Exhibit 13
Management's Discussion and Analysis
Major Factors Affecting Earnings
Major factors affecting comparison of earnings per share between fiscal years
2000 and 1999 were:
----------------------------------------------------------------------------
Higher shipments of industrial gases to electronics and chemicals and
process industries
----------------------------------------------------------------------------
Continued productivity gains
----------------------------------------------------------------------------
Increased equity affiliates' income
----------------------------------------------------------------------------
Lower equipment segment activity
----------------------------------------------------------------------------
Raw material cost increases in chemicals segment
----------------------------------------------------------------------------
Expense of The BOC Group plc transaction
----------------------------------------------------------------------------
Gain on sale of the polyvinyl alcohol business
----------------------------------------------------------------------------
Results of Operations
<TABLE>
<CAPTION>
Consolidated
---------------------------------------------------------------------------------------
[ millions of dollars, except per share ] 2000 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $5,467.1 $5,020.1 $4,919.0
---------------------------------------------------------------------------------------
Operating income 830.8 724.7 845.7
---------------------------------------------------------------------------------------
Equity affiliates' income 87.6 61.5 38.0
---------------------------------------------------------------------------------------
Net income 124.2 450.5 546.8
---------------------------------------------------------------------------------------
Basic earnings per share .58 2.12 2.54
---------------------------------------------------------------------------------------
Diluted earnings per share .57 2.09 2.48
---------------------------------------------------------------------------------------
</TABLE>
The results of 2000, 1999, and 1998 included the effects of special items. These
items should be considered in the comparison of the annual results.
(Sales and Operating Income graphs go here.)
Fiscal 2000 results were decreased by a net after-tax loss of $408.4 million, or
$1.89 per share, for special items. The components of special items on a before-
and after-tax basis were: a gain of $126.8 million ($79.1 million after-tax, or
$.37 per share) on the sale of the polyvinyl alcohol (PVOH) business; a charge
of $730.4 million ($456.5 million after-tax, or $2.12 per share) for costs
related to The BOC Group plc (BOC) transaction; a charge of $55.4 million ($35.0
million, or $.16 per share) for a global cost reduction plan; and a gain of
$6.3 million ($4.0 million, or $.02 per share) from the sale of packaged gas
facilities. Additional details on the divestiture of the PVOH business and the
BOC transaction are included in Notes 17 and 18 to the consolidated financial
statements, respectively.
Fiscal 1999 results included several special items which essentially offset at
the net income and earnings per share level. The components of special items on
a before- and after-tax basis were: a gain of $34.9 million ($23.6 million
after-tax, or $.11 per share) on the partial sale of assets related to the
formation of Air Products Polymers, L.P. (a 65% majority-owned venture with
Wacker-Chemie GmbH); expense of $34.2 million ($21.9 million after-tax, or $.10
per share) related to a global cost reduction program; expense of $10.3 million
($6.4 million after-tax, or $.03 per share) related to chemicals facility
closure costs; and a gain of $7.0 million ($4.4 million after-tax, or $.02 per
share) from BOC currency options, net of expenses. Additional details on the
formation of Air Products Polymers, L.P. and the BOC transaction are included in
Notes 17 and 18 to the consolidated financial statements, respectively.
Fiscal 1998 results were increased by net after-tax income of $58.1 million, or
$.26 per share, for special items. The components of special items on a before-
and after-tax basis were: a gain of $62.6 million ($35.1 million after-tax, or
$.16 per share) on the sale of the company's 50% interest in the American
Ref-Fuel Company; a gain of $28.3 million ($15.4 million after-tax, or $.07 per
share) from a power contract restructuring related to an American Ref-Fuel
project; and a gain of $12.6 million ($7.6 million after-tax, or $.03 per share)
from a cogeneration project contract settlement. Additional details of the
divestiture of the American Ref-Fuel Company are included in Note 17 to the
consolidated financial statements.
The table below presents the results for fiscal years 2000, 1999, and 1998
exclusive of special items. The discussion of the consolidated and segment
results is based on income excluding special items.
<TABLE>
<CAPTION>
Exclusive of Special Items
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
[ millions of dollars, except per share ] 2000 1999 1998
---------------------------------------------------------------------------------------
Sales $5,467.1 $5,020.1 $4,919.0
---------------------------------------------------------------------------------------
Operating income 879.9 769.2 845.7
---------------------------------------------------------------------------------------
Equity affiliates' income 87.6 61.5 38.0
---------------------------------------------------------------------------------------
Net income 532.6 450.8 488.7
---------------------------------------------------------------------------------------
Basic earnings per share 2.50 2.12 2.28
---------------------------------------------------------------------------------------
Diluted earnings per share 2.46 2.09 2.22
---------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Consolidated sales grew 9% over the prior year to a new record level. While
revenue growth was 16% for gases and 7% for chemicals, there was a decline of
$137.5 million, or 38%, in the equipment segment. Unfavorable currency impacts
reduced sales growth about 2%. The impact of the consolidation of acquired
affiliates contributed about one-third of the reported sales growth. The gas
segment sales growth benefited from increased demand in several major markets,
particularly electronics and chemicals and process industries (CPI). Sales in
the chemicals segment increased on broad-based volume growth.
Operating income increased $110.7 million to $879.9 million from $769.2 million
in the prior year, a 14% increase. Gases operating income increased
$149.9 million, primarily due to significantly improved volumes in the
electronics and CPI markets. Chemicals segment operating income decreased $10.3
million, or 5%, as volume growth, cost control, and productivity gains were more
than offset by increased raw material and energy costs. Lower equipment project
activity resulted in a $20.6 million, or 55%, decline in operating income.
Selling and administrative overheads were up about 2%, with the increase due to
acquisitions being substantially offset by constraints in overhead spending.
Currency and exchange-related impacts reduced year-to-year operating income
growth about 3%.
Equity affiliates' income was $87.6 million in fiscal 2000 compared to
$61.5 million reported in fiscal 1999. The increase of $26.1 million, a 42%
change, is primarily due to improved business conditions in Asia and Mexico.
About one-third of the increase was due to currency and exchange-related impacts
as well as tax benefits. The growth was achieved in spite of the consolidation
of Korea Industrial Gases (KIG) following the purchase of the remaining 51.1% of
the affiliate's shares in December 1999.
The company achieved higher sales of $5,020.1 million in fiscal 1999, while net
income and diluted earnings per share declined. Sales increased 2%, or
$101.1 million over the $4,919.0 reported in fiscal 1998. Operating income was
down $76.5 million, a 9% decrease. Equity affiliates' income increased to
$61.5 million from $38.0 million in fiscal 1998. The resulting diluted earnings
per share was $2.09, a $.13 decline, or 6%.
Consolidated sales grew 2%, primarily as a result of growth in chemicals and
gases outside North America. Chemicals businesses experienced volume gains as a
result of the emulsions venture with Wacker-Chemie GmbH and prior-year
acquisitions. Lower prices in both gases and chemicals had an unfavorable impact
on sales growth. The equipment segment sales were lower than the strong
prior-year sales. The impact of foreign currency changes was not significant.
Operating income decreased $76.5 million, or 9%, from the prior year. Lower
project activity in the equipment segment was a major contributor to the
decline. Operating income was also unfavorably impacted by the margin decline in
the chemicals segment, as prices declined in several key markets while raw
material costs increased. There were additional costs associated with new
capacity brought onstream, and some major customers experienced facility outages
and operating problems. Weakened gases sales in the electronics and metals
markets, combined with ongoing price declines, unfavorably impacted operating
income.
Equity affiliates' income increased due to the addition of the redispersible
powders venture formed with Wacker-Chemie GmbH, unfavorable foreign exchange
impacts in the prior year, and improved performance at several affiliates.
Segment Analysis
A description of the products, services, and markets for each of the business
segments is included in Note 21 to the consolidated financial statements.
<TABLE>
<CAPTION>
Gases
-------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $3,465.5 $2,996.4 $2,950.1
-------------------------------------------------------------------------------------------
Operating income 673.1 521.9 565.0
-------------------------------------------------------------------------------------------
Operating income - excluding special items 698.8 548.9 565.0
-------------------------------------------------------------------------------------------
Equity affiliates' income 73.6 46.8 33.3
-------------------------------------------------------------------------------------------
</TABLE>
Sales of $3,465.5 million in fiscal 2000 grew $469.1 million from
$2,996.4 million in the prior year. The 16% sales increase was primarily due
to strong demand in the electronics and CPI end markets as well as improved
business conditions in Asia. Contract pass-through of higher natural gas costs
added about 3% to sales growth. Approximately one-third of the increase was
attributable to acquisitions. The strong dollar relative to European currencies
had an adverse impact on sales of about 4%.
The electronics end markets rebounded in fiscal 2000, resulting in substantially
improved gases volumes. Growth for the company's specialty gases and chemicals
products to the electronics markets was particularly strong. Volumes increased
globally in the CPI end markets. Hydrogen/carbon monoxide (HYCO) volumes grew
18% and 3% in North America and Europe, respectively. Sales volumes of gaseous
oxygen and nitrogen increased 5% in North America and 8% in Europe.
26
<PAGE>
Liquid oxygen/liquid nitrogen (LOX/LIN) volumes were up 4% in North America,
including non-cryo gases. LOX/LIN prices in North America were up about 2%
compared to fiscal 1999. Price increases and surcharges, based on higher energy
and diesel fuel costs, offset price declines in the prior year. Liquid argon
volumes rose 11% over fiscal 1999 due to increased demand in the steel and
metals markets as well as construction growth in the electronics industry.
Liquid hydrogen volumes were up 8% due to increased government engine testing.
European volumes improved over the prior year, although reported sales were
adversely impacted by the strong dollar. Southern Europe sustained growth while
Northern Europe experienced modest improvement in business conditions over the
prior year. LOX/LIN volumes in Europe were up 5%, including non-cryo gases.
LOX/LIN prices in Europe were essentially unchanged from the prior year. Asian
sales increased substantially over fiscal 1999 reflecting acquisitions and
improved regional business conditions. The electronics markets in Asia were
particularly strong in fiscal 2000.
Operating income of $698.8 million increased 27%, or $149.9 million, over fiscal
1999. Significant growth in key markets and cost containment initiatives drove
the operating income improvement. Acquisitions contributed slightly less than
one-third of the increase. The operating margin increased to 20.2% in fiscal
2000 from 18.3% in the prior year. Higher volumes and cost control were key
factors in the margin increase of 1.9%. Price increases and surcharges only
partially offset higher energy and diesel fuel costs, moderating the margin
improvement.
Equity affiliates' income grew $26.8 million to $73.6 million, an increase of
57%. The growth was achieved in spite of the consolidation of KIG following the
purchase of the remaining 51.1% of the affiliate's shares in December 1999. The
growth in equity affiliates' income was mostly in Asia, Mexico, and the
energy-related ventures. Approximately one-third of the increase was due to
currency and exchange-related impacts as well as tax benefits.
Sales of $2,996.4 million in fiscal 1999 increased 2%, or $46.3 million, over
fiscal 1998. Consolidated Asian entities contributed $27.0 million of the sales
growth. Unfavorable currency impacts reduced year-to-year growth by slightly
less than 1%.
Overall gases volumes grew modestly, reflecting weak manufacturing activity in
North America and Northern Europe. LOX/LIN volumes, including non-cryo, were up
approximately 2% in North America and 8% in Europe. In the United States,
depressed conditions in the metals and electronics markets offset growth in
several other end-use markets. Packaged gases volumes grew 6% in the United
States, with a 3% increase in same-store sales and 3% growth from acquisitions.
In Europe, packaged gases sales growth was 3%. Pricing in the LOX/LIN component
of merchant gases was down about 2% in both North America and Europe, with
overall pricing experiencing continued competitive pressure. Tonnage gases
volume remained flat in North America due to weak steel demand. Tonnage gases
volumes in Europe increased 4% as a result of loading at the Rotterdam complex.
Operating income declined $16.1 million, or 3%, to $548.9 million from the prior
year. Operating margin for the fiscal year was 18.3%, down from 19.2% in the
prior year. The operating margin decline was mainly due to geographic mix, lower
volumes to steel customers, a weak electronics market, and competitive pricing
pressure partially offset by cost reduction efforts.
Equity affiliates' income increased $13.5 million to $46.8 million, or 41%. This
increase was due to unfavorable foreign exchange effects in the prior year
combined with improved performance at several affiliates, particularly in Korea
and Mexico.
<TABLE>
<CAPTION>
Chemicals
-----------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $1,772.8 $1,657.4 $1,539.2
-----------------------------------------------------------------------------------------
Operating income 182.1 193.7 247.2
-----------------------------------------------------------------------------------------
Operating income - excluding special items 197.7 208.0 247.2
-----------------------------------------------------------------------------------------
Equity affiliates' income 12.5 12.4 .6
-----------------------------------------------------------------------------------------
</TABLE>
Fiscal 2000 sales were $1,772.8 million, up 7%, or $115.4 million, from the
$1,657.4 million reported in the prior year. Operating income in fiscal 2000
declined $10.3 million, or 5%, from the prior year. Broad-based volume gains,
led by epoxy additives and polyurethane intermediates, resulted in an overall
segment volume growth of 8%. Emulsions volumes grew slightly as aggressive
pricing actions in response to raw material cost increases impacted sales
growth. PVOH volumes grew 11%. There was no significant contribution to
operating income from PVOH in fiscal 2000. The company completed the sale of the
PVOH business in September 2000. See Note 17 to the consolidated financial
statements for details on the PVOH business sale. Unfavorable currency and
exchange-related impacts reduced sales growth less than 1%, but had an
unfavorable impact of 5% on operating income growth. The operating margin was
11.2% in fiscal 2000 compared to 12.5% in the prior year. Strong volume growth,
productivity gains, and effective cost containment initiatives were more than
offset by raw material and energy cost pressures, as well as lower pricing in
select businesses. Aggressive pricing actions lagged the continued raw material
and energy cost increases.
