |
(Millions of dollars)
| |
|
|
|
|
|
|
|
|
| |
|
31 March |
|
30 September |
| |
|
2008 |
|
2007 |
| |
Identifiable assets (b) |
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
4,387.4 |
|
|
$ |
3,984.4 |
|
Tonnage Gases |
|
|
3,448.7 |
|
|
|
3,328.4 |
|
Electronics and Performance Materials |
|
|
2,515.4 |
|
|
|
2,435.3 |
|
Equipment and Energy |
|
|
368.3 |
|
|
|
362.6 |
|
Healthcare |
|
|
968.5 |
|
|
|
918.9 |
|
| |
Segment Totals |
|
|
11,688.3 |
|
|
|
11,029.6 |
|
Other |
|
|
654.4 |
|
|
|
402.3 |
|
Discontinued operations |
|
|
42.8 |
|
|
|
381.6 |
|
| |
Consolidated Totals |
|
$ |
12,385.5 |
|
|
$ |
11,813.5 |
|
| |
|
|
|
| (a) |
|
Other includes pension settlement charges of $26.3 and $27.7 for the three and six months
ended 31 March 2008, respectively. |
| |
| (b) |
|
Identifiable assets are equal to total assets less investments in and advances to equity
affiliates. |
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
(Millions of dollars)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
31 March |
|
31 March |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
Revenues from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
1,294.2 |
|
|
$ |
1,230.6 |
|
|
$ |
2,507.0 |
|
|
$ |
2,454.1 |
|
Europe |
|
|
856.6 |
|
|
|
683.6 |
|
|
|
1,664.1 |
|
|
|
1,348.0 |
|
Asia |
|
|
403.5 |
|
|
|
345.1 |
|
|
|
807.4 |
|
|
|
686.7 |
|
Latin America |
|
|
51.0 |
|
|
|
38.7 |
|
|
|
100.4 |
|
|
|
77.0 |
|
| |
Total |
|
$ |
2,605.3 |
|
|
$ |
2,298.0 |
|
|
$ |
5,078.9 |
|
|
$ |
4,565.8 |
|
| |
Geographic information is based on country of origin. The Europe segment operates principally in
Belgium, France, Germany, the Netherlands, Poland, Spain, and the U.K. The Asia segment operates
principally in China, Japan, Korea, and Taiwan.
9
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except for share data)
1. MAJOR ACCOUNTING POLICIES
Refer to the Company’s 2007 annual report on Form 10-K for a description of major accounting
policies. There have been no material changes to these accounting policies during the first six
months of 2008 other than those detailed in Note 2.
2. NEW ACCOUNTING STANDARDS
Uncertainty in Income Taxes
The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109,” (FIN No. 48) on 1
October 2007. Upon adoption, the Company recognized a $25.5 increase to its liability for
uncertain tax positions. This increase was recorded as an adjustment to beginning retained
earnings for $13.7 and goodwill for $11.8.
At 1 October 2007, the Company had $94.3 of unrecognized tax benefits including $25.9 for the
payment of interest and penalties. The Company classifies interest and penalties related to
unrecognized tax benefits as a component of income tax expense. At 1 October 2007, $48.3 of the
liability for unrecognized tax benefits, if recognized, would impact the effective tax rate. The
Company does not anticipate any significant changes in the amount of unrecognized income tax
benefits over the next twelve months.
The Company remains subject to examination in the following major tax jurisdictions for the years
indicated below. The following schedule has been revised to reflect the tax years closed during
the current period.
| |
|
|
| Major Tax Jurisdiction |
|
Open Tax Fiscal Years |
| |
|
|
|
North America |
|
|
United States
|
|
2005 — 2007 |
Canada
|
|
2006 — 2007 |
|
|
|
Europe |
|
|
United Kingdom
|
|
2005 — 2007 |
Germany
|
|
2006 — 2007 |
Belgium
|
|
2005 — 2007 |
Netherlands
|
|
2005 — 2007 |
Poland
|
|
2002 — 2007 |
Spain
|
|
2003 — 2007 |
|
|
|
Asia |
|
|
Taiwan
|
|
2001 — 2007 |
Korea
|
|
2003 — 2007 |
Business Combinations and Noncontrolling Interests
In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141
(revised 2007), “Business Combinations,” and No. 160, “Noncontrolling Interests in Consolidated
Financial Statements.” 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,
10
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.
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.
3. GLOBAL COST REDUCTION PLAN
The following table summarizes changes to the carrying amount of the accrual for the global cost
reduction plan for the six months ended 31 March 2008:
| |
|
|
|
|
| |
|
Severance and |
| |
|
Other Benefits |
| |
Accrual Balance at 30 September 2007 |
|
$ |
8.4 |
|
Noncash Expenses |
|
|
— |
|
Cash Expenditures |
|
|
(6.5 |
) |
| |
Accrual Balance at 31 March 2008 |
|
$ |
1.9 |
|
| |
4. DISCONTINUED OPERATIONS
The High Purity Process Chemicals (HPPC) business and the Polymer Emulsions business have been
accounted for as discontinued operations. The results of operations and cash flows of these
businesses have been removed from the results of continuing operations for all periods presented.
The balance sheet items of discontinued operations have been reclassified and are segregated in the
consolidated balance sheets.
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 are being
sold to KMG Chemicals, Inc. In the first quarter of 2008, this business generated sales of $22.9
and income, net of tax, of $.2. Also, the Company recorded an additional loss of $.5 ($.3
after-tax) on the sale of the business. In 2007, the HPPC business generated sales of $22.1 and
$45.0 and income, net of tax, of $.7 and $1.4 in the three and six
months ended 31 March 2007, respectively.
Assets and liabilities of the discontinued HPPC business are summarized below:
| |
|
|
|
|
|
|
|
|
| |
|
31 March 2008 |
|
30 September 2007 |
| |
Trade receivables, less allowances |
|
$ |
2.5 |
|
|
$ |
13.1 |
|
Inventories |
|
|
2.1 |
|
|
|
15.4 |
|
| |
Total Current Assets |
|
$ |
4.6 |
|
|
$ |
28.5 |
|
| |
11
| |
|
|
|
|
|
|
|
|
| |
|
31 March 2008 |
|
30 September 2007 |
| |
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 |
|
| |
Polymer Emulsions Business
On 11 December 2007, the Company announced it had signed a definitive agreement to sell its
interest in its vinyl acetate ethylene (VAE) polymers joint ventures to Wacker Chemie AG, its
long-time joint venture partner. The sale closed on 31 January 2008. As part of the 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 on the sale of the Polymer Emulsions business of $89.5 ($57.7 after-tax).
The sale 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.
Upon completion of the sale, the Company assumed full ownership of the Elkton and Piedmont plants
and related North American atmospheric emulsions and global pressure sensitive adhesives business.
The Company is currently actively marketing these businesses.
The operating results of the Polymer Emulsions business including the Elkton and Piedmont
facilities have been classified as discontinued operations and are summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
31 March |
|
31 March |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
Sales |
|
$ |
78.8 |
|
|
$ |
153.2 |
|
|
$ |
230.0 |
|
|
$ |
295.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
$ |
4.7 |
|
|
$ |
16.2 |
|
|
$ |
15.6 |
|
|
$ |
30.0 |
|
Income tax provision |
|
|
1.4 |
|
|
|
6.1 |
|
|
|
5.5 |
|
|
|
11.3 |
|
| |
Income from operations of
discontinued operations |
|
$ |
3.3 |
|
|
$ |
10.1 |
|
|
$ |
10.1 |
|
|
$ |
18.7 |
|
Gain on sale of business, net of tax |
|
|
57.7 |
|
|
|
— |
|
|
|
57.7 |
|
|
|
— |
|
| |
Income from discontinued
operations, net of tax |
|
$ |
61.0 |
|
|
$ |
10.1 |
|
|
$ |
67.8 |
|
|
$ |
18.7 |
|
| |
Details of balance sheet items for the Polymer Emulsions business including the Elkton and Piedmont
facilities are summarized below:
| |
|
|
|
|
|
|
|
|
| |
|
31 March 2008 |
|
30 September 2007 |
| |
Cash and cash items |
|
$ |
— |
|
|
$ |
1.8 |
|
Trade receivables, less allowances |
|
|
12.6 |
|
|
|
78.5 |
|
Inventories |
|
|
6.5 |
|
|
|
30.1 |
|
Prepaid expenses |
|
|
— |
|
|
|
1.3 |
|
Other receivables |
|
|
— |
|
|
|
4.7 |
|
| |
Total Current Assets |
|
$ |
19.1 |
|
|
$ |
116.4 |
|
| |
12
| |
|
|
|
|
|
|
|
|
| |
|
31 March 2008 |
|
30 September 2007 |
| |
Investment
in net assets of and advances to equity affiliates |
|
$ |
— |
|
|
$ |
67.9 |
|
Plant and equipment, net |
|
|
19.1 |
|
|
|
166.3 |
|
Goodwill |
|
|
— |
|
|
|
29.7 |
|
Other noncurrent assets |
|
|
— |
|
|
|
.9 |
|
| |
Total Noncurrent Assets |
|
$ |
19.1 |
|
|
$ |
264.8 |
|
| |
|
|
|
|
|
|
|
|
|
Payables and accrued liabilities |
|
$ |
10.4 |
|
|
$ |
53.4 |
|
Accrued income taxes |
|
|
— |
|
|
|
2.2 |
|
Short-term borrowings |
|
|
— |
|
|
|
6.3 |
|
| |
Total Current Liabilities |
|
$ |
10.4 |
|
|
$ |
61.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Deferred income taxes |
|
$ |
— |
|
|
$ |
6.9 |
|
Other noncurrent liabilities |
|
|
— |
|
|
|
2.9 |
|
| |
Total Noncurrent Liabilities |
|
$ |
— |
|
|
$ |
9.8 |
|
| |
|
|
|
|
|
|
|
|
|
Minority Interest |
|
$ |
— |
|
|
$ |
84.4 |
|
| |
|
|
|
|
|
|
|
|
|
Cumulative Translation Adjustments (accumulated other comprehensive income) |
|
$ |
— |
|
|
$ |
45.9 |
|
| |
5. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31
March 2008 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
| |
|
|
|
|
|
Adoption of |
|
Acquisitions and |
|
Translation and |
|
31 March |
| |
|
30 September 2007 |
|
FIN No. 48 |
|
Adjustment |
|
Other |
2008 |
| |
Merchant Gases |
|
$ |
475.7 |
|
|
$ |
9.4 |
|
|
$ |
(3.3 |
) |
|
$ |
63.3 |
|
|
$ |
545.1 |
|
Tonnage Gases |
|
|
22.4 |
|
|
|
— |
|
|
|
— |
|
|
|
(3.3 |
) |
|
|
19.1 |
|
Electronics
and Performance Materials |
|
|
308.1 |
|
|
|
— |
|
|
|
.1 |
|
|
|
2.2 |
|
|
|
310.4 |
|
Healthcare |
|
|
393.7 |
|
|
|
2.4 |
|
|
|
1.6 |
|
|
|
8.2 |
|
|
|
405.9 |
|
| |
|
|
$ |
1,199.9 |
|
|
$ |
11.8 |
|
|
$ |
(1.6 |
) |
|
$ |
70.4 |
|
|
$ |
1,280.5 |
|
| |
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.
The U.S. Healthcare business has operated below plan through the first six months of this fiscal
year. While the Company continues to execute its plan to increase volume in key product lines such
as respiratory therapy, the Company is evaluating its strategic alternatives. The Company expects
to complete this process during the third quarter of this fiscal year. The Company continues to
monitor the recoverability of goodwill of this reporting unit within the Healthcare segment. The
asset value of the U.S. Healthcare business at 31 March 2008 was $456.1, of which $294.3 was
goodwill.
13
6. SHARE-BASED COMPENSATION
The Company has various share-based compensation programs, which include stock options, deferred
stock units, and restricted shares. During the six months ended 31 March 2008, the Company granted
1.2 million stock options at a weighted-average exercise price of $98.85 and an estimated fair
value of $31.84 per option. The fair value of these options was estimated using a lattice-based
option valuation model that used the following assumptions: expected volatility of 30.4%; expected
dividend yield of 2.1%; expected life in years of 6.7-8.0; and a risk-free interest rate of
4.4%-4.7%. In addition, the Company granted 242,238 deferred stock units at a weighted-average
grant-date fair value of $100.17 and 25,893 restricted shares at a weighted-average grant-date fair
value of $96.44. Refer to Note 15 in the Company’s 2007 annual report on Form 10-K for information
on the valuation and accounting for these programs.
Share-based compensation cost charged against income in the three and six months ended 31 March
2008 was $16.0 ($9.9 after-tax) and $33.0 ($20.3 after-tax), respectively. Of the share-based
compensation cost recognized, 75% was a component of selling and administrative expense, 16% a
component of cost of sales, and 9% a component of research and development. Share-based
compensation cost charged against income in the three and six months ended 31 March 2007 was $15.0
($9.2 after-tax) and $31.4 ($19.3 after-tax), respectively. The amount of share-based
compensation cost capitalized in 2008 and 2007 was not material.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
Six Months Ended |
| |
|
31 March |
|
31 March |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
NUMERATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used in basic and diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
253.1 |
|
|
$ |
216.8 |
|
|
$ |
510.1 |
|
|
$ |
437.8 |
|
Income from discontinued operations |
|
|
61.2 |
|
|
|
10.8 |
|
|
|
67.9 |
|
|
|
20.1 |
|
| |
Net Income |
|
$ |
314.3 |
|
|
$ |
227.6 |
|
|
$ |
578.0 |
|
|
$ |
457.9 |
|
| |
DENOMINATOR (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares used in basic EPS |
|
|
212.3 |
|
|
|
216.5 |
|
|
|
213.6 |
|
|
|
216.6 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
5.8 |
|
|
|
5.7 |
|
|
|
6.1 |
|
|
|
5.7 |
|
Other award plans |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
1.1 |
|
|
|
1.1 |
|
| |
|
|
|
6.9 |
|
|
|
6.9 |
|
|
|
7.2 |
|
|
|
6.8 |
|
| |
Weighted average number of common
shares and dilutive potential common
shares used in diluted EPS |
|
|
219.2 |
|
|
|
223.4 |
|
|
|
220.8 |
|
|
|
223.4 |
|
| |
BASIC EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.19 |
|
|
$ |
1.00 |
|
|
$ |
2.39 |
|
|
$ |
2.02 |
|
Income from discontinued operations |
|
|
.29 |
|
|
|
.05 |
|
|
|
.32 |
|
|
|
.09 |
|
| |
Net Income |
|
$ |
1.48 |
|
|
$ |
1.05 |
|
|
$ |
2.71 |
|
|
$ |
2.11 |
|
| |
DILUTED EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.15 |
|
|
$ |
.97 |
|
|
$ |
2.31 |
|
|
$ |
1.96 |
|
Income from discontinued operations |
|
|
.28 |
|
|
|
.05 |
|
|
|
.31 |
|
|
|
.09 |
|
| |
Net Income |
|
$ |
1.43 |
|
|
$ |
1.02 |
|
|
$ |
2.62 |
|
|
$ |
2.05 |
|
| |
Options on 1.2 million shares were antidilutive and therefore excluded from the computation of
diluted earnings per share for the three and six months ended 31 March 2008. Options on 1.5
million shares were antidilutive and excluded from the computation for the three and six months
ended 31 March 2007.
14
8. RETIREMENT BENEFITS
A number
of corporate officers and others who were eligible for supplemental pension plan benefits
retired in fiscal year 2007. 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 cash payments made, the Company recognized $10.3 for settlement losses in the
fourth quarter of 2007 and an additional $1.4 and $26.3 in the first and second quarter of 2008,
respectively. The Company expects to recognize an additional $1 to $2 for settlement losses in the
remainder of 2008.