Equity affiliates' income in fiscal 2000 was $12.5 million compared to
$12.4 million in the prior year. The equity affiliates' income primarily
results from the redispersible powders venture with Wacker-Chemie GmbH.
Sales in fiscal 1999 increased 8%, or $118.2 million, to $1,657.4 million.
Operating income declined $39.2 million to $208.0 million, a 16% decrease.
Overall volume grew 10%, with 7% of the growth primarily from a new emulsion
venture with Wacker-Chemie GmbH. Amines and PVOH volumes declined from the
strong levels of fiscal 1998. The impact of the Imperial Chemicals Industries
(ICI) methylamines acquisition in the prior year also contributed to the sales
growth. Prices in the emulsions business
27
<PAGE>
declined in fiscal 1999, while raw material costs increased over the year,
resulting in a margin decline. An unfavorable Asian economy led to declines in
selling prices of methylamines and PVOH. Currency and exchange-related effects
were not significant to the change in sales or operating income in fiscal 1999.
The operating income decrease was due to price declines combined with raw
material cost increases, increased costs of new capacity additions, and customer
facility outages and operating difficulties. The resulting operating margin in
fiscal 1999 was 12.5%, compared to 16.1% in the prior year.
Equity affiliates' income increased $11.8 million to $12.4 million. The increase
reflects the company's 20% interest in the redispersible powders venture formed
with Wacker-Chemie GmbH in October 1998.
<TABLE>
<CAPTION>
Equipment
-----------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $228.8 $366.3 $429.7
-----------------------------------------------------------------------------------------------
Operating income 9.9 34.7 59.2
-----------------------------------------------------------------------------------------------
Operating income - excluding special items 16.8 37.4 59.2
-----------------------------------------------------------------------------------------------
Equity affiliates' income 2.0 1.6 1.9
-----------------------------------------------------------------------------------------------
</TABLE>
Sales were $228.8 million, down $137.5 million, or 38%, from the prior year.
Operating income of $16.8 million was down $20.6 million from $37.4 million in
fiscal 1999. Good project cost performance partially offset the impact of lower
project activity. Sales backlog for the equipment segment declined to $149
million at 30 September 2000, compared to $175 million at 30 September 1999. It
is expected that $131 million of the backlog will be completed during fiscal
2001.
Sales declined $63.4 million to $366.3 million from $429.7 million in fiscal
1998. Operating income declined $21.8 million, or 37%, to $37.4 million. The
decrease in sales and operating income was due to lower project activity in most
areas, particularly natural gas liquefaction equipment. Sales backlog for the
equipment segment declined to $175 million at 30 September 1999, compared to
$302 million at 30 September 1998.
BOC transaction
In July 1999, the company, BOC, and L'Air Liquide S.A. (Air Liquide) of France
announced that they had agreed to the terms of a recommended offer for the share
capital of BOC at UK(pound)14.60 per BOC share (the Offer). The Offer, which was
to be made jointly by the company and Air Liquide, was subject to certain
preconditions, one of which was the approval of the U.S. Federal Trade
Commission (FTC).
During ten months of discussions with the FTC, the company and Air Liquide made
a number of comprehensive and practical proposals, including divestitures, which
responded to the defined requirements of the FTC. On 10 May 2000, the company
and Air Liquide announced that the FTC had indicated it would not approve the
Offer by 12 May 2000, the date on which the period for satisfying the
preconditions to the Offer would expire, and the Offer was not extended beyond
12 May 2000.
Since the BOC transaction did not occur, certain costs and financing fees that
had been deferred were required to be expensed. In addition, the company and Air
Liquide were obligated to pay BOC a fee of $50 million each since the Offer to
acquire BOC was not made.
The company had entered into various purchased currency options and forward
exchange contracts to hedge the currency exposure related to the proposed
purchase of BOC shares at UK(pound)14.60 per share. Net losses associated with
the change in market value of these contracts were recorded in earnings. The
company purchased U.K. Pound Sterling put options to cap the rate change
exposure of the forward exchange contracts.
The results for the year ended 30 September 2000 included a total charge related
to the BOC transaction of $730.4 million ($456.5 million after-tax, or $2.12 per
share). Of this amount, $594.6 million ($371.6 million after-tax) of charges
were recorded on purchased currency option and forward exchange contracts
entered into to hedge the currency exposure of the transaction, resulting in a
cumulative charge recorded on the currency hedging instruments of $582.0 million
($363.8 million after-tax). The remaining charge of $135.8 million ($84.9
million after-tax) consists of the BOC fee paid and transaction expenses.
The results for the year ended 30 September 1999 included a net gain of
$7.0 million ($4.4 million after-tax, or $.02 per share) from BOC currency
options, net of expenses.
The cash impact of the BOC transaction of $690.1 million in fiscal 2000 and
$33.3 million in fiscal 1999 was principally reflected as an investing activity
in the statement of Consolidated Cash Flows. This cash impact does not consider
the tax benefits associated with this transaction.
Interest Expense
------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
------------------------------------------------------------------------------
Interest incurred $214.1 $181.2 $178.5
Less: Interest capitalized 17.4 22.1 15.7
------------------------------------------------------------------------------
Interest expense $196.7 $159.1 $162.8
------------------------------------------------------------------------------
Interest expense in fiscal 2000 increased $37.6 million. The increase was due to
higher average debt, slightly higher interest rates, and lower capitalized
interest. The higher average debt resulted from the BOC transaction. Interest
expense in fiscal 1999 decreased $3.7 million. Higher capitalized interest and
lower rates more than offset the unfavorable impact of higher average debt.
28
<PAGE>
<TABLE>
<CAPTION>
Income Taxes
-----------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effective tax rate (12.4%) 31.1% 33.6%
-----------------------------------------------------------------------------------------
Effective tax rate - excluding special items 30.2% 31.3% 32.2%
-----------------------------------------------------------------------------------------
</TABLE>
The company had a net tax benefit for the year ending 30 September 2000. The net
benefit resulted from the loss on the BOC transaction, as well as tax credits
and adjustments. The current year net tax benefit compares to an effective tax
rate of 31.1%, after minority interest of $15.1 million, in the prior year.
Excluding the tax impact of the fiscal 2000 special items, the effective tax
rate for the year is 30.2%, after minority interest of $7.6 million. The
comparable effective tax rate in fiscal 1999 was 31.3%. The 1.1% reduction in
effective tax rates after special items was due to credits and adjustments.
The effective tax rate in fiscal 1999 excluding special items decreased .9% from
the comparable rate in fiscal 1998. The decrease was essentially due to higher
after-tax equity affiliates' income.
Environmental Matters
The company is subject to various environmental laws and regulations in the
United States and foreign countries where it has operations. Compliance with
these laws and regulations results in higher capital expenditures and costs.
Additionally, from time to time the company is involved in proceedings under the
Comprehensive Environmental Response, Compensation, and Liability Act (the
federal Superfund law), similar state laws, and the Resource Conservation and
Recovery Act (RCRA) relating to the designation of certain sites for
investigation and possible cleanup. The company's accounting policies for
environmental expenditures are discussed in Note 1 to the consolidated financial
statements.
The amounts charged to earnings on an after-tax basis related to environmental
protection totaled $30.3 million, $27.2 million, and $23.5 million for fiscal
2000, 1999, and 1998, 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 $28 million in fiscal 2001 and $25 million in fiscal 2002.
Although precise amounts are difficult to define, the company estimates that in
fiscal 2000 it spent approximately $3 million on capital projects to control
pollution versus $7 million in fiscal 1999. Capital expenditures to control
pollution in future years are estimated at $5 million in both fiscal 2001 and
2002.
It is the company's policy to accrue environmental investigatory and noncapital
remediation costs for identified sites when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The potential
exposure for such costs is estimated to range from $8 million to a reasonably
possible upper exposure of $21 million. The balance sheet at 30 September 2000
included an accrual of $16.7 million. At 30 September 1999, the balance sheet
accrual was $19.4 million.
In addition to the environmental exposures discussed in the preceding paragraph,
there will be spending at a company-owned manufacturing site where the company
is undertaking RCRA corrective action remediation. The company estimates capital
costs to implement the anticipated remedial program will range from
$24-$33 million. Spending was $21 million through fiscal 2000 and is estimated
at $2 million for fiscal 2001 and $1 million for fiscal 2002. Operating and
maintenance expenses associated with continuing the remedial program were
minimal in fiscal 2000 and are estimated at $1 million a year beginning in
fiscal 2001 and will continue for an estimated period of up to 30 years. A
former owner and operator at the site has agreed to reimburse the company 20% of
the costs incurred in the remediation. Reimbursement of $1.4 million and
$2.2 million was received in fiscal 2000 and 1999, respectively, and is
estimated at $.5 million for fiscal 2001. In fiscal 1999, an insurance recovery
related to this environmental site was received in the amount of $7.7 million.
The cost estimates have not been reduced by the value of such reimbursements.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. Subject to the imprecision in estimating future environmental costs,
the company does not expect that any sum it may have to pay in connection with
environmental matters in excess of the amounts recorded or disclosed above would
have a materially adverse effect on its financial condition or results of
operations in any one year.
Liquidity, Capital Resources, and Other Financial Data
Notwithstanding the loss incurred on the attempted acquisition of BOC, the
company maintained a solid financial condition throughout fiscal 2000. Cash from
operations, supplemented with proceeds from asset sales and debt financings,
provided funding for the company's capital spending program and the BOC
transaction related loss. Cash flow from operations and financing activities
will meet liquidity needs for the foreseeable future. The company's long-term
debt and commercial paper continue to be rated A/A3 and A-1/P-2, respectively.
29
<PAGE>
Capital Expenditures
Capital expenditures in fiscal 2000 totaled $973.0 million, down 12% from the
fiscal 1999 level. As in fiscal 1999, additions to plant and equipment and
acquisitions in fiscal 2000 were largely in support of worldwide expansion of
the gas business. Acquisitions in fiscal 2000 principally included the purchase
of the remaining 51.1% of KIG, raising the company's ownership to 100%.
Acquisitions in fiscal 1998 included $108.4 million for the ICI methylamines and
derivatives businesses in the chemicals group. Investments in equity affiliates
in fiscal 1999 included $52.0 million in INOX, an Indian industrial gases
company, and $53.0 million in a joint venture with Wacker-Chemie GmbH.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Additions to plant and equipment $767.7 $ 888.9 $ 770.9
------------------------------------------------------------------------------------------
Investments in and advances to
unconsolidated affiliates 5.6 110.6 31.9
------------------------------------------------------------------------------------------
Acquisitions 194.8 90.4 192.2
------------------------------------------------------------------------------------------
Capital leases 4.9 18.5 5.7
------------------------------------------------------------------------------------------
Total $973.0 $1,108.4 $1,000.7
------------------------------------------------------------------------------------------
</TABLE>
Capital expenditures are expected to be approximately $1.0 billion in fiscal
2001. It is anticipated these expenditures will be funded with cash from
operations supplemented with proceeds from financing activities.
Financing and Capital Structure
Capital needs in fiscal 2000 were satisfied with cash from operations, proceeds
from asset sales, including $326 million from the sale of the PVOH business, and
additional borrowings. At the end of fiscal 2000, total debt outstanding was
$3.0 billion compared to $2.8 billion at the end of fiscal 1999.
Financing activities during fiscal 2000 included $760 million equivalent in
Eurobond issues, $50 million of tax-exempt debt, and $63 million equivalent in
Korean Won bank loans. The Eurobonds were issued in two tranches in the Euro
public debt market--$480 million equivalent in five-year notes with a coupon of
6.0% and $280 million in seven-year notes with a coupon of 6.5%. The $50 million
of tax-exempt debt has a term of 35 years and a coupon which resets weekly and
is correlated to published tax-exempt weekly rate indices. The Korean Won bank
loans are for an initial term of one year and carry an interest rate of 8.5%.
At 30 September 2000, $143.0 million of commercial paper was outstanding
compared to $363.0 million at the end of fiscal 1999.
Substantial credit facilities are maintained to provide backup funding for
commercial paper and to ensure availability of adequate resources for corporate
liquidity. At 30 September 2000, the company's committed lines of credit totaled
$1,100 million, including $500 million added during the year to provide
liquidity while the BOC transaction was in progress. No borrowings were
outstanding under these commitments at the end of fiscal 2000. Additional
commitments totaling $69.6 million are maintained by the company's foreign
subsidiaries, of which $16.1 million was outstanding at 30 September 2000. In
October 2000 the $500 million of commitments added during the year matured.
During fiscal 2000, the bank credit facility executed during fiscal 1999 to
ensure the availability of funding to finance the anticipated acquisition of BOC
was terminated.
Financial Instruments
The company enters into contractual agreements in the ordinary course of
business to hedge its exposure to interest rate and foreign currency risks.
Counterparties to these agreements are major financial institutions. Management
believes the risk of incurring losses related to credit risk is remote and any
losses would be immaterial.
Interest rate swap agreements are used to reduce interest rate risks and costs
inherent in the company's debt portfolio. The company enters into these
agreements to change the fixed/variable interest rate mix of the debt portfolio
in order to maintain the percentage of fixed and variable debt within certain
parameters set by management. Accordingly, the company enters into agreements to
both effectively convert variable-rate debt to fixed-rate debt and to
effectively convert fixed-rate debt into variable-rate debt which is principally
indexed to LIBOR rates. The company has also entered into interest rate swap
contracts to effectively convert the stated variable rates to interest rates
based on LIBOR.
The company is also party to interest rate and currency 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 at inception and at a specified future date. These contracts effectively
convert the currency denomination of a debt instrument into another currency in
which the company has a net equity position while changing the interest rate
characteristics of the instrument. The contracts are used to hedge intercompany
and third-party lending activities and the value of investments in certain
foreign subsidiaries and affiliates.