The components of net pension cost for the defined benefit pension plans and other postretirement
benefit cost were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended 31 March |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
Pension Benefits |
|
Other Benefits |
| |
Service cost |
|
$ |
19.6 |
|
|
$ |
20.3 |
|
|
$ |
1.5 |
|
|
$ |
1.4 |
|
Interest cost |
|
|
45.5 |
|
|
|
41.9 |
|
|
|
1.4 |
|
|
|
1.4 |
|
Expected return on plan assets |
|
|
(52.0 |
) |
|
|
(46.9 |
) |
|
|
— |
|
|
|
— |
|
Prior service cost (credit) amortization |
|
|
.8 |
|
|
|
1.0 |
|
|
|
(.3 |
) |
|
|
(.4 |
) |
Actuarial loss amortization |
|
|
9.8 |
|
|
|
14.3 |
|
|
|
.4 |
|
|
|
.5 |
|
Settlement and curtailment charges |
|
|
26.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Special termination benefits |
|
|
.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
.1 |
|
|
|
.5 |
|
|
|
— |
|
|
|
— |
|
| |
Net periodic benefit cost |
|
$ |
50.6 |
|
|
$ |
31.1 |
|
|
$ |
3.0 |
|
|
$ |
2.9 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended 31 March |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
Pension Benefits |
|
Other Benefits |
| |
Service cost |
|
$ |
39.2 |
|
|
$ |
40.3 |
|
|
$ |
3.0 |
|
|
$ |
2.9 |
|
Interest cost |
|
|
91.2 |
|
|
|
83.4 |
|
|
|
2.9 |
|
|
|
2.7 |
|
Expected return on plan assets |
|
|
(104.1 |
) |
|
|
(93.4 |
) |
|
|
— |
|
|
|
— |
|
Prior service cost (credit) amortization |
|
|
1.6 |
|
|
|
2.1 |
|
|
|
(.7 |
) |
|
|
(.9 |
) |
Actuarial loss amortization |
|
|
19.7 |
|
|
|
28.6 |
|
|
|
.8 |
|
|
|
1.1 |
|
Settlement and curtailment charges |
|
|
27.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Special termination benefits |
|
|
.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
1.0 |
|
|
|
.9 |
|
|
|
— |
|
|
|
— |
|
| |
Net periodic benefit cost |
|
$ |
76.8 |
|
|
$ |
61.9 |
|
|
$ |
6.0 |
|
|
$ |
5.8 |
|
| |
During the six months ended 31 March 2008, pension contributions of $118.3 were made. The Company
expects to contribute approximately $19 to the pension plans during the remainder of 2008. For the
six months ended 31 March 2007, pension contributions of $255.9 were made. During 2007, total
contributions were $290.0.
15
9. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various legal proceedings, including competition, environmental, health,
safety, product liability, and insurance matters. In particular, during the second quarter of 2007,
a unit of the Brazilian Ministry of Justice issued a report on its investigation of the Company’s
Brazilian subsidiary, Air Products Brazil, and several other Brazilian industrial gas companies
(subsequently, this report was recalled by such unit due to certain technical issues related to its
release and has not been rereleased). The report recommended that the Brazilian Administrative
Council for Economic Defense impose sanctions on Air Products Brazil 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
Accruals for environmental loss contingencies are recorded when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheet
at 31 March 2008 and 30 September 2007 included an accrual of $52.1 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 $52 to a reasonably possible upper exposure of $65 as of 31 March 2008.
Refer to Note 19 to the consolidated financial statements in the Company’s 2007 annual report on
Form 10-K for background information on the Company’s environmental accrual related to the Pace,
Florida, facility. At 31 March 2008, the accrual balance associated with this facility totaled
$40.1. The Company has implemented many of the remedial corrective measures at the Pace, Florida,
facility required under 1995 Consent Orders issued by the Florida Department of Environmental
Protection and the United States Environmental Protection Agency. Contaminated soils have been
bioremediated and the treated soils have been secured in a lined onsite disposal cell. Several
groundwater recovery systems have been installed to contain and remove contamination from
groundwater. The Company has recently conducted an extensive assessment of the site to determine
how well existing measures are working, what additional corrective measures may be needed, and
whether newer remediation technologies that were not available in the 1990’s might be suitable to
more quickly and effectively remove groundwater contaminants. Based on our assessment results, we
are now conducting a focused feasibility study to identify potential new approaches to more
effectively remove contaminants.
10. SUPPLEMENTAL INFORMATION
Share Repurchase Program
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 authorization which was announced in March 2006. As of 30 September 2007, the Company
had purchased 15.0 million of its outstanding shares at a cost of $1,063.4. During the first six
months of fiscal year 2008, the Company purchased 6.0 million of its outstanding shares at a cost
of $554.3. 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.
Bond Issuances
On 6 February 2008, the Company issued a $300.0 fixed rate 4.15% bond which matures on 1 February
2013. During the first quarter of fiscal 2008, the Company issued Industrial Revenue bonds of
$145.0, the proceeds of which must be held in escrow until related project spending occurs. As of
31 March 2008, $132.3 was classified as a noncurrent asset.
16
11. BUSINESS SEGMENTS
Previously, the Company reported results for the 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 has been accounted for as discontinued operations
as discussed in Note 2. Also beginning with the first quarter of 2008, the PUI business is
reported as part of the Tonnage Gases segment as the PUI business model is similar to Tonnage Gases
in that it has long-term contracts and raw material cost pass-through provisions. Prior period
information has been restated to reflect this business reorganization.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Millions of dollars, except for share data)
The disclosures in this quarterly report are complementary to those made in the Company’s 2007
annual report on Form 10-K. An analysis of results for the second quarter and first six months of
2008, including an update to the Company’s 2008 Outlook, is provided in the Management’s Discussion
and Analysis to follow.
All comparisons in the discussion are to the corresponding prior year unless otherwise stated. All
amounts presented are in accordance with U.S. generally accepted accounting principles. All
amounts are presented in millions of dollars, except for share data, unless otherwise indicated.
SECOND QUARTER 2008 VS. SECOND QUARTER 2007
SECOND QUARTER 2008 IN SUMMARY
| |
• |
|
Sales of $2,605 were up 13% from the prior year, primarily due to volume growth in the
Tonnage Gases and Electronics and Performance Materials segments, improved pricing in
Merchant Gases, and the favorable impact of currency effects. |
| |
| |
• |
|
Operating income of $338 increased 10% from improved volumes and favorable currency
effects, partially offset by a pension settlement charge of $26 for the 2007 retirements of
certain corporate officers. |
| |
| |
• |
|
Net income of $314 increased 38% and diluted earnings per share of $1.43 increased 40%.
A summary table of changes in diluted earnings per share is presented below. The Company
sold its interest in its Polymer Emulsions joint ventures to its partner Wacker Chemie AG
(Wacker) for cash proceeds of $258 plus Wacker’s interest in two production facilities
resulting in an after-tax gain of $58. |
| |
| |
• |
|
The Company purchased 4.0 million of its outstanding shares at a cost of $364.5 under
its share repurchase program. |
| |
| |
• |
|
For a discussion of the challenges, risks, and opportunities on which management is
focused, refer to the update to the Company’s 2008 Outlook provided on page 31. |
17
Changes in Diluted Earnings per Share
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
| |
|
31 March |
|
Increase |
| |
|
2008 |
|
2007 |
|
(Decrease) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
1.43 |
|
|
$ |
1.02 |
|
|
$ |
.41 |
|
| |
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying business |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.08 |
|
Price/raw materials/mix |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Costs |
|
|
|
|
|
|
|
|
|
|
— |
|
Acquisitions/divestitures |
|
|
|
|
|
|
|
|
|
|
.02 |
|
Currency |
|
|
|
|
|
|
|
|
|
|
.07 |
|
Pension settlement |
|
|
|
|
|
|
|
|
|
|
(.08 |
) |
| |
Operating Income |
|
|
|
|
|
|
|
|
|
|
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates’ income |
|
|
|
|
|
|
|
|
|
|
.05 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
.23 |
|
Income tax rate |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
.02 |
|
| |
Other |
|
|
|
|
|
|
|
|
|
|
.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
$ |
.41 |
|
| |
RESULTS OF OPERATIONS
Discussion of Consolidated Results
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
2,605.3 |
|
|
$ |
2,298.0 |
|
|
|
13 |
% |
Operating income |
|
|
338.2 |
|
|
|
308.6 |
|
|
|
10 |
% |
Equity affiliates’ income |
|
|
42.4 |
|
|
|
27.5 |
|
|
|
54 |
% |
| |
Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
4 |
% |
Price/mix |
|
|
1 |
% |
Acquisitions/divestitures |
|
|
2 |
% |
Currency |
|
|
4 |
% |
Natural gas cost pass-through |
|
|
2 |
% |
| |
Total Consolidated Change |
|
|
13 |
% |
| |
Sales of $2,605.3 increased 13%, or $307.3. Underlying base business growth accounted for 5% of
the increase. Sales increased 4% from volumes as higher volumes in Tonnage Gases, Electronics
and Performance Materials, and Healthcare were partially offset by lower activity in Equipment
and Energy, as discussed in the Segment Analysis which follows. Improved pricing, primarily in
the Merchant Gases segment, increased sales by 1%. The acquisition of the Polish industrial gas
business of BOC Gazy Sp z o.o. (BOC Gazy) increased sales by 2%. Sales improved 4% from
favorable currency effects, driven primarily by the weakening of the U.S. dollar against key
18
European currencies. Higher natural gas contractual cost pass-through to customers increased
sales by 2%.
Operating Income
| |
|
|
|
|
| |
|
Change from |
| |
|
Prior Year |
| |
Prior Year Operating Income |
|
$ |
309 |
|
Underlying business |
|
|
|
|
Volume |
|
|
24 |
|
Price/raw materials/mix |
|
|
4 |
|
Costs |
|
|
1 |
|
Acquisitions/divestitures |
|
|
6 |
|
Currency |
|
|
20 |
|
Pension settlement |
|
|
(26 |
) |
| |
Operating Income |
|
$ |
338 |
|
| |
Operating income of $338.2 increased 10%, or $29.6.
| • |
|
Higher volumes in Tonnage Gases and Electronics and Performance Materials, partially offset
by lower activity in Equipment and Energy, increased operating income by $24 as discussed in
the Segment Analysis which follows. |
| |
| • |
|
Improved pricing in Merchant Gases, partially offset by lower pricing in Electronics and
Performance Materials, increased operating income by $4. |
| |
| • |
|
Operating income increased $1 from reduced costs, as benefits of productivity and the
global cost reduction plan more than offset inflation and higher costs to support growth. |
| |
| • |
|
Favorable currency effects, primarily from the weakening of the U.S. dollar against key
European currencies, increased operating income by $20. |
| |
| • |
|
A pension settlement charge for the 2007 retirements of certain corporate officers
decreased operating income by $26. |
Equity Affiliates’ Income
Income from equity affiliates of $42.4 increased $14.9, or 54%, primarily due to higher income from
equity affiliates in all regions of the Merchant Gases segment. Results in 2008 included a gain of
$6.5 resulting from the expected reimbursement of an antitrust fine levied against an Italian
affiliate in 2006. A higher court overruled the Italian antitrust authority who levied the fine.
Selling and Administrative Expense (S&A)
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Acquisitions/divestitures |
|
|
3 |
% |
Currency |
|
|
2 |
% |
Other costs |
|
|
5 |
% |
| |
Total S&A Change |
|
|
10 |
% |
| |
S&A expense of $311.8 increased 10%, or $28.2. S&A as a percent of sales declined to 12.0% from
12.3% in 2007. S&A increased by 3% due to the acquisition of BOC Gazy in the third quarter of 2007.
Currency effects, driven by the weakening of the U.S. dollar against key European and Asian
currencies, increased S&A by 2%. Underlying costs increased S&A by 5%, as productivity gains were
more than offset by inflation and higher costs to support growth.
19
Research and Development (R&D)
R&D increased 6%, or $2.0. R&D decreased as a percent of sales to 1.3% from 1.4% in 2007.
Pension Settlement
A number
of corporate officers and others who were eligible for supplemental pension plan benefits
retired in fiscal year 2007. 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 cash payments made, the Company recognized $10.3 for settlement losses in the
fourth quarter of 2007 and an additional $1.4 and $26.3 in the first and second quarter of 2008,
respectively. The Company expects to recognize an additional $1 to $2 for settlement losses in the
remainder of 2008.
Other (Income) Expense, Net
Other income of $9.1 increased $6.7. Items recorded to other income arise from transactions and
events not directly related to the principal income earning activities of the Company. No
individual items were material in comparison to the prior year.
Interest Expense
| |
|
|
|
|
|
|
|
|
| |
|
Three Months |
| |
|
Ended 31 March |
| |
|
2008 |
|
2007 |
| |
Interest incurred |
|
$ |
45.7 |
|
|
$ |
40.2 |
|
Less: interest capitalized |
|
|
6.6 |
|
|
|
2.9 |
|
| |
Interest Expense |
|
$ |
39.1 |
|
|
$ |
37.3 |
|
| |
Interest incurred increased $5.5. 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 $3.7 primarily due to increased project levels in the Tonnage Gases segment.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations
before taxes less minority interest.
The effective tax rate was 24.9% and 26.4% in the second quarter of 2008 and 2007, respectively.
The remaining difference in the rates was due to a tax benefit associated with foreign
operations and other higher credits and adjustments.
Discontinued Operations
The High Purity Process Chemicals (HPPC) business and the Polymer Emulsions business have been
accounted for as discontinued operations. The results of operations and cash flows of these
businesses have been removed from the results of continuing operations for all periods presented.
Refer to Note 4 of the consolidated financial statements for additional details.
On 31 December 2007, the Company completed the sale of its HPPC business to KMG Chemicals, Inc.,
resulting in an additional loss of $.5 ($.3 after-tax) in the first quarter of 2008. The HPPC
business generated sales of $22.1 and income, net of tax, of $.7 in the second quarter of 2007.
On 31 January 2008, the Company completed the sale of its interest in its vinyl acetate ethylene
polymers joint ventures to Wacker Chemie AG (Wacker), its long-time joint venture partner. As part
of the agreement, the Company received cash proceeds of $258.2 and Wacker’s interest in the Elkton,
Md., and Piedmont, S.C., production facilities and their related businesses. The Company
recognized a gain on the sale of the Polymer
20
Emulsions business of $89.5 ($57.7 after-tax). The Polymer Emulsions business generated sales of
$78.8 and $153.2 and income, net of tax, of $3.3 and $10.1 in the second quarter of 2008 and 2007,
respectively.
Net Income
Net income was $314.3 compared to $227.6 in 2007. Diluted earnings per share was $1.43 compared to
$1.02 in 2007. A summary table of changes in earnings per share is presented on page 18.
Segment Analysis
Merchant Gases
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
901.6 |
|
|
$ |
784.5 |
|
|
|
15 |
% |
Operating income |
|
|
166.9 |
|
|
|
141.2 |
|
|
|
18 |
% |
Equity affiliates’ income |
|
|
36.7 |
|
|
|
23.3 |
|
|
|
58 |
% |
| |
Merchant Gases Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
Underlying business |
|
|
|
|
Volume |
|
|
(1 |
%) |
Price/mix |
|
|
4 |
% |
Acquisitions/divestitures |
|
|
5 |
% |
Currency |
|
|
7 |
% |
| |
Total Merchant Gases Change |
|
|
15 |
% |
| |
Sales of $901.6 increased 15%, or $117.1. Underlying base business growth improved sales
by 3%. Improved volumes from the sale of gas increased sales by 3%. Lower equipment
activity decreased sales by 4%. Pricing increased sales by 4% across all regions, primarily
from pricing actions to recover higher power, distribution, and other manufacturing costs.
Acquisitions/divestitures improved sales by 5% due to the acquisition of BOC Gazy in the
third quarter of 2007. Sales increased 7% from favorable currency effects, driven
primarily by the weakening of the U.S. dollar against key European and Asian currencies.
Merchant Gases Operating Income
Operating income of $166.9 increased 18%, or $25.7. Favorable operating income variances resulted
from improved pricing and customer mix of $21 and currency of $10. Operating income declined $9
from higher costs, primarily increased distribution costs.
Merchant Gases Equity Affiliates’ Income
Merchant Gases equity affiliates’ income of $36.7 increased $13.4, from higher income from equity
affiliates in all regions. Results in 2008 included a gain of $6.5 resulting from the expected
reimbursement of an antitrust fine levied against an Italian affiliate in 2006. A higher court
overruled the Italian antitrust authority who levied the fine.
Tonnage Gases
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
867.2 |
|
|
$ |
695.8 |
|
|
|
25 |
% |
Operating income |
|
|
111.1 |
|
|
|
92.2 |
|
|
|
20 |
% |
| |
21
Tonnage Gases Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
Underlying business |
|
|
|
|
Volume |
|
|
12 |
% |
Acquisitions/divestitures |
|
|
2 |
% |
Currency |
|
|
3 |
% |
Natural gas cost pass-through |
|
|
8 |
% |
| |
Total Tonnage Gases Change |
|
|
25 |
% |
| |
Sales of $867.2 increased 25%, or $171.4. Underlying base business volume growth increased
sales by 12%, primarily due to improved plant loading and new plants brought on-stream in
Europe and Asia.
The acquisition of BOC Gazy in the third quarter of 2007 increased sales by 2%. Sales
increased 3% from favorable currency effects, driven primarily by the weakening of the U.S.
dollar against the Euro. Higher natural gas contractual costs pass-through to customers
increased sales by 8%.