The company, in management of its exposure to fluctuations in foreign currency
exchange rates, has entered into a variety of foreign exchange contracts,
including forward, option combination, and purchased option contracts. These
agreements generally involve the exchange of one currency for a second currency
at some future date. The company enters into forward exchange and option
combination contracts to reduce the exposure to foreign currency fluctuations
associated with certain monetary assets and liabilities, as well as certain firm
commitments and highly anticipated cash flows. 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 is also party to purchased option contracts which,
if exercised, involve the sale or purchase of foreign currency at a fixed
exchange rate for a specified period of time. These contracts are used to hedge
firm commitments and certain highly anticipated cash flows, including export
sales transactions.
30
<PAGE>
Additional details on these and other financial instruments are set forth in
Notes 3, 5, 6, and 18 to the consolidated financial statements and in the
Financial Instruments Sensitivity Analysis.
Working Capital
Working capital at 30 September 2000 (excluding cash and cash items, short-term
borrowings, and the current portion of long-term debt) was $765.3 million, up
$21.7 million from the prior year. Excluding the impact of currency options and
deferred financing expenses included in the prior-year working capital related
to the BOC transaction, working capital was up $55.8 million. Working capital at
30 September 2000 was slightly reduced due to the sale of the PVOH business and
the consolidation of KIG. Excluding the BOC, PVOH, and KIG impacts on working
capital, the year-to-year change in working capital was due to higher trade
receivables.
Working capital at 30 September 1999 (excluding cash and cash items, short-term
borrowings, and the current portion of long-term debt) was $743.6 million, up
$5.8 million over the prior year. Excluding the impact of the currency options
related to the BOC transaction and deferred financing expenses, working capital
was down slightly, or $28.3 million.
Dividends and Stock Split
The Board of Directors in May 2000 increased the quarterly cash dividend 6%,
from 18.0 cents per share, to 19.0 cents per share. Dividends are declared by
the Board of Directors and, when declared, usually will be paid during the sixth
week after the close of the fiscal quarter.
In May 1998, the Board of Directors approved a two-for-one stock split. The
additional shares were issued on 15 June 1998 to shareholders of record on
15 May 1998.
Cost Reduction Plan
A global cost reduction plan (the 2000 Plan) was initiated in the chemicals
segment in the fiscal quarter ended 31 March 2000. The 2000 Plan included staff
reductions of 103 employees in the areas of manufacturing and overheads. The
charge to earnings for the 2000 Plan was $8.7 million. As of 30 September 2000,
79 of the positions have been eliminated, with completion of the eliminations
expected by 31 March 2001. Termination expenses of $5.6 million have been
incurred, with $3.1 million remaining in accrued liabilities.
Under the 2000 Plan, the results for the quarter ended 30 June 2000 reflected a
charge of $39.2 million for additional staff reductions of 347 positions in the
areas of manufacturing, engineering, distribution, and overheads. The results
for the fiscal quarter ended 30 June 2000 also included a charge of $7.5 million
for asset impairments related to the rationalization of three facilities in
Europe. As of 30 September 2000, 84 positions have been eliminated, with
completion of the 2000 Plan expected by 30 June 2001. Termination expenses of
$18.8 million have been incurred, and $20.4 million remain in accrued
liabilities.
For the fiscal year ended 30 September 2000, the total staff reduction plan and
related facility impairments resulted in a charge to expense of $55.4 million
($35.0 million after-tax, or $.16 per share). The 2000 Plan in total included
450 position eliminations and three facility impairments. Benefits from the
total 2000 Plan are expected to be $30 million and $35 million in fiscal 2001
and 2002, respectively.
The company initiated a global cost reduction plan (the 1999 Plan) in the fiscal
quarter ended 31 December 1998 and expanded the 1999 Plan in the fiscal quarter
ended 30 June 1999 to a total of 348 positions. For the fiscal year ended 30
September 1999, the total charge to expense for the 1999 Plan was $34.2 million
($21.9 million after-tax, or $.10 per share). The 1999 Plan was completed in
fiscal 2000 essentially as expected.
New Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities"--a replacement of SFAS No. 125. SFAS No. 140 adds new disclosure
requirements for fiscal years ending after 15 December 2000. Certain provisions
apply to transfers of financial assets and extinguishments of liabilities
occurring after 31 March 2001. SFAS No. 140 also revises the criteria involving
qualifying special purpose entities. The company is reviewing the impact of SFAS
No. 140 but does not expect any material impact to the financial statements from
the adoption of this standard.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities"--an amendment of FASB Statement
No. 133. This Statement addresses a limited number of issues causing
implementation difficulties for numerous entities that apply SFAS No. 133. SFAS
No. 133 was issued in June 1998 and establishes accounting and reporting
standards requiring that every derivative (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or a liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless special accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge treatment. The transition adjustment resulting from adopting
this Statement shall be reported in net income and other comprehensive income.
The company will adopt SFAS No. 133 and SFAS No. 138 in the first quarter of
fiscal 2001. The adoption of these Statements will not have a material effect on
the company's financial statements or risk management processes.
31
<PAGE>
Pension Plan Funding
The funding policy for pension plans is to accumulate plan assets that, over the
long run, will approximate the present value of projected benefits payable. In
fiscal 2000, the company contributed $7.3 million compared to $8.2 million in
fiscal 1999. The company expects to make contributions of approximately
$22 million in fiscal 2001.
Exchange Rate Fluctuations
Exchange rate fluctuations can be a significant variable for international
operations, especially fluctuations in local currencies where hedging
opportunities are unreasonably expensive or unavailable.
Inflation
The financial statements are presented in accordance with 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 international areas with both inflation and currency
issues. The ability to pass on inflation costs 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.
Forward-Looking Statements
The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. In addition to important risk factors and
uncertainties referred to in the Management's Discussion and Analysis, other
important risk factors and uncertainties include overall economic and business
conditions; demand for the goods and services of the company; competitive
factors in the industries in which it competes; the ability to recover increased
energy and raw material costs through pricing; changes in government
regulations; success of implementing cost reduction programs; the timing,
impact, and other uncertainties of future acquisitions and divestitures;
fluctuations in interest rates and foreign currencies; the impact of tax and
other legislation and regulations in the jurisdictions in which the company and
its affiliates operate; and the timing and rate at which tax credits can be
utilized.
Financial Instruments Sensitivity Analysis
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 utilizing a third-party software model which 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. All instruments are entered into for
other than trading purposes. The utilization of these instruments is described
more fully in the financial instruments section of the Management's Discussion
and Analysis and Notes 3, 5, and 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, interest rate and
currency swaps, foreign exchange-forward contracts, and foreign exchange-option
contracts. 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 $34.7 million at 30
September 2000 and $38.4 million at 30 September 1999 as disclosed in Note 3 to
the consolidated financial statements. These amounts principally represent an
investment in a publicly traded foreign company accounted for by the cost
method. The company assessed the materiality of the market risk exposure on
these financial instruments and determined this exposure to be immaterial.
At 30 September 2000, the net financial instrument position was a liability of
$2,862.0 million. At 30 September 1999, the net financial instrument position
was a liability of $2,504.3 million, excluding currency options executed to
hedge the BOC transaction. The increase in the net financial instrument position
is due mainly to the increase in long-term debt, including the current portion.
32
<PAGE>
Interest Rate Risk
The company's debt portfolio, including interest rate swap agreements, as of
30 September 2000 is comprised primarily of debt denominated in U.S. dollars
(53%). The primary currencies of non-U.S. dollar debt are the Euro currencies,
U.K. Pound Sterling, and Korean Won. The company has both fixed- and
variable-rate debt. Changes in interest rates have different impacts on the
fixed- and variable-rate portions of the company's debt portfolio. A change in
interest rates on the fixed portion of the debt portfolio impacts the net
financial instrument position but has no impact on interest incurred or cash
flows. A change in interest rates on the variable portion of the debt portfolio
impacts the interest incurred and cash flows but does not impact the net
financial instrument position.
The sensitivity analysis related to the fixed portion of the company's debt
portfolio assumes an instantaneous 100 basis point move in interest rates from
their levels at 30 September 2000 and 1999, with all other variables (including
foreign exchange rates) held constant. A 100 basis point increase in market
interest rates would result in a decrease in the net financial instrument
position of $130 million and $95 million at 30 September 2000 and 1999,
respectively. A 100 basis point decrease in market interest rates would result
in an increase in the net financial instrument position of $137 million and
$117 million at 30 September 2000 and 1999, respectively.
Based on the variable-rate debt included in the company's debt portfolio,
including the interest rate swap agreements, as of 30 September 2000 and 1999,
a 100 basis point increase in interest rates would result in an additional $7
million and $12 million in interest incurred per year at 30 September 2000 and
1999, respectively. A 100 basis point decline would lower interest incurred by
$7 million and $12 million per year at 30 September 2000 and 1999, respectively.
Foreign Currency Exchange Rate Risk
The sensitivity analysis assumes an instantaneous 10% change in the foreign
currency exchange rates from their levels of 30 September 2000 and 1999, with
all other variables (including interest rates) held constant. A 10%
strengthening of the functional currency of an entity versus all other
currencies would result in a decrease in the net financial instrument position
of $161 million at 30 September 2000 and a decrease of $103 million at 30
September 1999, excluding the currency options related to the BOC transaction. A
10% weakening of the functional currency of an entity versus all other
currencies would result in an increase in the net financial instrument position
of $161 million at 30 September 2000 and an increase of $103 million at
30 September 1999, excluding the currency options related to the BOC
transaction.
The primary currencies for which the company has exchange rate exposure are the
U.S. dollar versus the Euro currencies, the Euro currencies versus the U.K.
Pound Sterling, and the Euro currencies versus the Canadian Dollar. Foreign
currency debt, interest rate and currency swaps, and foreign exchange-forward
contracts are used in countries where it does business, thereby reducing the
company's net asset exposure. Foreign exchange-forward contracts are also used
to hedge the company's firm and highly anticipated foreign currency cash flows,
along with foreign exchange-option contracts. Thus, there is either an asset or
cash flow exposure related to all 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.
33
<PAGE>
Company Responsibility for Financial Statements
The accompanying consolidated financial statements have been prepared by the
company. They conform with accounting principles generally accepted in the
United States and reflect judgments and estimates as to the expected effects of
incomplete transactions and events being accounted for currently. The company
believes that the accounting systems and related controls that it maintains are
sufficient to provide reasonable assurance that assets are safeguarded,
transactions are appropriately authorized and recorded, and the financial
records are reliable for preparing such financial statements. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal accounting controls must be related to the benefits derived. The
company maintains an internal audit function which is responsible for evaluating
the adequacy and application of financial and operating controls and for testing
compliance with company policies and procedures.
The independent public accountants are engaged to perform an audit of the
consolidated financial statements in accordance with auditing standards
generally accepted in the United States. Their report follows.
The Audit Committee of the Board of Directors is comprised entirely of
individuals who are not employees of the company. This Committee meets
periodically with the independent public accountants, the internal auditors, and
management to consider audit results and to discuss significant internal
accounting control, auditing, and financial reporting matters. The Audit
Committee recommends the selection of the independent public accountants who are
then appointed by the Board of Directors subject to ratification by the
shareholders.