Tonnage Gases Operating Income
Operating income of $111.1 increased 20%, or $18.9. Operating income increased by $14 from higher
volumes and $3 from favorable currency effects.
Electronics and Performance Materials
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
562.1 |
|
|
$ |
528.8 |
|
|
|
6 |
% |
Operating income |
|
|
67.6 |
|
|
|
56.5 |
|
|
|
20 |
% |
| |
Electronics and Performance Materials Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
Underlying business |
|
|
|
|
Volume |
|
|
5 |
% |
Price/mix |
|
|
(1 |
%) |
Currency |
|
|
2 |
% |
| |
Total Electronics and Performance |
|
|
|
|
Materials Change |
|
|
6 |
% |
| |
Sales of $562.1 increased 6%, or $33.3. Underlying base business growth increased sales by
4%. In Electronics, higher volumes in specialty materials and tonnage gases were partially
offset by lower equipment sales and product rationalization efforts. Higher volumes in
Europe and the Middle East increased sales in Performance Materials. Pricing decreased
sales by 1%, as electronic specialty materials continued to experience pricing pressure.
Favorable currency effects, driven primarily by 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 $67.6 increased 20%, or $11.1. Operating income increased $19 from higher
volumes, and $6 from currency. Lower pricing, net of variable costs, decreased operating income by
$15.
22
Equipment and Energy
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
104.7 |
|
|
$ |
131.8 |
|
|
|
(21 |
%) |
Operating income |
|
|
10.0 |
|
|
|
16.4 |
|
|
|
(39 |
%) |
| |
Equipment and Energy Sales and Operating Income
Sales of $104.7 decreased by $27.1, primarily from lower liquefied natural gas (LNG) activity as
expected. Operating income of $10.0 decreased by $6.4, primarily from lower LNG heat exchanger
activity, partially offset by improved large air separation unit project performance.
The sales backlog for the Equipment business at 31 March 2008 was $203, compared to $258 at 30
September 2007. The decrease is primarily due to a decline in the large air separation unit
backlog.
Healthcare
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
169.7 |
|
|
$ |
157.1 |
|
|
|
8 |
% |
Operating income |
|
|
9.4 |
|
|
|
7.0 |
|
|
|
34 |
% |
| |
Healthcare Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
2 |
% |
Price/mix |
|
|
(1 |
%) |
Currency |
|
|
7 |
% |
| |
Total Healthcare Change |
|
|
8 |
% |
| |
Sales of $169.7 increased 8%, or $12.6. Sales increased 2% due to higher volumes on
continued growth in Spain and the U.K., partially offset by lower volumes in the U.S.
Service mix decreased sales by 1% as prior year results included higher emergency billings
during the stabilization period of the U.K. respiratory contract. Favorable currency
effects, primarily the weakening of the U.S. dollar against the Euro and Pound Sterling,
increased sales by 7%.
Healthcare Operating Income
Operating income of $9.4 increased 34%, or $2.4 primarily from higher volumes in Europe and
favorable currency effects.
Other
| |
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
| |
|
Ended 31 March |
|
| |
|
2008 |
|
|
2007 |
|
| |
Operating (loss) |
|
|
($26.8 |
) |
|
|
($4.7 |
) |
| |
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 the Polymer Emulsions business. Also included are LIFO inventory
adjustments, as the business segments use FIFO and the LIFO pool is kept at corporate.
The operating loss of $26.8 increased by $22.1. Results in 2008 included the pension settlement
charge of $26.3. No other individual items were material in comparison to the prior year.
23
FIRST SIX MONTHS 2008 VS. FIRST SIX MONTHS 2007
FIRST SIX MONTHS 2008 IN SUMMARY
| |
• |
|
Sales of $5,079 were up 11% from the prior year, due to volume growth in Merchant Gases,
Tonnage Gases, and Electronics and Performance Materials, improved pricing in Merchant
Gases, and favorable currency effects. |
| |
| |
• |
|
Operating income of $710 increased 13% from volume growth, improved pricing, and
favorable currency effects, partially offset by a pension settlement charge of $28 for the
2007 retirements of certain corporate officers. |
| |
| |
• |
|
Net income of $578 increased 26% and diluted earnings per share of $2.62 increased 28%.
A summary table of changes in earnings per share is presented below. The Company sold its
interest in its Polymer Emulsions joint ventures to its partner Wacker Chemie AG (Wacker)
for cash proceeds of $258 plus Wacker’s interest in two production facilities resulting in
an after-tax gain of $58. The Company completed the sale of its High Purity Process
Chemicals (HPPC) business to KMG Chemicals, Inc. for $69. |
| |
| |
• |
|
The Company purchased 6.0 million of its outstanding shares at a cost of $554.3 under
its share repurchase program. |
| |
| |
• |
|
For a discussion of the challenges, risks, and opportunities on which management is
focused, refer to the update to the Company’s 2008 Outlook provided on page 31. |
24
Changes in Diluted Earnings per Share
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
|
| |
|
31 March |
|
Increase |
| |
|
2008 |
|
2007 |
|
(Decrease) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
2.62 |
|
|
$ |
2.05 |
|
|
$ |
.57 |
|
| |
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying business |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.11 |
|
Price/raw materials/mix |
|
|
|
|
|
|
|
|
|
|
.06 |
|
Costs |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Acquisitions/divestitures |
|
|
|
|
|
|
|
|
|
|
.04 |
|
Currency |
|
|
|
|
|
|
|
|
|
|
.14 |
|
Pension settlement |
|
|
|
|
|
|
|
|
|
|
(.08 |
) |
| |
Operating Income |
|
|
|
|
|
|
|
|
|
|
.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates’ income |
|
|
|
|
|
|
|
|
|
|
.04 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
.22 |
|
Income tax rate |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
.03 |
|
| |
Other |
|
|
|
|
|
|
|
|
|
|
.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
$ |
.57 |
|
| |
RESULTS OF OPERATIONS
Consolidated Results
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
5,078.9 |
|
|
$ |
4,565.8 |
|
|
|
11 |
% |
Operating income |
|
|
710.2 |
|
|
|
626.0 |
|
|
|
13 |
% |
Equity affiliates’ income |
|
|
67.7 |
|
|
|
54.8 |
|
|
|
24 |
% |
| |
Discussion of Consolidated Results
Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
2 |
% |
Price/mix |
|
|
1 |
% |
Acquisitions/divestitures |
|
|
2 |
% |
Currency |
|
|
4 |
% |
Natural gas cost pass-through |
|
|
2 |
% |
| |
Total Consolidated Change |
|
|
11 |
% |
| |
25
Sales of $5,078.9 increased 11%, or $513.1. Underlying base business growth accounted for 3% of
the increase. Sales increased 2% from higher volumes across all segments, partially offset by
lower activity in Equipment and Energy, as discussed in the Segment Analysis which follows.
Pricing increased sales by 1%, primarily due to improved pricing in the Merchant Gases segment,
partially offset by lower pricing in Electronics and Performance Materials. Sales improved 4%
from favorable currency effects, primarily the weakening of the U.S. dollar against key European
currencies. Higher natural gas contractual cost pass-through to customers increased sales by 2%.
Operating Income
| |
|
|
|
|
| |
|
Change from |
| |
|
Prior Year |
| |
Prior Year Operating Income |
|
$ |
626 |
|
Underlying business |
|
|
|
|
Volume |
|
|
34 |
|
Price/raw materials/mix |
|
|
18 |
|
Costs |
|
|
4 |
|
Acquisitions/divestitures |
|
|
14 |
|
Currency |
|
|
42 |
|
Pension settlement |
|
|
(28 |
) |
| |
Operating Income |
|
$ |
710 |
|
| |
Operating income of $710.2 increased 13%, or $84.2.
| |
• |
|
Higher volumes across all segments, partially offset by lower Equipment and Energy
activity increased operating income by $34, as discussed in the Segment Analysis which
follows. |
| |
| |
• |
|
Higher pricing in Merchant Gases, partially offset by price declines in Electronics and
Performance Materials improved operating income by $18. |
| |
| |
• |
|
Operating income increased by $4 as improved productivity and the benefits of the cost
reduction plan more than offset inflation and higher costs to support growth. |
| |
| |
• |
|
Favorable currency effects, primarily the weakening of the U.S. dollar against key
European currencies, increased operating income by $42. |
| |
| |
• |
|
A pension settlement charge for the 2007 retirements of certain corporate officers
decreased operating income by $28. |
Equity Affiliates’ Income
Income from equity affiliates of $67.7 increased $12.9, or 24%, primarily due to higher income from
equity affiliates in all regions of the Merchant Gases segment. Results in 2008 included a gain of
$6.5 resulting from the expected reimbursement of an antitrust fine levied against an Italian
affiliate in 2006. A higher court overruled the Italian antitrust authority who levied the fine.
Selling and Administrative Expense (S&A)
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Acquisitions/divestitures |
|
|
2 |
% |
Currency |
|
|
3 |
% |
Other costs |
|
|
4 |
% |
| |
Total S&A Change |
|
|
9 |
% |
| |
S&A expense of $608.6 increased 9%, or $49.6. S&A as a percent of sales declined to 12.0% from
12.2% in 2007. S&A increased 2% from the acquisition of BOC Gazy. Currency effects, driven by the
weakening of the U.S. dollar
26
against key European and Asian currencies, increased S&A by 3%. Underlying costs increased S&A by
4%, as productivity gains were more than offset by inflation and higher costs to support growth.
Research and Development (R&D)
R&D increased $.2. R&D decreased as a percent of sales to 1.3% from 1.4% in 2007.
Pension Settlement
A number
of corporate officers and others who were eligible for supplemental pension plan benefits
retired in fiscal year 2007. 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 cash payments made, the Company recognized $10.3 for settlement losses in the
fourth quarter of 2007 and an additional $1.4 and $26.3 in the first and second quarter of 2008,
respectively. The Company expects to recognize an additional $1 to $2 for settlement losses in the
remainder of 2008.
Other (Income) Expense, Net
Other income of $24.5 increased $15.3. Items recorded to other income arise from transactions and
events not directly related to the principal income earning activities of the Company. Results in
2008 included the favorable impacts of asset management activities, including a gain of $5.6
related to the sale of a cost-based investment in Europe. Otherwise, no individual items were
material in comparison to the prior year.
Interest Expense
| |
|
|
|
|
|
|
|
|
| |
|
Six Months |
| |
|
Ended 31 March |
| |
|
2008 |
|
2007 |
| |
Interest incurred |
|
$ |
92.9 |
|
|
$ |
81.3 |
|
Less: interest capitalized |
|
|
12.8 |
|
|
|
4.9 |
|
| |
Interest Expense |
|
$ |
80.1 |
|
|
$ |
76.4 |
|
| |
Interest incurred increased $11.6. 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 $7.9 primarily due to increased project levels in the Tonnage Gases segment.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations
before taxes less minority interest.
The effective tax rate was 25.8% and 26.4% in 2008 and 2007,
respectively. The remaining difference in the
rates was due to a tax benefit associated with foreign operations and other higher credits and
adjustments.
Discontinued Operations
The High Purity Process Chemicals (HPPC) business and the Polymer Emulsions business have been
accounted for as discontinued operations. The results of operations and cash flows of these
businesses have been removed from the results of continuing operations for all periods presented.
Refer to Note 4 of the consolidated financial statements for additional details.
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. On 31 December 2007, the Company completed the sale of its HPPC business to KMG Chemicals,
Inc., resulting in an additional loss of $.5 ($.3 after-tax) in the first quarter of 2008. The HPPC
business generated sales of $22.9 and $45.0 and income, net of tax, of $.4 and $1.4 in 2008 and
2007, respectively.
27
On 31 January 2008, the Company completed the sale of its interest in its vinyl acetate ethylene
polymers joint ventures to Wacker Chemie AG (Wacker), its long-time joint venture partner. As part
of the agreement, the Company received cash proceeds of $258.2 and Wacker’s interest in the Elkton,
Md., and Piedmont, S.C., production facilities and their related businesses. The Company
recognized a gain on the sale of the Polymer Emulsions business of $89.5 ($57.7 after-tax). The
Polymer Emulsions business generated sales of $230.0 and $295.0 and income, net of tax, of $10.1
and $18.7 in 2008 and 2007, respectively.
Net Income
Net income was $578.0 compared to $457.9 in 2007. Diluted earnings per share was $2.62 compared to
$2.05 in 2007. A summary table of changes in earnings per share is presented on page 25.
Segment Analysis
Merchant Gases
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
1,798.6 |
|
|
$ |
1,524.5 |
|
|
|
18 |
% |
Operating income |
|
|
342.3 |
|
|
|
280.4 |
|
|
|
22 |
% |
Equity affiliates’ income |
|
|
61.9 |
|
|
|
44.4 |
|
|
|
39 |
% |
| |
Merchant Gases Sales
| |
|
|
|
|
| |
|
% Change from Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
2 |
% |
Price/mix |
|
|
4 |
% |
Acquisitions/divestitures |
|
|
5 |
% |
Currency |
|
|
7 |
% |
| |
Total Merchant Gases Change |
|
|
18 |
% |
| |
Sales of $1,798.6 increased 18%, or $274.1. Underlying base business growth improved sales
by 6%. Improved volumes from the sale of gas increased sales by 4%, primarily in North
America where demand for liquid nitrogen in the oil field services industry increased and
continued growth across Asia. Lower equipment activity decreased sales by 2%. Overall
volume growth was limited due to continued limited availability of argon and helium in most
regions. Pricing increased sales by 4%, primarily from pricing actions to recover higher
power, distribution, and other manufacturing costs in North America and Europe.
The acquisition of BOC Gazy in the third quarter of 2007 increased sales by 5%. Sales
increased 7% from favorable currency effects, primarily by the weakening of the U.S. dollar
against key European and Asian currencies.
Merchant Gases Operating Income
Operating income of $342.3 increased 22%, or $61.9. Favorable operating income variances resulted
from improved pricing and customer mix of $40, currency effects of $22, and higher volumes of $13.
Operating income declined $20 from inflation and higher costs to support growth.
Merchant Gases Equity Affiliates’ Income
Merchant Gases equity affiliates’ income of $61.9 increased $17.5, from higher income from equity
affiliates in all regions. Results in 2008 included a gain of $6.5 resulting from the expected
reimbursement of an antitrust fine levied against an Italian affiliate in 2006. A higher court
overruled the Italian antitrust authority who levied the fine.
28
Tonnage Gases
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
1,658.3 |
|
|
$ |
1,385.3 |
|
|
|
20 |
% |
Operating income |
|
|
222.2 |
|
|
|
187.6 |
|
|
|
18 |
% |
| |
Tonnage Gases Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
9 |
% |
Acquisitions/divestitures |
|
|
2 |
% |
Currency |
|
|
3 |
% |
Natural gas cost pass-through |
|
|
6 |
% |
| |
Total Tonnage Gases Change |
|
|
20 |
% |
| |
Sales of $1,658.3 increased 20%, or $273.0. Underlying base business volume growth
increased sales by 9% primarily due to improved plant loading.
The acquisition of BOC Gazy in the third quarter of 2007 improved sales by 2%. Sales
increased 3% from favorable currency effects, primarily the weakening of the U.S. dollar
against the Euro. Higher natural gas contractual cost pass-through to customers increased
sales by 6%.
Tonnage Gases Operating Income
Operating income of $222.2 increased 18%, or $34.6. Operating income increased by $15 from higher
volumes, $4 from improved variable costs and efficiencies, $5 from favorable currency effects, and
$5 from the sale of a cost-based investment in Europe.
Electronics and Performance Materials
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
1,076.4 |
|
|
$ |
1,015.7 |
|
|
|
6 |
% |
Operating income |
|
|
133.6 |
|
|
|
106.3 |
|
|
|
26 |
% |
| |
Electronics and Performance Materials Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
5 |
% |
Price/mix |
|
|
(1 |
%) |
Currency |
|
|
2 |
% |
| |
Total Electronics and Performance |
|
|
|
|
Materials Change |
|
|
6 |
% |
| |
Sales of $1,076.4 increased 6%, or $60.7. Underlying base business growth increased sales
by 4%. In Electronics, higher volumes in specialty materials and tonnage gases were
partially offset by lower equipment sales and product rationalization efforts. Higher
volumes in Europe and the Middle East increased sales in Performance Materials. Pricing
decreased sales by 1%, as electronic specialty materials continued to experience pricing
pressure. Favorable currency effects, primarily the weakening of the U.S. dollar against
key European and Asian currencies, improved sales by 2%.