Harold A. Wagner Leo J. Daley
Chairman and Vice President-Finance
Chief Executive Officer and Controller
27 October 2000 27 October 2000
Report of Independent Public Accountants
To the Shareholders and Board of Directors, Air Products and Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets of Air Products and
Chemicals, Inc. (a Delaware corporation) and subsidiaries as of 30 September
2000 and 1999, and the related consolidated statements of income, comprehensive
income, cash flows, and shareholders' equity for each of the three years in the
period ended 30 September 2000. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 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 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
30 September 2000, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania
27 October 2000
34
<PAGE>
The Financial Statements
<TABLE>
<CAPTION>
Consolidated Income
Air Products and Chemicals, Inc. and Subsidiaries
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended 30 September [ millions of dollars, except per share ] 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Sales and Other Income
-----------------------------------------------------------------------------------------------------------------------------------
Sales - note 1 $5,467.1 $5,020.1 $4,919.0
-----------------------------------------------------------------------------------------------------------------------------------
Other income, net - note 20 28.4 19.7 15.5
-----------------------------------------------------------------------------------------------------------------------------------
5,495.5 5,039.8 4,934.5
-----------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Cost of sales 3,825.6 3,501.4 3,317.0
-----------------------------------------------------------------------------------------------------------------------------------
Selling and administrative 714.7 690.6 659.8
-----------------------------------------------------------------------------------------------------------------------------------
Research and development 124.4 123.1 112.0
-----------------------------------------------------------------------------------------------------------------------------------
Operating Income 830.8 724.7 845.7
-----------------------------------------------------------------------------------------------------------------------------------
Income from equity affiliates, net of related expenses - note 8 87.6 61.5 38.0
-----------------------------------------------------------------------------------------------------------------------------------
Gain on sale of polyvinyl alcohol business - note 17 126.8 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Gain (loss) on currency hedges related to BOC transaction and expenses - note 18 (730.4) 7.0 --
-----------------------------------------------------------------------------------------------------------------------------------
Net gain on formation of polymer venture - note 17 -- 34.9 --
-----------------------------------------------------------------------------------------------------------------------------------
Gain on American Ref-Fuel sale and contract settlements - note 17 -- -- 103.5
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense - note 1 196.7 159.1 162.8
-----------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes and Minority Interest 118.1 669.0 824.4
-----------------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) - notes 1 and 10 (13.7) 203.4 276.9
-----------------------------------------------------------------------------------------------------------------------------------
Minority interest in earnings of subsidiary companies 7.6 15.1 .7
-----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 124.2 $ 450.5 $ 546.8
-----------------------------------------------------------------------------------------------------------------------------------
Monthly Average of Common Shares Outstanding (in millions) - note 13 213.4 212.2 215.5
-----------------------------------------------------------------------------------------------------------------------------------
Monthly Average of Common and Common Equivalent Shares Outstanding (in millions) - note 13 216.2 216.0 220.1
-----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share - note 13 $.58 $2.12 $2.54
-----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Common Share - note 13 $.57 $2.09 $2.48
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Comprehensive Income
Air Products and Chemicals, Inc. and Subsidiaries
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended 30 September [ millions of dollars ] 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Net Income $124.2 $450.5 $546.8
-----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), net of tax
-----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments (137.3) (61.3) (36.1)
-----------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the period 1.8 8.9 (1.9)
-----------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustments 2.1 9.5 (14.3)
-----------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (133.4) (42.9) (52.3)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ (9.2) $407.6 $494.5
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Air Products and Chemicals, Inc. and Subsidiaries
---------------------------------------------------------------------------------------------------------------------------------
30 September [ millions of dollars, except per share ] 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
---------------------------------------------------------------------------------------------------------------------------------
Current Assets
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash items - note 1 $ 94.1 $ 61.6
---------------------------------------------------------------------------------------------------------------------------------
Trade receivables, less allowances for doubtful accounts of $13.4 in 2000 and $11.6 in 1999 982.7 894.7
---------------------------------------------------------------------------------------------------------------------------------
Inventories - notes 1 and 7 388.8 424.9
---------------------------------------------------------------------------------------------------------------------------------
Contracts in progress, less progress billings 93.4 79.8
---------------------------------------------------------------------------------------------------------------------------------
Other current assets 246.0 321.4
---------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,805.0 1,782.4
---------------------------------------------------------------------------------------------------------------------------------
Investment in Net Assets of and Advances to Equity Affiliates - notes 1 and 8 466.6 521.4
---------------------------------------------------------------------------------------------------------------------------------
Plant and Equipment - notes 1, 4, 11, and 15
---------------------------------------------------------------------------------------------------------------------------------
Plant and equipment, at cost 10,310.9 10,187.9
---------------------------------------------------------------------------------------------------------------------------------
Less--Accumulated depreciation 5,054.2 4,995.0
---------------------------------------------------------------------------------------------------------------------------------
Plant and Equipment, net 5,256.7 5,192.9
---------------------------------------------------------------------------------------------------------------------------------
Goodwill and Other Noncurrent Assets - note 1 742.2 738.8
---------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 8,270.5 $8,235.5
---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
---------------------------------------------------------------------------------------------------------------------------------
Payables, trade and other - note 20 $ 578.4 $ 505.8
---------------------------------------------------------------------------------------------------------------------------------
Accrued liabilities - note 20 357.2 407.0
---------------------------------------------------------------------------------------------------------------------------------
Accrued income taxes 10.0 64.4
---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings - note 20 249.7 407.6
---------------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt - note 4 179.5 473.0
---------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,374.8 1,857.8
---------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt - notes 4 and 15 2,615.8 1,961.6
---------------------------------------------------------------------------------------------------------------------------------
Deferred Income and Other Noncurrent Liabilities 561.3 596.1
---------------------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes - notes 1 and 10 781.8 731.1
---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 5,333.7 5,146.6
---------------------------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 115.5 127.3
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity - notes 1, 9, and 12
---------------------------------------------------------------------------------------------------------------------------------
Common Stock (par value $1 per share; issued 2000 and 1999 - 249,455,584 shares) 249.4 249.4
---------------------------------------------------------------------------------------------------------------------------------
Capital in excess of par value 342.2 341.5
---------------------------------------------------------------------------------------------------------------------------------
Retained earnings 3,667.9 3,701.8
---------------------------------------------------------------------------------------------------------------------------------
Unrealized gain on investments 15.7 13.9
---------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustments (2.7) (4.8)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative translation adjustments (420.8) (283.5)
---------------------------------------------------------------------------------------------------------------------------------
Treasury Stock, at cost (2000 - 20,150,393 shares; 1999 - 20,150,772 shares) (681.6) (681.6)
---------------------------------------------------------------------------------------------------------------------------------
Shares in trust (2000 - 15,086,482 shares; 1999 - 16,260,580 shares) (348.8) (375.1)
---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,821.3 2,961.6
---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 8,270.5 $ 8,235.5
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
<TABLE>
<CAPTION>
Consolidated Cash Flows
Air Products and Chemicals, Inc. and Subsidiaries
---------------------------------------------------------------------------------------------------------------------------------
Year Ended 30 September [ millions of dollars ] 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
---------------------------------------------------------------------------------------------------------------------------------
Net income $ 124.2 $ 450.5 $ 546.8
---------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile income to cash provided by operating activities:
---------------------------------------------------------------------------------------------------------------------------------
Depreciation - note 1 575.7 527.2 489.4
---------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes - note 10 (5.5) 58.8 62.3
---------------------------------------------------------------------------------------------------------------------------------
Loss (gain) on BOC transaction - note 18 706.1 (12.5) --
---------------------------------------------------------------------------------------------------------------------------------
American Ref-Fuel divestiture deferred income taxes - note 17 -- -- (80.3)
---------------------------------------------------------------------------------------------------------------------------------
Undistributed earnings of unconsolidated affiliates (49.9) (46.3) (3.8)
---------------------------------------------------------------------------------------------------------------------------------
(Gain) loss on sale of assets and investments (138.6) 3.7 (87.9)
---------------------------------------------------------------------------------------------------------------------------------
Other 100.8 73.2 133.7
---------------------------------------------------------------------------------------------------------------------------------
Working capital changes that provided (used) cash, net of effects of acquisitions:
---------------------------------------------------------------------------------------------------------------------------------
Trade receivables (158.5) (26.3) 11.2
---------------------------------------------------------------------------------------------------------------------------------
Inventories and contracts in progress (57.4) 37.0 (2.7)
---------------------------------------------------------------------------------------------------------------------------------
Payables, trade and other 92.1 26.3 (144.4)
---------------------------------------------------------------------------------------------------------------------------------
Other (15.0) (2.7) 49.4
---------------------------------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities 1,174.0 1,088.9 973.7
---------------------------------------------------------------------------------------------------------------------------------
Investing Activities
---------------------------------------------------------------------------------------------------------------------------------
Additions to plant and equipment[a] (767.7) (888.9) (770.9)
---------------------------------------------------------------------------------------------------------------------------------
Acquisitions, less cash acquired[b] (170.4) (83.0) (182.2)
---------------------------------------------------------------------------------------------------------------------------------
Investment in and advances to unconsolidated affiliates (5.6) (110.6) (31.9)
---------------------------------------------------------------------------------------------------------------------------------
BOC transaction costs (665.8) (27.7) --
---------------------------------------------------------------------------------------------------------------------------------
Proceeds from sale of assets and investments 381.8 45.6 328.3
---------------------------------------------------------------------------------------------------------------------------------
Other .1 4.5 (27.6)
---------------------------------------------------------------------------------------------------------------------------------
Cash Used for Investing Activities (1,227.6) (1,060.1) (684.3)
---------------------------------------------------------------------------------------------------------------------------------
Financing Activities
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt proceeds[a] 820.9 119.5 102.2
---------------------------------------------------------------------------------------------------------------------------------
Payments on long-term debt (418.0) (82.9) (70.7)
---------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in commercial paper and short-term borrowings (182.1) 57.5 174.4
---------------------------------------------------------------------------------------------------------------------------------
Dividends paid to shareholders (155.7) (146.2) (134.0)
---------------------------------------------------------------------------------------------------------------------------------
Purchase of Treasury Stock -- (24.6) (365.0)
---------------------------------------------------------------------------------------------------------------------------------
Other 15.0 46.6 13.2
---------------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Financing Activities 80.1 (30.1) (279.9)
---------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 6.0 1.4 (.5)
---------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Items 32.5 .1 9.0
---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Items--Beginning of Year 61.6 61.5 52.5
---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Items--End of Year - note 1 $ 94.1 $ 61.6 $ 61.5
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
[a] Excludes capital leases of $4.9 million, $18.5 million, and $5.7 million in
2000, 1999, and 1998, respectively.
[b] Excludes $24.4 million of long-term debt assumed in acquisitions in fiscal
2000 and $7.4 million of former shareholder liability of a company acquired
in fiscal 1999. Excludes debt of $10.0 million to former shareholders of a
company acquired in fiscal 1998.
37
<PAGE>
<TABLE>
<CAPTION>
Consolidated Shareholders' Equity
Air Products and Chemicals, Inc. and Subsidiaries
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended 30 September [ millions of dollars, except per share ] 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, Beginning of Year $ 249.4 $ 249.4 $ 124.7
-----------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split -- -- 124.7
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year 249.4 249.4 249.4
-----------------------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
-----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year 341.5 329.2 453.0
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of Treasury Shares and Shares in Trust for benefit and stock option and award plans,
1,174,477 shares in 2000, 2,194,464 shares in 1999, and 677,844 shares in 1998 (7.9) (1.0) (11.2)
-----------------------------------------------------------------------------------------------------------------------------------
Tax benefit of stock option and award plans 8.6 13.3 12.1
-----------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split -- -- (124.7)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year 342.2 341.5 329.2
-----------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
-----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year 3,701.8 3,400.0 2,990.2
-----------------------------------------------------------------------------------------------------------------------------------
Net income 124.2 450.5 546.8
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends--Common Stock, $.74 per share in 2000, $.70 per share in 1999,
and $.64 per share in 1998, restated (158.1) (148.7) (137.0)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year 3,667.9 3,701.8 3,400.0
-----------------------------------------------------------------------------------------------------------------------------------
Unrealized Gain on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year 13.9 5.0 6.9
-----------------------------------------------------------------------------------------------------------------------------------
Change in unrealized gain, net of income tax expense of $1.0 in 2000, $4.9 in 1999,
and income tax benefit of $1.0 in 1998 1.8 8.9 (1.9)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year 15.7 13.9 5.0
-----------------------------------------------------------------------------------------------------------------------------------
Minimum Pension Liability Adjustments
-----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year (4.8) (14.3) --
-----------------------------------------------------------------------------------------------------------------------------------
Adjustments during year, net of income tax expense of $1.3 in 2000, $5.7 in 1999, and
income tax benefit of $8.6 in 1998 2.1 9.5 (14.3)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year (2.7) (4.8) (14.3)
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustments
-----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year (283.5) (222.2) (186.1)
-----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments, net of income tax expense of $29.3 in 2000, $2.2 in 1999, and income
tax benefit of $13.8 in 1998 (137.3) (61.3) (36.1)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year (420.8) (283.5) (222.2)
-----------------------------------------------------------------------------------------------------------------------------------
Treasury Stock
-----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year (681.6) (657.0) (297.3)
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of Treasury Shares for benefit and stock option and award plans, 379 shares in 2000,
371 shares in 1999, and 108,975 shares in 1998 -- -- 5.3
-----------------------------------------------------------------------------------------------------------------------------------
Purchase of Treasury Shares, 620,000 in 1999 and 6,835,394 in 1998 -- (24.6) (365.0)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year (681.6) (681.6) (657.0)
-----------------------------------------------------------------------------------------------------------------------------------
Shares in Trust - note 1
----------------------------------------------------------------------------------------------------------------------------------
Balance, Beginning of Year (375.1) (422.8) (443.3)
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of Shares in Trust for benefit and stock option and award plans,
1,174,098 shares in 2000, 2,194,093 shares in 1999, and 568,869 shares in 1998 26.3 47.7 20.5
-----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year (348.8) (375.1) (422.8)
-----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $2,821.3 $2,961.6 $2,667.3
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
38
<PAGE>
Notes to the Financial Statements
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
equity method of accounting is used when the company has a 20% to 50% interest
in other companies. 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.
Reclassification
Certain amounts in 1999 and 1998 have been restated to conform to the current
year presentation.
Revenue Recognition
Revenue from gases and chemicals sales is recognized as risk and title to the
product transfers to the customer, which usually occurs at the time shipment is
made. Revenues from equipment sale contracts are recorded primarily using the
percentage-of-completion method. Under this method, revenues for sale of major
equipment, such as Liquid Natural Gas and 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.
In accordance with Emerging Issues Task Force (EITF) 00-10, amounts billed for
shipping and handling fees are classified as sales in the consolidated income
statement. Costs incurred for shipping and handling are classified as cost of
sales.
Depreciation
In the financial statements, the straight-line method of depreciation is used
which deducts equal amounts of the cost of each asset from earnings every year
over its expected useful life.
The estimated useful lives primarily range from 5 to 45 years (principally 30
years) for buildings and components and from 14 to 20 years for gas generating
and chemical facilities, machinery and equipment.
Major Maintenance
The company changed from the accrue-in-advance method of accounting for major
maintenance and hydrostatic testing to the expense-as-incurred method. The
change was made to conform the company's accounting policy to recent accounting
guidelines recommending the expense-as-incurred method. The impact of this
change was not material to the financial statements.
Capitalized Interest
As the company builds new plant and equipment or invests in equity affiliates in
the development stage, it includes in the cost of these assets a portion of the
interest payments it makes during the year. In 2000, the amount of capitalized
interest was $17.4 million. In 1999, it was $22.1 million, and in 1998,
$15.7 million.
Interest Rate Swap Agreements
The company enters into interest rate swap agreements to reduce interest rate
risks and to modify the interest rate characteristics of its outstanding debt.