29
Electronics and Performance Materials Operating Income
Operating income of $133.6 increased 26%, or $27.3. Operating income increased $34 from higher
volumes, $10 from favorable currency effects, and $6 from lower costs due to productivity and
product rationalization efforts. Operating income declined by $22 from lower pricing, net of
variable costs, primarily due to lower electronics specialty materials pricing.
Equipment and Energy
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
205.0 |
|
|
$ |
327.4 |
|
|
|
(37 |
%) |
Operating income |
|
|
19.3 |
|
|
|
43.2 |
|
|
|
(55 |
%) |
| |
Equipment and Energy Sales and Operating Income
Sales of $205.0 decreased by $122.4, primarily from lower liquefied natural gas (LNG) activity and
a one-time energy related equipment sale that occurred in the prior year. Operating income of $19.3
decreased by $23.9, primarily from lower LNG heat exchanger activity. Prior year results included a
benefit from the cancellation of an exchanger order due to a project termination by a customer.
The sales backlog for the Equipment business at 31 March 2008 was $203, compared to $258 at 30
September 2007. The decrease is primarily due to a decline in the large air separation unit
backlog.
Healthcare
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months |
|
|
| |
|
Ended 31 March |
|
|
| |
|
2008 |
|
2007 |
|
% Change |
| |
Sales |
|
$ |
340.6 |
|
|
$ |
312.9 |
|
|
|
9 |
% |
Operating income |
|
|
23.0 |
|
|
|
16.4 |
|
|
|
40 |
% |
| |
Healthcare Sales
| |
|
|
|
|
| |
|
% Change from |
| |
|
Prior Year |
| |
Underlying business |
|
|
|
|
Volume |
|
|
4 |
% |
Price/mix |
|
|
(1 |
%) |
Currency |
|
|
6 |
% |
| |
Total Healthcare Change |
|
|
9 |
% |
| |
Sales of $340.6 increased 9%, or $27.7. Sales increased 4% due to higher volumes on
continued growth in Spain and the U.K., partially offset by lower volumes in the U.S.
Service mix decreased sales by 1% as prior year results included higher emergency billings
during the stabilization period of the U.K. respiratory contract. Favorable currency
effects, primarily the weakening of the U.S. dollar against the Euro and Pound Sterling,
increased sales by 6%.
Healthcare Operating Income
Operating income of $23.0 increased $6.6, as higher volumes in Europe were mostly offset by lower
volumes in the U.S.
Other
| |
|
|
|
|
|
|
|
|
| |
|
Six Months |
| |
|
Ended 31 March |
| |
|
2008 |
|
2007 |
| |
Operating loss |
|
|
($30.2 |
) |
|
|
($7.9 |
) |
| |
30
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 the Polymer Emulsions business. Also included are LIFO inventory
adjustments, as the business segments use FIFO and the LIFO pool is kept at corporate.
The operating loss of $30.2 increased by $22.3. Results in 2008 included the pension settlement
charge of $27.7. No other individual items were material in comparison to the prior year.
2008 OUTLOOK
The Company’s priority is to improve return on capital and expand margins by loading existing
assets, driving productivity, and maintaining capital discipline by focusing capital investment on
growth opportunities. The discussion below outlines the areas of challenge, risk, and opportunity
on which management is focused.
Economic Environment
Domestic manufacturing activity in the first six months of 2008 was higher by 2.3% compared to the
prior year while global manufacturing activity for the first four months of 2008 was higher by 3.5%
based on preliminary data. The Company originally anticipated domestic manufacturing growth
between 2% and 3% and global manufacturing growth between 3.5% and 4.0% for its fiscal year 2008.
The Company currently estimates domestic manufacturing growth around 2% and global manufacturing
growth around 3%.
Segments
| |
• |
|
Merchant Gases volumes should improve driven by new applications and improved loading.
The business will continue to implement pricing increases to recover higher costs. |
| |
| |
• |
|
Tonnage Gases should benefit from new plants brought on-stream. |
| |
| |
• |
|
In Electronics and Performance Materials, results should continue to improve from higher
volumes and the benefits of product rationalization efforts. |
| |
| |
• |
|
Equipment and Energy results are expected to be lower from a decrease in LNG activity
and higher energy development spending and maintenance outages. |
| |
| |
• |
|
The U.S. Healthcare business has operated below plan through the first six months of
this fiscal year. While the Company continues to execute its plan to increase volume in
key product lines such as respiratory therapy, the Company is evaluating its strategic
alternatives. The Company expects to complete this process during the third quarter of
this fiscal year. The Company continues to monitor the recoverability of goodwill of this
reporting unit within the Healthcare segment. The asset value of the U.S. Healthcare
business at 31 March 2008 was $456.1, of which $294.3 was goodwill. |
Global Cost Reduction Plan
Based on actions taken in the second quarter, the Company does not expect a material change to the
original estimated cost savings from its global cost reduction plan of $44 for 2008 and $48
annually beyond 2008.
Capital Expenditures
Capital expenditures for new plant and equipment are expected to be between $1,100 and $1,200 for
2008. The Company intends to continue to evaluate acquisition opportunities and investments in
equity affiliates.
Pension Settlements
The
Company recorded settlement losses of $27.7 related to the cash settlement of pension plan
liabilities in the first six months of 2008. The Company does not expect any material additional
pension settlements for the remainder of 2008.
31
SHARE-BASED COMPENSATION
Refer to Note 6 to the consolidated financial statements for information on the Company’s
share-based compensation programs. For additional information on the valuation and accounting for
the various programs, refer to Note 15 to the consolidated financial statements in the Company’s
2007 annual report on Form 10-K.
PENSION BENEFITS
Refer to Note 8 to the consolidated financial statements for details on pension cost and cash
contributions. For additional information on the Company’s pension benefits and associated
accounting policies, refer to the Pension Benefits section of Management’s Discussion and Analysis
and Note 18 to the consolidated financial statements in the Company’s 2007 annual report on Form
10-K.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The narrative below refers to the Consolidated Statements of Cash Flows included on pages 6-7.
Operating Activities from Continuing Operations
For the first six months, net cash provided by operating activities increased $247.2. This
increase was primarily due to a reduction in the use of working capital of $227.5. Cash used for
payables and accrued liabilities decreased by $162.3, due mainly to an increase in customer
advances related to sale of equipment projects. Cash provided by prepaid expenses in 2008 was
$188.0 favorable from 2007, which included a prepayment of U.S. federal income taxes.
Investing Activities from Continuing Operations
Cash used for investing activities increased $174.5 due principally to the issuance of Industrial
Revenue Bonds. During the first quarter of fiscal 2008, the Company issued $145.0 of Industrial
Revenue Bonds, the proceeds of which must be held in escrow until related project spending occurs.
As of 31 March 2008, $132.3 was classified as a noncurrent asset and reflected as a use of cash in
investing activities.
Capital expenditures for continuing operations are detailed in the table below.
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
| |
|
31 March |
| |
|
2008 |
|
2007 |
| |
Additions to plant and equipment |
|
$ |
529.5 |
|
|
$ |
488.7 |
|
Acquisitions, less cash acquired |
|
|
1.7 |
|
|
|
20.0 |
|
Investment in and advances to unconsolidated affiliates |
|
|
— |
|
|
|
1.5 |
|
Capital leases |
|
|
.7 |
|
|
|
.8 |
|
| |
Total Capital Expenditures |
|
$ |
531.9 |
|
|
$ |
511.0 |
|
| |
Financing Activities from Continuing Operations
Cash used for financing activities increased $302.9, due principally to an increase of $305.0 in
the use of cash for the purchase of Treasury Stock. Net borrowings (short- and long-term proceeds
net of repayments) were $451.8 in 2008 versus $374.9 in the prior year. Long-term debt proceeds of
$461.6 in 2008 included $300.0 from the issuance of a fixed-rate 4.15% five-year bond and $145.0
from Industrial Revenue Bonds.
Total debt at 31 March 2008 and 30 September 2007, expressed as a percentage of the sum of total
debt, shareholders’ equity, and minority interest, was 43.7% and 39.8%, respectively. Total debt
increased from $3,670.9 at 30 September 2007 to $4,386.8 at 31 March 2008.
The Company’s total multicurrency revolving facility, maturing in May 2011, amounted to $1,200.0 at
31 March 2008. No borrowings were outstanding under these commitments. Additional commitments
totaling $395.2 are maintained by the Company’s foreign subsidiaries, of which $272.7 was utilized
at 31 March 2008.
32
The estimated fair value of the Company’s long-term debt, including current portion, as of 31 March
2008 was $3,785.4 compared to a book value of $3,693.9.