These agreements involve the exchange of fixed- and floating-rate interest
payments periodically over the life of the agreement without the exchange of the
underlying principal amounts. The net amount to be paid or received is accrued
as interest rates change and recognized over the life of the agreements as an
adjustment to interest expense. The fair value of these swap agreements is not
recognized in the financial statements. The notional amount of these agreements
is equal to or less than the designated debt instrument being hedged. The
variable rate bases of the swap instruments and the debt to which they are
designated are the same. The company will not enter into any interest rate swap
contracts which lever a move in interest rates on a greater than one-to-one
basis.
The company is also party to interest rate and currency 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. The contracts are
used to hedge intercompany and third party lending transactions and the value of
investments in certain foreign subsidiaries and affiliates. Gains and losses on
the currency component of these contracts, which hedge lending transactions, are
recognized in income and offset the foreign exchange gains and losses of the
related transaction. Gains and losses on the currency component of these
contracts which hedge investments in certain foreign subsidiaries and foreign
equity affiliates are not included in the income statement but are shown in the
cumulative translation adjustments account. The interest component of these
contracts is accounted for similarly to other interest rate swap agreements.
Gains and losses on terminated interest rate swap agreements are amortized into
income over the remaining life of the underlying debt obligation or the
remaining life of the original swap, if shorter.
39
<PAGE>
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.
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 the cumulative translation adjustments account in the shareholders' equity
section of the balance sheet. Certain forward exchange contracts are used to
hedge the value of investments in certain subsidiaries and equity affiliates.
Gains and losses on these contracts are not included in the income statement but
are shown in the cumulative translation adjustments account.
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 of the company and its subsidiaries are made in currencies
different from their own. Gains and losses from these foreign currency
transactions are generally included in income as they occur. The company enters
into forward exchange and option combination contracts to manage the exposure to
foreign currency fluctuations associated with certain monetary assets and
liabilities denominated in a foreign currency as well as certain highly
anticipated cash flows. Gains and losses on these contracts are recognized in
income and offset the foreign exchange gains and losses of the related
transaction.
Forward exchange and option combination contracts are sometimes used to hedge
firm commitments, such as the purchase of plant and equipment. Additionally,
purchased foreign currency options are sometimes used to hedge firm commitments
and certain highly anticipated cash flows, including export sales transactions.
The contracts are designated as, and effective as, hedges. The significant
characteristics and expected terms of the highly anticipated cash flows are
identified. Gains and losses resulting from these agreements are deferred and
reflected as adjustments of the related foreign currency transactions. Gains and
losses on terminated contracts, for which hedge criteria are met, are deferred
and recognized as an adjustment of the related foreign currency transaction.
Environmental Expenditures
Accruals for investigatory and noncapital remediation costs are recorded when it
is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Remediation costs are capitalized if the costs improve the
company's property as compared with the condition of the property when
originally constructed or acquired or if the costs prevent environmental
contamination from future operations. Costs to operate and maintain the
capitalized facilities are expensed as incurred.
The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and considers
factors such as existing technology, presently enacted laws and regulations, and
prior experience in remediation of contaminated sites. While the current law
potentially imposes joint and several liability upon each party at any Superfund
site, the company's contribution to clean up these sites is expected to be
limited, given the number of other companies which have also been named as
potentially responsible parties and the volumes of waste involved. A reasonable
basis for apportionment of costs among responsible parties is determined and the
likelihood of contribution by other parties is established. If it is considered
probable that the company will only have to pay its expected share of the total
site cleanup, the liability reflects the company's expected share. In
determining the probability of contribution, the company considers the solvency
of the parties, whether responsibility is being disputed, the terms of any
existing agreements, and experience to date regarding similar matters. These
liabilities do not take into account any claims for recoveries from insurance or
third parties and are not discounted. As assessments and remediation progress at
individual sites, these liabilities are reviewed periodically and adjusted to
reflect additional technical and legal information which becomes available.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The accruals for environmental liabilities are reflected in the
balance sheet primarily as part of other noncurrent liabilities.
Income Taxes
The company accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the tax effects
of temporary differences between the financial reporting and tax bases of assets
and liabilities using enacted tax rates. A principal temporary difference
results from the excess of tax depreciation over book depreciation because
accelerated methods of depreciation and shorter useful lives are used for income
tax purposes. The cumulative impact of a change in tax rates or regulations is
included in income tax expense in the period that includes the enactment date.
40
<PAGE>
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.
Inventories
To determine the cost of chemical inventories and some gas and equipment
inventories in the United States, the company uses the last-in, first-out (LIFO)
method. This method assumes the most recent cost is closer to the cost of
replacing an item that has been sold. During periods of rising prices, LIFO
maximizes the cost of goods sold and minimizes the profit reported on the
company's income statement.
All other inventory values are determined using the first-in, first-out (FIFO)
method. Cost of an item sold is based on the first item produced or on the
current market value, whichever is lower.
Goodwill
When a company is acquired, the difference between the fair value of its net
assets and the purchase price is goodwill. Goodwill is recorded as an asset on
the balance sheet and is amortized into income over periods not exceeding 40
years. The company assesses the impairment of goodwill related to consolidated
subsidiaries in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121. This statement requires the recognition of an impairment loss
for an asset held for use when the estimate of undiscounted future cash flows
expected to be generated by the asset is less than its carrying amount.
Measurement of the impairment loss is based on the fair value of the asset,
which is determined using valuation techniques such as the present value of
expected future cash flows. The measurement of an impairment loss of goodwill
related to equity affiliates, however, is based on expected undiscounted future
cash flows and is excluded from the scope of SFAS No. 121.
Shares in Trust
The company has established a trust, funded with Treasury Stock, to provide for
a portion of future payments to employees under the company's existing
compensation and benefit programs. Shares issued to the trust were valued at
market price on the date of contribution and reflected as a reduction of
shareholders' equity in the balance sheet. As shares are transferred from the
trust to fund compensation and benefit obligations, this equity account is
reduced based on the original cost of shares to the trust; the satisfaction of
liabilities is based on the fair value of shares transferred; and the difference
between the fair value of shares transferred and the original cost of shares to
the trust is charged or credited to capital in excess of par value.
Estimates and Assumptions
The preparation of financial statements in conformity with 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.
2. New Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"--a replacement of SFAS No. 125. SFAS No. 140
adds new disclosure requirements for fiscal years ending after 15 December 2000.
Certain provisions apply to transfers of financial assets and extinguishments of
liabilities occurring after 31 March 2001. SFAS No. 140 also revises the
criteria involving qualifying special purpose entities. The company is reviewing
the impact of SFAS No. 140 but does not expect any material impact on the
financial statements from the adoption of this standard.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The company will not be required to change its revenue
recognition accounting principles due to the adoption of SAB 101.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities"--an amendment of FASB Statement No.
133. This Statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS No. 133. SFAS No. 133 was
issued in June 1998 and establishes
41
<PAGE>
accounting and reporting standards requiring that every derivative (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless special accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge treatment. The transition adjustment
resulting from adopting this Statement will be reported in net income and other
comprehensive income. The company will adopt SFAS No. 133 and SFAS No. 138 in
the first quarter of fiscal year 2001. The adoption of these Statements will not
have a material effect on the company's financial statements or risk management
processes.
3. Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the company's
financial instruments as of 30 September 2000 and 1999. The fair value of the
company's debt, interest rate swap agreements, forward exchange contracts,
option combination contracts, and purchased foreign currency options is 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 fair
values of these instruments is generally performed by the company.
The fair value of other investments is based principally on quoted market
prices. The carrying amounts reported in the balance sheet for cash and cash
items, 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 table below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
2000 2000 1999 1999
Carrying Fair Carrying Fair
30 September [millions of dollars] Value Value Value Value
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Other investments $34.7 $34.7 $38.4 $38.4
----------------------------------------------------------------------------------------------------------------------
Currency option contracts - notes 5 and 18 -- -- 70.6 70.5
----------------------------------------------------------------------------------------------------------------------
Interest rate swap agreements - note 6 33.4 33.5 85.4 136.9
----------------------------------------------------------------------------------------------------------------------
Forward exchange contracts - note 5 47.2 29.7 12.5 1.7
----------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt, including current portion - note 4 $2,795.3 $2,925.2 $2,434.6 $2,642.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
4. Long-Term Debt
The following table shows the company's outstanding debt at the end of fiscal
2000 and 1999, excluding any portion of the debt required to be repaid within a
year:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payable in U.S. dollars:
---------------------------------------------------------------------------------------------------------------------------------
8 7/8% notes, due 2001 $ -- $ 100.0
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes, Series C, due through 2001 -- 10.0
---------------------------------------------------------------------------------------------------------------------------------
8.35% debentures, due 2002, effective interest rate 8.4% 100.0 100.0
---------------------------------------------------------------------------------------------------------------------------------
6 1/4% notes, due 2003 100.0 100.0
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes, Series B, due through 2003, weighted average interest rate 6.1% 16.0 16.0
---------------------------------------------------------------------------------------------------------------------------------
7 3/8% notes, due 2005, effective interest rate 7.5% 150.0 150.0
---------------------------------------------------------------------------------------------------------------------------------
8 1/2% debentures, due 2006, callable by company in 2004, effective interest rate 8.6% 100.0 100.0
---------------------------------------------------------------------------------------------------------------------------------
Notes, due through 2006, weighted average interest rate 7.2% 72.5 72.5
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes, Series F, due through 2016, weighted average interest rate 6.4% 215.0 215.0
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes, Series D, due through 2016, weighted average interest rate 6.8% 400.0 400.0
---------------------------------------------------------------------------------------------------------------------------------
8 3/4% debentures, due 2021, effective interest rate 9.0% 100.0 100.0
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes, Series E, due through 2026, weighted average interest rate 7.6% 250.0 250.0
---------------------------------------------------------------------------------------------------------------------------------
California Pollution Control bonds, due 2027, weighted average interest rate 4.7% 57.0 57.0
---------------------------------------------------------------------------------------------------------------------------------
Solid Waste Disposal Revenue bonds, due through 2035, weighted average interest rate 5.7% 75.0 25.0
---------------------------------------------------------------------------------------------------------------------------------
Other, due through 2023, weighted average interest rate 7.2% 62.9 44.4
---------------------------------------------------------------------------------------------------------------------------------
Payable in foreign currency:
---------------------------------------------------------------------------------------------------------------------------------
British Pound loan, due 2004, interest rate 6.5% 32.3 36.2
---------------------------------------------------------------------------------------------------------------------------------
6.0% Euro loan, due 2005 438.5 --
---------------------------------------------------------------------------------------------------------------------------------
Euro loan, due 2006, interest rate 4.7% 40.5 49.1
---------------------------------------------------------------------------------------------------------------------------------
5.97% Dutch Guilder loan, due through 2006 29.9 43.4
---------------------------------------------------------------------------------------------------------------------------------
Belgian Franc loans, due through 2006, weighted average interest rate 4.2% 8.0 15.2
---------------------------------------------------------------------------------------------------------------------------------
6.5% Euro loan, due 2007 263.1 --
---------------------------------------------------------------------------------------------------------------------------------
Malaysian Ringgit loans, due through 2007, weighted average interest rate 7.1% 39.9 41.9
---------------------------------------------------------------------------------------------------------------------------------
Korean Won loans, due through 2018, weighted average interest rate 8.4% 25.2 --
---------------------------------------------------------------------------------------------------------------------------------
Other, due through 2018, weighted average interest rate 4.7% 7.4 10.3
---------------------------------------------------------------------------------------------------------------------------------
Less: Unamortized discount (6.7) (4.1)
---------------------------------------------------------------------------------------------------------------------------------
2,576.5 1,931.9
Capital lease obligations:
---------------------------------------------------------------------------------------------------------------------------------
United States, due through 2005, weighted average interest rate 7.3% 6.2 6.2
---------------------------------------------------------------------------------------------------------------------------------
Foreign, due through 2004, weighted average interest rate 8.5% 33.1 23.5
---------------------------------------------------------------------------------------------------------------------------------
39.3 29.7
---------------------------------------------------------------------------------------------------------------------------------
$2,615.8 $1,961.6
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
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 has obtained the commitment of a number of commercial banks to lend
money at market rates whenever needed by the company. These committed lines of
credit also are used to support the issuance of commercial paper. In January
1996, the company entered into a $600 million committed, multicurrency,
syndicated credit facility which matures in January 2003. During fiscal 2000,
the company added an additional $500 million revolving credit commitment which
matured in October 2000. No borrowings were outstanding under these commitments
at 30 September 2000. At 30 September 2000, foreign subsidiaries had additional
committed credit lines of $69.6 million, $16.1 million of which was borrowed and
outstanding.
Maturities of long-term debt in each of the next five years are as follows:
$179.5 million in 2001; $218.0 million in 2002; $151.0 million in 2003;
$163.3 million in 2004; and $617.5 million in 2005.
Included in the medium-term notes, Series E, is a $100.0 million note, due in
2026, with a one-time put option exercisable by the investor in 2008. Included
in Series F is a $50.0 million note, due in 2016, with a one-time put option
exercisable by the investor in 2002.
5. Foreign Exchange Contracts
The company, in management of its exposure to fluctuations in foreign currency
exchange rates, has entered into a variety of foreign exchange contracts,
including forward, option combination, and purchased option contracts. These
agreements generally involve the exchange of one currency for a second currency
at some future date. Counterparties to these agreements are major international
financial institutions. The company's counterparty credit guidelines and
management's position regarding possible exposure to losses related to credit
risk is comparable to that for interest rate swap agreements as discussed in
Note 6.
The company enters into forward exchange and option combination contracts to
reduce the exposure to foreign currency fluctuations associated with certain
monetary assets and liabilities, as well as certain firm commitments and highly
anticipated cash flows. 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 is also party to purchased option contracts which, if exercised, involve
the sale or purchase of foreign currency at a fixed exchange rate for a
specified period of time. Purchased option contracts are used to hedge firm
commitments and certain highly anticipated cash flows, including export sales
transactions. The company had entered into various purchased currency options
and forward exchange contracts to hedge the currency exposure related to The BOC
Group plc (BOC) transaction. Information regarding this transaction and these
contracts is disclosed in Note 18.
The following table illustrates the U.S. dollar equivalent, including offsetting
positions, of foreign exchange contracts at 30 September 2000 and 1999 along
with maturity dates, net unrealized gain (loss), and net unrealized gain (loss)
deferred.
44
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Net
Latest Unrealized Unrealized Net Unrealized
Contract Amount Maturity Gross Gross Unrealized Gain (Loss)
[ millions of dollars ] ($U.S. Equivalent) Date Gain (Loss) Gain (Loss) Deferred
------------------------------------------------------------------------------------------------------------------------------------
30 September 2000
------------------------------------------------------------------------------------------------------------------------------------
Forward exchange contracts:
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$U.S./Euro $473.1 2007 $27.1 $ (.3) $26.8 $ --
----------------------------------------------------------------------------------------------------------------------------------
Euro/U.K. Pound Sterling 118.1 2001 .1 -- .1 .1
----------------------------------------------------------------------------------------------------------------------------------
Euro/Canadian Dollar 110.2 2001 -- (.2) (.2) --
----------------------------------------------------------------------------------------------------------------------------------
$U.S./U.K. Pound Sterling 79.7 2001 3.8 (.3) 3.5 (.3)
----------------------------------------------------------------------------------------------------------------------------------
Other 69.2 2001 .2 (.7) (.5) (.4)
----------------------------------------------------------------------------------------------------------------------------------
$850.3 $31.2 $(1.5) $29.7 $(.6)
----------------------------------------------------------------------------------------------------------------------------------
30 September 1999
----------------------------------------------------------------------------------------------------------------------------------
Forward exchange contracts:
----------------------------------------------------------------------------------------------------------------------------------
$U.S./Euro $ 417.4 2003 $ 4.7 $(1.6) $ 3.1 $ --
----------------------------------------------------------------------------------------------------------------------------------
$U.S./U.K. Pound Sterling 230.9 2000 .9 (3.4) (2.5) .9
----------------------------------------------------------------------------------------------------------------------------------
Euro/Canadian Dollar 96.3 2000 1.3 -- 1.3 --
----------------------------------------------------------------------------------------------------------------------------------
Euro/U.K. Pound Sterling 56.8 2000 1.1 -- 1.1 1.1
----------------------------------------------------------------------------------------------------------------------------------
Other 75.7 2000 .1 (1.4) (1.3) (1.2)
----------------------------------------------------------------------------------------------------------------------------------
877.1 8.1 (6.4) 1.7 .8
----------------------------------------------------------------------------------------------------------------------------------
Option contracts:
----------------------------------------------------------------------------------------------------------------------------------
$U.S./U.K. Pound Sterling 2,748.3 2000 12.5 -- 12.5 --
----------------------------------------------------------------------------------------------------------------------------------
$U.S./Japanese Yen 7.2 2000 -- (.1) (.1) (.1)
----------------------------------------------------------------------------------------------------------------------------------
2,755.5 12.5 (.1) 12.4 (.1)
----------------------------------------------------------------------------------------------------------------------------------
$3,632.6 $20.6 $(6.5) $14.1 $ .7
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The company's net equity position in its principal foreign subsidiaries at
30 September 2000 was $1,724.1 million. These subsidiaries have operations in
the United Kingdom, Germany, Spain, France, Netherlands, Belgium, Brazil, Japan,
China, Malaysia, Korea, Singapore, Indonesia, and Canada. In addition to its
foreign subsidiaries, the company has an equity position in foreign equity
affiliates as disclosed in Note 8.
45
<PAGE>
6. Interest Rate Swap Agreements
The company enters into interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio in order to maintain the
percentage of fixed- and variable-rate debt within certain 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.
Accordingly, the company enters into agreements to both effectively convert
variable-rate debt to fixed-rate debt and to effectively convert fixed-rate debt
to variable-rate debt, which is principally indexed to LIBOR rates. The company
has also entered into variable to variable interest rate swap contracts to
effectively convert the stated variable interest rates of the medium-term notes,
Series C, to an average interest rate slightly above the three-month U.S. dollar
LIBOR rate. The fair value gain (loss) on the variable to variable swaps is
equally offset by a fair value loss (gain) on the related debt agreements.
The company is also party to interest rate and currency swap contracts. These
contracts effectively convert the currency denomination of a debt instrument
into another currency in which the company has a net equity position while
changing the interest rate characteristics of the instrument.
Counterparties to interest rate swap agreements are major financial
institutions. The company has established counterparty credit guidelines and
only enters into transactions with financial institutions of investment grade or
better. Minimum credit standards become more stringent as the duration of the
swap agreement increases. The company has provisions to require collateral in
certain instances. The market value of such collateral posted in the company's
favor as of 30 September 2000 is $19.0 million and is a result of the fair value
exposure to an investment grade counterparty exceeding the company's policy
maximum. Management believes the risk of incurring losses related to credit risk
is remote.
The table below illustrates the contract or notional (face) amounts outstanding,
maturity dates, weighted average receive and pay rates as of the end of the
fiscal year, and the net unrealized gain of interest rate swap agreements by
type at 30 September 2000 and 1999. The notional amounts are used to calculate
contractual payments to be exchanged and are not generally actually paid or
received, except for the currency swap component of the contracts. The net
unrealized gain on these agreements, which equals their fair value, is based on
the relevant yield curve at the end of the fiscal year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average Unrealized Unrealized Net
[ millions of dollars ] Notional Rate Rate Gross Gross Unrealized
30 September 2000 Amount Maturities Receive Pay Gain (Loss) Gain
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed to Variable $ 31.0 2004 6.9% 6.6% $ .2 $ -- $ .2
-----------------------------------------------------------------------------------------------------------------------------------
Variable to Variable 10.0 2001 20.7% 6.8% 21.2 -- 21.2
-----------------------------------------------------------------------------------------------------------------------------------
Interest Rate/Currency 160.7 2001-2005 7.7% 7.7% 12.3 (.2) 12.1
-----------------------------------------------------------------------------------------------------------------------------------
$201.7 $33.7 $(.2) $33.5
-----------------------------------------------------------------------------------------------------------------------------------
30 September 1999
-----------------------------------------------------------------------------------------------------------------------------------
Fixed to Variable $311.0 2000-2007 6.9% 5.2% $ 5.6 $ -- $ 5.6
-----------------------------------------------------------------------------------------------------------------------------------
Variable to Variable 60.0 2000-2001 20.0% 5.4% 121.1 -- 121.1
-----------------------------------------------------------------------------------------------------------------------------------
Interest Rate/Currency 270.8 2002-2006 5.3% 7.9% 13.5 (3.3) 10.2
-----------------------------------------------------------------------------------------------------------------------------------
$641.8 $140.2 $(3.3) $136.9
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Of the net unrealized gain as of 30 September 2000 and 1999, a net gain of
$.1 million and $51.5 million, respectively, has not been recognized in the
financial statements. At the end of fiscal 2000 and 1999, a net deferred gain of
$.8 million and $1.1 million, respectively, resulted from terminated contracts.
After the effects of interest rate swap agreements, the company's total debt,
including current portion, is composed of 77% fixed-rate debt and 23%
variable-rate debt as of 30 September 2000.
7. Inventories
The components of inventories are as follows:
---------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
---------------------------------------------------------------------------
Inventories at FIFO cost:
----------------------------------------------------------------------------
Finished goods $244.5 $278.2
---------------------------------------------------------------------------
Work in process 39.7 36.0
---------------------------------------------------------------------------
Raw materials and supplies 131.9 134.7
---------------------------------------------------------------------------
416.1 448.9
Less excess of FIFO cost over LIFO cost (27.3) (24.0)
---------------------------------------------------------------------------
$388.8 $424.9
---------------------------------------------------------------------------
Inventories valued using the LIFO method comprised 43.2% and 49.4% of
consolidated inventories before LIFO adjustment at 30 September 2000 and 1999,
respectively. Liquidation of prior years' LIFO inventory layers in 2000, 1999,
and 1998 did not materially affect cost of sales in any of these years.
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: Cambria CoGen
Company (50%); Stockton CoGen Company (50%); Orlando CoGen Limited, L.P. (50%);
Pure Air on the Lake, L.P. (50%); Bangkok Cogeneration Company Limited (48.8%);
Sankyo Air Products Co., Ltd. (50%); San-Apro Ltd. (50%); Daido Air Products
Electronics, Inc. (49%); Sapio Produzione Idrogeno Ossigeno S.r.L. (49%); INFRA
Group (40%); San Fu Chemicals (48.1%); Air Products South Africa (50%); Bangkok
Industrial Gases Company Ltd. (50.6%); INOX Air Products Limited (48.9%); APP
GmbH in WPS GmbH & CoKG (20%); and principally other industrial gas producers.
----------------------------------------------------------------------------
[ millions of dollars ] 2000 1999
----------------------------------------------------------------------------
Current assets $ 739.3 $ 648.3
----------------------------------------------------------------------------
Noncurrent assets 1,508.1 1,659.4
----------------------------------------------------------------------------
Current liabilities 506.9 483.5
----------------------------------------------------------------------------
Noncurrent liabilities 714.8 790.5
----------------------------------------------------------------------------
Net sales 1,681.1 1,436.0
----------------------------------------------------------------------------
Sales less cost of sales 565.6 487.8
----------------------------------------------------------------------------
Net income 245.7 221.3
----------------------------------------------------------------------------
47
<PAGE>
The company's share of income of all equity affiliates for 2000, 1999, and 1998
was $99.6 million, $83.7 million, and $48.4 million, respectively. These amounts
exclude $12.0 million, $22.2 million, and $10.4 million of related net expenses
incurred by the company. Dividends received from equity affiliates were
$49.7 million, $36.1 million, and $44.6 million in 2000, 1999, and 1998,
respectively.
The investment in net assets of and advances to equity affiliates at
30 September 2000 and 1999 included investment in foreign affiliates of
$442.4 million and $478.9 million, respectively.
As of 30 September 2000 and 1999, the amount of investment in companies
accounted for by the equity method included goodwill in the amount of
$85.3 million and $93.6 million, respectively. The goodwill is being amortized
into income over periods not exceeding 40 years.
9. Capital Stock
The 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 2000, and
300 million shares of Common Stock with a par value of $1 per share. In May
1998, the Board of Directors authorized a two-for-one stock split. On 15 June
1998, each shareholder was issued one additional share of Common Stock for each
share owned as of 15 May 1998. The consolidated financial statements have been
adjusted, where appropriate, to reflect the effects of the stock split for all
periods presented. At 30 September 2000, the number of shares of Common Stock
outstanding was 214,218,709.
The company established a trust to fund a portion of future payments to
employees under existing compensation and benefit programs in fiscal 1994. The
trust, which is administered by an independent trustee, was funded with
20 million shares of Treasury Stock. It will not increase or alter the amount of
benefits or compensation which is paid under existing plans. The establishment
of the trust does not have an effect on earnings per share or return on average
shareholders' equity. As of 30 September 2000, the balance of shares remaining
in the trust is 15.1 million.
On 19 March 1998, the Board of Directors unanimously approved a shareholder
rights plan to replace the company's previous rights plan, which expired
16 March 1998. Under the plan, the Board of Directors declared a dividend of one
Right for each share of Common Stock outstanding at the close of business on
19 March 1998 and with respect to Common Shares issued thereafter until the
Distribution Date (as defined below). Each Right, when it becomes exercisable as
described below, will entitle its holder to purchase one one-thousandth
(1/1,000) of a share of Series A Participating Cumulative Preferred Stock, par
value $1 per share, of the company (the "Preferred Shares") at a price of
$345.00 (the "Purchase Price").
Until the earlier of (i) such time as the company learns that a person or group
has acquired, or obtained the right to acquire, beneficial ownership of more
than 15% of the outstanding Common Shares (such person or group being called an
"Acquiring Person"), and (ii) such date, if any, as may be designated by the
Board of Directors following the commencement of, or first public disclosure of
an intention to commence, a tender or exchange offer for outstanding Common
Shares which could result in such person or group becoming the beneficial owner
of more than 15% of the outstanding Common Shares, (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced by
certificates for Common Shares and not by separate Right certificates.
Therefore, until the Distribution Date, the Rights will be transferred with and
only with the Common Shares. The Rights are not exercisable until the
Distribution Date and will expire on 19 March 2008 (the "Expiration Date"),
unless earlier redeemed by the company as described on the following page.
48
<PAGE>
Subject to the right of the Board of Directors to redeem the Rights, at such
time as there is an Acquiring Person, each Right (other than Rights held by an
Acquiring Person) will thereafter have the right to receive, upon exercise
thereof, for the Purchase Price, that number of one one-thousandth of a
Preferred Share equal to the number of Common Shares which at the time of such
transaction would have a market value of twice the Purchase Price. If the
company is acquired in a merger or other business combination by an Acquiring
Person, or 50% or more of the company's assets or assets representing 50% or
more of the company's earning power are sold, leased, exchanged, or otherwise
transferred (in one or more transactions) to an Acquiring Person, each Right
(other than Rights held by an Acquiring Person) will entitle its holder to
purchase, for the Purchase Price, that number of common shares of such
corporation (or, if such corporation is not publicly traded, common shares of
any publicly traded affiliate of such corporation) which at the time of the
transaction would have a market value (or, if the Acquiring Person is not a
publicly traded corporation, having a book value) of twice the Purchase Price.
The Rights are redeemable by the Board of Directors at a redemption price of
$.01 per Right any time prior to the earlier of such time as there is an
Acquiring Person and Expiration Date.