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 authorization which was announced in March 2006. As of 30 September 2007, the Company
had purchased 15.0 million of its outstanding shares at a cost of $1,063.4. During the first six
months of fiscal year 2008, the Company purchased 6.0 million of its outstanding shares at a cost
of $554.3. 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.
On 20 March 2008, the Board of Directors increased the quarterly cash dividend 16% from 38 cents 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.
Discontinued Operations
Cash provided by discontinued operations in 2008 was $318.6 compared to cash used for discontinued
operations of $3.4 in 2007. Proceeds from the sales of the Polymer Emulsions Business for $258.2
and the HPPC business for $69.3 were included in 2008.
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. Other than
the new long-term debt issuances discussed above, there have been no material changes to
contractual obligations as reflected in the Management’s Discussion and Analysis in the Company’s
2007 annual report on Form 10-K.
COMMITMENTS AND CONTINGENCIES
Refer to Note 19 to the consolidated financial statements in the Company’s 2007 annual report on
Form 10-K and Note 9 in this quarterly filing.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to off-balance sheet arrangements as reflected in the
Management’s Discussion and Analysis in the Company’s 2007 annual report on Form 10-K. The
Company’s off-balance sheet arrangements are not reasonably likely to have a material impact on
financial condition, changes in financial condition, results of operations, or liquidity.
RELATED PARTY TRANSACTIONS
The Company’s principal related parties are equity affiliates operating in industrial gas and
chemicals businesses. The Company did not engage in any material transactions involving related
parties that included terms or other aspects that differ from those which would be negotiated at
arm’s length with clearly independent parties.
MARKET RISKS AND SENSITIVITY ANALYSIS
Information on the Company’s utilization of financial instruments and an analysis of the
sensitivity of these instruments to selected changes in market rates and prices is included in the
Company’s 2007 annual report on Form 10-K.
The sensitivity analysis related to the fixed portion of the Company’s debt portfolio assumes an
instantaneous 100 basis point move in interest rates with all other variables held constant. A 100
basis point increase in market interest rates would result in a decrease of $116 and $95 in the net
liability position of financial instruments at 31 March
33
2008 and 30 September 2007, respectively. A 100 basis point decrease in market interest rates
would result in an increase of $125 and $103 in the net liability position of financial instruments
at 31 March 2008 and 30 September 2007, respectively.
There were no material changes to market risk sensitivities for foreign currency exchange rate risk
or commodity price risk since 30 September 2007.
The net financial instrument position increased from a liability of $3,157.3 at 30 September 2007
to a liability of $3,854.3 at 31 March 2008, primarily due to the issuance of new long-term debt
and the impact of a weaker U.S. dollar on the translation of foreign currency debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of the Company’s financial condition and results of operations
is based on the consolidated financial statements and accompanying notes that have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The significant accounting policies of the Company are described in Note 1 to the consolidated
financial statements and the critical accounting policies and estimates are described in the
Management’s Discussion and Analysis included in the 2007 annual report on Form 10-K. Information
concerning the Company’s implementation and impact of new accounting standards issued by the
Financial Accounting Standards Board (FASB) is included in Note 2 to the consolidated financial
statements. There have been no changes in accounting policy in the current period that had a
material impact on the Company’s financial condition, change in financial condition, liquidity or
results of operations.
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, overall economic and business conditions different than those
currently anticipated; future financial and operating performance of major customers and industries
served by the Company; 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 a natural disaster; the ability to attract, hire and retain qualified
personnel in all regions of the world where the Company operates; charges related to portfolio
management, goodwill recoverability, business restructuring and cost reduction actions; the success
of implementing cost reduction programs; the timing, impact, and other uncertainties of future
acquisitions or divestitures; unanticipated contract terminations or customer cancellation or
postponement of projects or sales; 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
34
assumptions, beliefs or expectations or any change in events, conditions or circumstances upon
which any such forward-looking statements are based.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Market Risks and Sensitivity Analysis discussion of Item 2 in Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be
disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported
accurately and within the time periods specified in the SEC’s rules and forms. As of 31 March 2008
(the Evaluation Date), an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, the design and operation of these disclosure controls and procedures were
effective to provide reasonable assurance of the achievement of the objectives described above.
During the quarter that ended on the Evaluation Date, there was no change in internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 and will defend against any proceedings
that may arise in connection with this matter. The Company cannot, at this time, reasonably
predict the ultimate outcome of any such proceedings or the sanctions, if any, that will 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value) of |
|
| |
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
|
Shares (or Units) |
|
| |
|
|
|
|
|
|
|
|
|
Shares (or Units) |
|
|
that May Yet Be |
|
| |
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
|
Purchased Under the |
|
| |
|
(a) Total Number of |
|
|
(b) Average Price |
|
|
of Publicly |
|
|
Plans or |
|
| |
|
Shares (or Units) |
|
|
Paid per Share |
|
|
Announced Plans or |
|
|
Programs |
|
| Period |
|
Purchased |
|
|
(or Unit) |
|
|
Programs |
|
|
(1)(2) |
|
1/1 — 1/31/08 |
|
|
1,672,700 |
|
|
$ |
89.68 |
|
|
|
1,672,700 |
|
|
$ |
1,096,843,514 |
|
2/1 — 2/29/08 |
|
|
1,051,400 |
|
|
$ |
90.40 |
|
|
|
1,051,400 |
|
|
$ |
1,001,799,781 |
|
3/1 — 3/31/08 |
|
|
1,343,300 |
|
|
$ |
88.93 |
|
|
|
1,343,300 |
|
|
$ |
882,343,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
|
4,067,400 |
|
|
$ |
89.62 |
|
|
|
4,067,400 |
|
|
$ |
882,343,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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 31 March 2008, the Company expended $370.5 million in cash
for the repurchase of shares, which was composed of $364.5 million for shares repurchased during
the quarter and $6.0 million for shares repurchased in December 2007 and settling in January 2008. |
Item 4. Submission of Matters to a Vote of Security Holders
| |
a. |
|
The Annual Meeting of Shareholders of the Registrant was
held on 24 January 2008. |
| |
| |
b. |
|
The following directors were elected at the meeting:
Michael J. Donahue, Ursula O. Fairbairn, John P. Jones III and
Lawrence S. Smith. Directors whose term of office continued after
the meeting include: Mario L. Baeza, Edward E. Hagenlocker, John
E. McGlade, Charles H. Noski, William L. Davis, III, W. Douglas
Ford, Evert Henkes and Margaret G. McGlynn. |
36
| |
c. |
|
The following matters were voted on at the Annual Meeting: |
| |
| |
1. |
|
Election of Directors |
| |
|
|
|
|
|
|
|
|
| |
|
NUMBER OF VOTES CAST |
| NAME OF DIRECTOR |
|
FOR |
|
AGAINST OR WITHHELD |
Michael J. Donahue |
|
|
189,758,144 |
|
|
|
3,760,113 |
|
Ursula O. Fairbairn |
|
|
185,883,725 |
|
|
|
7,634,532 |
|
John P. Jones III |
|
|
188,923,144 |
|
|
|
4,595,113 |
|
Lawrence S. Smith |
|
|
190,426,485 |
|
|
|
3,091,772 |
|
| |
2. |
|
Ratification of the appointment of KPMG LLP of Philadelphia, Pennsylvania, as
independent auditor for the registrant for the fiscal year ending 30 September 2008 |
| |
|
|
|
|
|
|
|
|
| NUMBER OF VOTES CAST |
| |
|
AGAINST |
|
|
| |
|
OR |
|
|
| FOR |
|
WITHHELD |
|
ABSTENTIONS |
190,080,826 |
|
|
1,818,259 |
|
|
|
1,619,074 |
|
Item 6. Exhibits.
Exhibits required by Item 601 of Regulation S-K
| 12. |
|
Computation of Ratios of Earnings to Fixed Charges. |
| |
| 31.1. |
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
| 31.2. |
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
| 32. |
|
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| |
Air Products and Chemicals, Inc.
(Registrant)
|
|
| Date: 25 April 2008 |
By: |
/s/ Paul E. Huck
|
|
| |
|
Paul E. Huck |
|
| |
|
Senior Vice President and Chief Financial Officer |
|
38
EXHIBIT INDEX
| 12. |
|
Computation of Ratios of Earnings to Fixed Charges. |
| |
| 31.1. |
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
| 31.2. |
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
| 32. |
|
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
39