10. Income Taxes
The following table shows the components of the provision for income taxes:
---------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
---------------------------------------------------------------------------
Federal:
---------------------------------------------------------------------------
Current $(31.3) $117.5 $238.7
---------------------------------------------------------------------------
Deferred 3.6 38.8 (32.5)
---------------------------------------------------------------------------
(27.7) 156.3 206.2
---------------------------------------------------------------------------
State:
---------------------------------------------------------------------------
Current 3.0 6.3 22.7
---------------------------------------------------------------------------
Deferred (14.7) 1.6 (10.8)
---------------------------------------------------------------------------
Impact of law/rate change -- (1.9) --
---------------------------------------------------------------------------
(11.7) 6.0 11.9
---------------------------------------------------------------------------
Foreign:
---------------------------------------------------------------------------
Current 20.1 20.8 33.5
---------------------------------------------------------------------------
Deferred 5.6 20.3 24.7
---------------------------------------------------------------------------
Impact of law/rate change -- -- .6
---------------------------------------------------------------------------
25.7 41.1 58.8
---------------------------------------------------------------------------
$(13.7) $203.4 $276.9
---------------------------------------------------------------------------
The significant components of deferred tax assets and liabilities are as
follows:
-----------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
-----------------------------------------------------------------------------
Gross deferred tax assets:
-----------------------------------------------------------------------------
Pension and other compensation accruals $142.0 $121.1
-----------------------------------------------------------------------------
Tax loss and investment tax credit carryforwards 34.9 29.2
-----------------------------------------------------------------------------
Reserves and accruals 18.9 27.6
-----------------------------------------------------------------------------
Postretirement benefits 27.8 28.8
-----------------------------------------------------------------------------
Inventory 18.4 18.6
-----------------------------------------------------------------------------
Other 70.2 69.2
-----------------------------------------------------------------------------
Valuation allowance (6.2) (3.5)
-----------------------------------------------------------------------------
Deferred tax assets 306.0 291.0
-----------------------------------------------------------------------------
Gross deferred tax liabilities:
-----------------------------------------------------------------------------
Plant and equipment 752.0 789.8
-----------------------------------------------------------------------------
Investment in partnerships 84.6 52.1
-----------------------------------------------------------------------------
Employee benefit plans 54.4 45.6
-----------------------------------------------------------------------------
Currency gains 16.9 11.3
-----------------------------------------------------------------------------
Construction contract accounting methods 5.0 10.7
-----------------------------------------------------------------------------
Unrealized gain on cost investment 12.2 7.7
-----------------------------------------------------------------------------
Other 74.5 60.9
-----------------------------------------------------------------------------
Deferred tax liabilities 999.6 978.1
-----------------------------------------------------------------------------
Net deferred income tax liability $693.6 $687.1
-----------------------------------------------------------------------------
49
<PAGE>
Net current deferred tax assets of $51.5 million and net noncurrent deferred tax
assets of $36.7 million are included in other current assets and other
noncurrent assets at 30 September 2000, respectively. Net current deferred tax
assets of $35.1 million and net noncurrent deferred tax assets of $8.9 million
are included in other current assets and other noncurrent assets at 30 September
1999.
Foreign and state operating loss carryforwards on 30 September 2000 were
$66.7 million and $7.3 million, respectively. Foreign losses of $1.9 million are
available to offset future foreign income through 2002. The balance of these
losses have an unlimited carryover period. State operating loss carryforwards
are available through 2020. Foreign capital loss carryforwards were $2.0 million
on 30 September 2000 and have an unlimited carryover period.
The valuation allowance as of 30 September 2000 primarily relates to the tax
loss carryforwards referenced above. If events warrant the reversal of the
$6.2 million valuation allowance, it would result in a reduction of tax expense.
Major differences between the federal statutory rate and the effective tax rate
are:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
[ percent of income before taxes ] 2000 1999 1998
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States federal statutory rate 35.0% 35.0% 35.0%
----------------------------------------------------------------------------------------------
State taxes, net of federal tax benefit (3.5) 2.1 1.9
----------------------------------------------------------------------------------------------
Income from equity affiliates (22.1) (3.0) (1.9)
----------------------------------------------------------------------------------------------
Foreign tax credits and refunds on dividends
received from foreign affiliates (8.3) .6 (1.0)
----------------------------------------------------------------------------------------------
Export tax benefits (4.7) (1.4) (.9)
----------------------------------------------------------------------------------------------
Investment tax credits (.5) (.1) (.3)
----------------------------------------------------------------------------------------------
Restructuring of operations (6.7) -- --
----------------------------------------------------------------------------------------------
American Ref-Fuel sale and contract settlements -- -- 1.4
----------------------------------------------------------------------------------------------
Other (1.6) (2.1) (.6)
----------------------------------------------------------------------------------------------
Effective tax rate after minority interest (12.4%) 31.1% 33.6%
----------------------------------------------------------------------------------------------
Minority interest .8 (.7) --
----------------------------------------------------------------------------------------------
Effective tax rate (11.6%) 30.4% 33.6%
----------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the income of U.S. and foreign operations, before
taxes and minority interest:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
--------------------------------------------------------------------------------------
Income from consolidated operations:
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $(145.2) $433.8 $626.8
--------------------------------------------------------------------------------------
Foreign 163.7 151.5 149.2
--------------------------------------------------------------------------------------
Income from equity affiliates 99.6 83.7 48.4
--------------------------------------------------------------------------------------
$ 118.1 $669.0 $824.4
--------------------------------------------------------------------------------------
</TABLE>
The company does not pay or record U.S. income taxes on the undistributed
earnings of its foreign subsidiaries and its 20% to 50% owned corporate joint
ventures as long as those earnings are permanently reinvested in the companies
that produced them. These cumulative undistributed earnings are included in
consolidated retained earnings on the balance sheet and amounted to
$865.5 million at the end of fiscal 2000. An estimated $203.3 million in U.S.
income and foreign withholding taxes would be due if these earnings were
remitted as dividends, after payment of all deferred taxes.
11. Plant and Equipment
The major classes of plant and equipment, at cost, are as follows:
-------------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
-------------------------------------------------------------------------------
Land $ 144.0 $ 139.3
-------------------------------------------------------------------------------
Buildings 668.8 651.2
-------------------------------------------------------------------------------
Gas generating and chemical facilities,
machinery and equipment 9,031.0 8,713.7
-------------------------------------------------------------------------------
Construction in progress 467.1 683.7
-------------------------------------------------------------------------------
$10,310.9 $10,187.9
-------------------------------------------------------------------------------
50
<PAGE>
12. Stock Option and Award Plans
Long-Term Incentive Plan
The Long-Term Incentive Plan (the "Plan") provides awards of stock options and
deferred stock units to executives and key employees. The award type most
frequently used is the nonqualified stock option with an exercise price fixed at
100% of the fair market value of a share of Air Products Common Stock ("stock")
on the date of grant. Nonqualified stock options become exercisable in
cumulative installments of 33 1/3% one year after the date of grant and annually
thereafter, and must be exercised no later than ten years and one day from the
date of grant.
In October 1998, the company granted 697,300 premium priced stock options in
addition to the fair market value stock options. These stock options have an
exercise price above market on the date of grant. The awards are 100% vested
after two years and are exercisable over an additional three-year period.
In fiscal 1997 and 1999, the company also granted deferred stock units
identified as performance shares to executive officers and other key employees.
These awards provide for the issuance of Common Stock based on certain
management objectives achieved by the performance period ending 30 September
1998 and 30 September 2000, respectively. Generally, 50% of the performance
shares are payable at the end of the performance period, with the balance
payable after retirement. No shares will be paid out under the 1999 grant. The
number of shares outstanding for the fiscal 1997 grant is 360,585 share units.
Compensation expense is recognized over the vesting period.
Prior to the issuance of performance shares, the company granted deferred stock
units as career share awards in fiscal years 1992 through 1997 to certain
executive officers and other key employees. Career shares are deferred stock
units payable in shares of stock after retirement. Career share awards
equivalent to 777,482 and 803,743 shares of stock were outstanding at the end of
fiscal years 2000 and 1999, respectively. Compensation expense is recognized
over the vesting period.
The following table summarizes stock option transactions (fair market value
stock options and premium priced stock options) as follows:
-------------------------------------------------------------------------------
Number of Average
Shares Price
-------------------------------------------------------------------------------
Outstanding at 30 September 1997 10,859,886 $21.73
-------------------------------------------------------------------------------
Granted 2,014,500 41.31
-------------------------------------------------------------------------------
Exercised (1,021,169) 13.56
-------------------------------------------------------------------------------
Forfeited (40,075) 32.32
-------------------------------------------------------------------------------
Outstanding at 30 September 1998 11,813,142 25.73
------------------------------------------------------------------------------
Granted 2,644,400 32.25
------------------------------------------------------------------------------
Exercised (1,050,803) 14.67
------------------------------------------------------------------------------
Forfeited (149,233) 33.98
------------------------------------------------------------------------------
Outstanding at 30 September 1999 13,257,506 27.81
------------------------------------------------------------------------------
Granted 2,003,500 28.78
------------------------------------------------------------------------------
Exercised (985,853) 13.67
------------------------------------------------------------------------------
Forfeited (54,548) 32.52
------------------------------------------------------------------------------
Outstanding at 30 September 2000 14,220,605 28.91
------------------------------------------------------------------------------
Exercisable at end of year 9,620,945
------------------------------------------------------------------------------
Participants at end of year 563
------------------------------------------------------------------------------
Available for future grant at end of year 2,590,295
------------------------------------------------------------------------------
51
<PAGE>
The following table summarizes information about options outstanding at
30 September 2000:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.92-23.13 4,026,276 3.65 $20.62 4,026,276 $20.62
-------------------------------------------------------------------------------------------------------------
26.03-29.47 6,920,005 8.20 28.48 3,681,520 27.98
-------------------------------------------------------------------------------------------------------------
36.00-41.69 3,274,324 8.01 40.01 1,913,149 39.56
-------------------------------------------------------------------------------------------------------------
</TABLE>
Other Stock-Based Incentives
In addition to the Long-Term Incentive Plan, there is a Directors' Stock Option
Plan. Options awarded to nonemployee directors are exercisable six months after
grant date and must be exercised no later than ten years and one day from the
date of grant. Under this plan, there were 124,000 and 104,000 options
outstanding and exercisable at the end of fiscal years 2000 and 1999,
respectively. Option prices were $30.81 and $34.53 per share for options issued
in fiscal 2000 and 1999, respectively.
Deferred stock units equivalent to 692,808 and 853,081 shares of stock were
outstanding at the end of fiscal year 2000 and 1999, respectively. Compensation
expense is generally recognized over the four-year deferral period applicable to
the awards.
In fiscal 2000, the company granted stock options to certain employees below the
executive level. These options vest three years after date of grant and are
exercisable over an additional seven-year period. Options for fiscal 2000 were
granted at $28.78 per share. As of 30 September 2000, 574,000 options were
outstanding.
In October 1995, 1997, and 1999, the company awarded stock options to virtually
all employees. These options vest three years after date of grant and are
exercisable over an additional seven-year period. The following table summarizes
these global stock option transactions:
----------------------------------------------------------------------------
Number of Average
Shares Price
----------------------------------------------------------------------------
Outstanding at 30 September 1998 5,669,600 $34.59
----------------------------------------------------------------------------
Exercised (722,200) 26.03
----------------------------------------------------------------------------
Forfeited (115,200) 37.38
----------------------------------------------------------------------------
Outstanding at 30 September 1999 4,832,200 35.82
----------------------------------------------------------------------------
Granted 1,667,100 28.78
----------------------------------------------------------------------------
Exercised (76,200) 26.03
----------------------------------------------------------------------------
Forfeited (196,240) 35.93
----------------------------------------------------------------------------
Outstanding at 30 September 2000 6,226,860 34.05
----------------------------------------------------------------------------
Pro Forma Information
The company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. SFAS No. 123 requires the company to
disclose pro forma net income and pro forma earnings per share amounts as if
compensation expense were recognized for options granted after fiscal year 1995.
Using this approach, net income and earnings per share would have been reduced
to the pro forma amounts indicated in the table:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
[ millions of dollars, except per share ] 2000 1999 1998
----------------------------------------------------------------------------------------
Net earnings
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported $124.2 $450.5 $546.8
----------------------------------------------------------------------------------------
Pro forma 98.3 428.7 522.0
----------------------------------------------------------------------------------------
Basic earnings per share
----------------------------------------------------------------------------------------
As reported $.58 $2.12 $2.54
----------------------------------------------------------------------------------------
Pro forma .46 2.02 2.42
----------------------------------------------------------------------------------------
Diluted earnings per share
----------------------------------------------------------------------------------------
As reported $.57 $2.09 $2.48
----------------------------------------------------------------------------------------
Pro forma .45 1.98 2.36
----------------------------------------------------------------------------------------
</TABLE>
For disclosure purposes, the fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average of assumptions:
-------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------
Dividend yield 2.0% 2.0% 2.0%
-------------------------------------------------------------------------
Expected volatility 28.4% 21.1% 20.1%
-------------------------------------------------------------------------
Risk-free interest rate 6.2% 4.4% 6.0%
-------------------------------------------------------------------------
Expected life (years) 6.6 7.2 6.2
-------------------------------------------------------------------------
52
<PAGE>
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of subjective
assumptions, including the expected stock price volatility. Because the
company's options have characteristics different from those of traded options,
in the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.
13. Earnings Per Share
The calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
30 September [ in millions, except per share ] 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
-------------------------------------------------------------------------------------------------
Income available to common shareholders used in basic and
diluted earnings per share $124.2 $450.5 $546.8
-------------------------------------------------------------------------------------------------
Denominator:
-------------------------------------------------------------------------------------------------
Weighted average number of common shares used in basic
earnings per share 213.4 212.2 215.5
-------------------------------------------------------------------------------------------------
Effect of dilutive securities:
-------------------------------------------------------------------------------------------------
Employee stock options 2.0 2.8 3.6
-------------------------------------------------------------------------------------------------
Other award plans .8 1.0 1.0
-------------------------------------------------------------------------------------------------
2.8 3.8 4.6
-------------------------------------------------------------------------------------------------
Weighted average number of common shares and dilutive
potential common shares used in diluted earnings per share 216.2 216.0 220.1
-------------------------------------------------------------------------------------------------
Basic earnings per share $.58 $2.12 $2.54
-------------------------------------------------------------------------------------------------
Diluted earnings per share $.57 $2.09 $2.48
-------------------------------------------------------------------------------------------------
</TABLE>
Options on 6.4 million, 6.7 million, and 6.1 million shares of Common Stock were
not included in computing diluted earnings per share for fiscal 2000, 1999, and
1998, respectively, because their effects were antidilutive.
(Dividends and Market Price Range per Shares graphs go here.)
53
<PAGE>
14. Pension and Other Postretirement Benefits
The following table shows reconciliations of the domestic pension plans and
other postretirement plan benefits as of 30 September 2000 and 1999. The foreign
pension plan information is as of 30 June 2000 and 1999:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
[ millions of dollars ] 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation on 1 October $1,250.4 $1,307.2 $62.0 $64.6
-------------------------------------------------------------------------------------------------------------------
Service cost 44.5 49.2 4.9 4.9
-------------------------------------------------------------------------------------------------------------------
Interest cost 89.7 84.7 5.6 4.3
-------------------------------------------------------------------------------------------------------------------
Amendments 15.8 6.2 -- --
-------------------------------------------------------------------------------------------------------------------
Actuarial gain (29.7) (140.6) (1.3) (6.9)
-------------------------------------------------------------------------------------------------------------------
Plan participant contributions 3.2 3.4 -- --
-------------------------------------------------------------------------------------------------------------------
Benefits paid (52.0) (45.5) (4.8) (4.9)
-------------------------------------------------------------------------------------------------------------------
Currency translation/Other (47.8) (14.2) -- --
-------------------------------------------------------------------------------------------------------------------
Benefit obligation on 30 September $1,274.1 $1,250.4 $66.4 $62.0
-------------------------------------------------------------------------------------------------------------------
Change in plan assets
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets on 1 October $1,183.6 $1,044.7 $ -- $ --
-------------------------------------------------------------------------------------------------------------------
Actual return on plan assets 138.1 182.8 -- --
-------------------------------------------------------------------------------------------------------------------
Company contributions 7.3 8.2 -- --
-------------------------------------------------------------------------------------------------------------------
Plan participant contributions 3.2 3.4 -- --
-------------------------------------------------------------------------------------------------------------------
Benefits paid (45.1) (41.0) -- --
-------------------------------------------------------------------------------------------------------------------
Currency translation/Other (55.3) (14.5) -- --
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets on 1 October $1,231.8 $1,183.6 $ -- $ --
Funded status of the plan $ (42.3) $ (66.8) $(66.4) $(62.0)
-------------------------------------------------------------------------------------------------------------------
Unrecognized actuarial gain (109.5) (30.7) (11.3) (10.1)
-------------------------------------------------------------------------------------------------------------------
Unrecognized prior service cost 16.0 17.0 (1.0) (1.0)
-------------------------------------------------------------------------------------------------------------------
Unrecognized net transition asset (10.7) (14.5) -- --
-------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (146.5) $ (95.0) $(78.7) $(73.1)
Total recognized amounts in the balance sheet consist of:
-------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 98.7 $ 111.8 $ -- $ --
-------------------------------------------------------------------------------------------------------------------
Accrued benefit liability (252.2) (221.4) (78.7) (73.1)
-------------------------------------------------------------------------------------------------------------------
Intangible asset 2.7 6.8 -- --
-------------------------------------------------------------------------------------------------------------------
Shareholders' equity 4.3 7.8 -- --
-------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (146.5) $ (95.0) $(78.7) $(73.1)
Weighted average assumptions as of 30 September
-------------------------------------------------------------------------------------------------------------------
Discount rate 7.6% 7.2% 8.0% 7.75%
-------------------------------------------------------------------------------------------------------------------
Expected return on plan assets 9.5% 9.5% -- --
-------------------------------------------------------------------------------------------------------------------
Rate of compensation increase 4.7% 4.6% 5.0% 5.0%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
For measurement purposes, an 8.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 2001. The rate was
assumed to decrease gradually to 5.5% for fiscal 2006 and thereafter.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
[ millions of dollars ] 2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $44.5 $49.2 $ 38.1 $ 4.9 $4.9 $4.1
------------------------------------------------------------------------------------------------------------------------
Interest cost 89.7 84.7 74.6 5.6 4.3 4.3
------------------------------------------------------------------------------------------------------------------------
Expected return on plan assets (95.8) (93.9) (80.8) -- -- --
------------------------------------------------------------------------------------------------------------------------
Prior service cost amortization 2.4 2.3 1.9 (.1) (.1) (.1)
------------------------------------------------------------------------------------------------------------------------
Actuarial (gain)/loss amortization 3.2 15.2 2.8 -- -- (.1)
------------------------------------------------------------------------------------------------------------------------
Transition amount amortization (3.5) (3.8) (3.8) -- -- --
------------------------------------------------------------------------------------------------------------------------
Special termination benefit 10.7 -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $51.2 $53.7 $ 32.8 $10.4 $9.1 $8.2
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $96.0 million, $72.3 million, and $1.5 million,
respectively, as of 30 September 2000, and $167.4 million, $146.7 million, and
$70.6 million, respectively, as of 30 September 1999.
The company has two nonpension postretirement benefit plans. Health care
benefits are contributory with contributions adjusted periodically; the life
insurance plan is noncontributory. The effect of a change in the health care
trend rate is slightly tempered by a cap on average retiree medical cost. A one
percentage point change in the assumed health care cost trend rate would have
the following effects:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
[ millions of dollars ] 1 Percentage point 1 Percentage point
Increase Decrease
----------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and
interest cost $.4 $(.6)
----------------------------------------------------------------------------------
Effect on the postretirement
benefit obligation $3.0 $(3.5)
----------------------------------------------------------------------------------
</TABLE>
In addition to the above plans, U.S. employees are eligible to contribute to a
401(k) plan. The company matches a portion of these contributions. Contributions
charged to income for this plan for 2000, 1999, and 1998 were $14.1 million,
$13.8 million, and $12.9 million, respectively.
15. Leases
Capital leases, primarily for machinery and equipment, are included with owned
plant and equipment on the balance sheet in the amount of $60.3 million and
$63.9 million at the end of fiscal 2000 and 1999, respectively. Related amounts
of accumulated depreciation are $27.6 million and $26.6 million, respectively.
Operating leases, including month-to-month agreements, cost the company
$89.7 million in 2000, $87.7 million in 1999, and $84.4 million in 1998.
At 30 September 2000, minimum payments due under leases are as follows:
---------------------------------------------------------------------------
[ millions of dollars ] Capital Operating
Leases Leases
---------------------------------------------------------------------------
2001 $15.1 $ 29.9
---------------------------------------------------------------------------
2002 13.4 20.8
---------------------------------------------------------------------------
2003 10.1 15.1
---------------------------------------------------------------------------
2004 8.1 11.7
---------------------------------------------------------------------------
2005 17.3 8.9
---------------------------------------------------------------------------
2006 and thereafter -- 72.4
---------------------------------------------------------------------------
$64.0 $158.8
---------------------------------------------------------------------------
The present value of the above future capital lease payments is included in the
liability section of the balance sheet. At the end of fiscal 2000, $11.1 million
was classified as current and $39.3 million as long-term.
55
<PAGE>
16. Other Commitments and Contingencies
General partnerships, in which subsidiaries of Air Products have a 50% interest,
own facilities in Stockton, California and Cambria County, Pennsylvania that
burn coal and coal waste, respectively, and produce electricity and steam. Air
Products is also operator of these projects. In the aggregate for both
facilities, specific performance guarantees obligate Air Products to pay damages
of $3 million annually up to a cumulative total of $22 million under certain
circumstances and if the general partnership is unable to service its debt.
Other completed cogeneration projects, in which Air Products, through equity
affiliates, beneficially owns 48.8% (Map Ta Phut, Thailand) and 50% (Rotterdam,
the Netherlands) burn natural gas to produce electricity and steam. Specific
equity support agreements related to the financings of the two projects obligate
Air Products to contribute equity up to a cumulative total for the two projects
of $15 million under certain circumstances.
Additionally, Air Products and a subsidiary have a 50% interest in a limited
partnership that owns a natural gas-fired cogeneration facility in Orlando,
Florida. Under agreements with the partnership, Air Products provides financial
support relating to the facility's natural gas supply. In the event the
partnership's municipal utility district customer (one of the project's two
power purchasers) terminates its contract due to a partnership default, Air
Products will make available up to $15 million (escalates from February 1992) to
compensate the utility district for the higher cost of power procured from other
sources over a period of up to five years.
In connection with the financing of the domestic cogeneration projects, Air
Products has contracted to provide financial support in the event of a title
problem at the plant site.
In addition, the company has guaranteed repayment of borrowings of certain
domestic and foreign equity affiliates. At 30 September 2000, these guarantees
totaled approximately $49 million.
The company has accrued for certain environmental investigatory and noncapital
remediation costs consistent with the policy set forth in Note 1. The potential
exposure for such costs is estimated to range from $8 million to a reasonably
possible upper exposure of $21 million. The balance sheet at 30 September 2000
includes an accrual of $16.7 million. The company does not expect that any sums
it may have to pay in connection with these environmental matters would have a
materially adverse effect on its consolidated financial position or results of
operations in any one year.
The company in the normal course of business has commitments, lawsuits,
contingent liabilities, and claims. However, the company does not expect that
any sum it may have to pay in connection with these matters will have a
materially adverse effect on its consolidated financial position or results of
operations.
At the end of fiscal 2000, the company had purchase commitments to spend
approximately $179 million for additional plant and equipment.
17. Acquisitions and Divestitures
Polyvinyl Alcohol
On 29 September 2000, the company completed the sale of its polyvinyl alcohol
business (PVOH) to Celanese AG, Kronberg, Germany, for $326 million. Included in
the sale were working capital and production facilities at Pasadena, Texas and
Calvert City, Kentucky. The facilities produce 200 million pounds of polyvinyl
alcohol per year and employ 200 people. Sales in fiscal 2000 were
$194.2 million, with essentially no operating income contribution. The income
statement for the year ended 30 September 2000 includes a gain of $126.8 million
from the sale ($79.1 million after-tax, or $.37 per share).
Korea Industrial Gases Ltd.
Acquisitions in fiscal 2000, totaling $194.8 million, principally included the
purchase in December 1999 of the remaining 51.1% of the shares of Korea
Industrial Gases Ltd. (KIG). KIG is the largest industrial gas company in Korea.
Since 1980, the company has had a joint venture arrangement with KIG. As a
result of the purchase of the remaining outstanding shares, KIG is a wholly
owned subsidiary of Air Products. KIG is a full-service industrial gas company
with a broad product portfolio supplying specialty gases, liquid/bulk,
pipeline/on-site, and noncryogenic units to the Korean marketplace. Consolidated
sales in fiscal 2000 included $121 million from KIG.
Wacker-Chemie Joint Ventures
On 1 October 1998, Air Products and Chemicals, Inc. and Wacker-Chemie GmbH
formed two joint ventures to consolidate their respective positions in polymer
emulsions and redispersible powder polymers businesses. The combined annual
sales of the ventures were approximately $800 million in fiscal 1999. The
ventures extend the company's strategy to continue globalization of the
chemicals segment by establishing manufacturing and support facilities in key
regions.
56
<PAGE>
The polymer emulsions joint venture, Air Products Polymers, L.P. (APP), is
headquartered in the United States and has facilities in Germany, Mexico, Korea,
and several locations in the United States. Air Products has a 65% interest in
the venture and Wacker-Chemie has a 35% interest. This venture is consolidated
into Air Products' financial statements and the Wacker-Chemie interest is
accounted for as minority interest. The accounting for this transaction as a
business combination resulted in the partial sale of assets, with a gain of
$34.9 million ($23.6 million after-tax, or $.11 per share).
The redispersible powders venture, Wacker Polymer Systems (WPS), is
headquartered in Germany, with manufacturing facilities in Germany and the
United States. Air Products has a 20% interest in this venture and reports the
results by the equity accounting method.
Air Products' fiscal 1999 sales were approximately $110 million higher than
would have occurred without the ventures. After the Wacker-Chemie minority
interest eliminations, net income in the initial year of operation was
approximately the same as before the ventures.
American Ref-Fuel Company
In December 1997, the company sold its 50% interest in the American Ref-Fuel
Company, its former waste-to-energy joint venture with Browning-Ferris
Industries, Inc. (BFI), to a limited liability company formed by Duke Energy
Power Services and United American Energy Corporation. This transaction provided
for the sale of Air Products' interest in American Ref-Fuel's five
waste-to-energy facilities for $237 million, and Duke Energy Capital
Corporation, the parent company of Duke Energy Power Services, assumed various
parental support agreements. The income statement for the year ended 30
September 1998 includes a gain of $62.6 million from this sale ($35.1 million
after-tax, or $.16 per share).
Power Generation Facilities
In fiscal 2000, the company decided to explore possible divestiture of its
interest in most of its cogeneration facilities.
18. BOC Transaction
In July 1999, the company, BOC, and L'Air Liquide S.A. (Air Liquide) of France
announced that they had agreed to the terms of a recommended offer for the share
capital of BOC at UK(pound)14.60 per BOC share (the Offer). The Offer, which was
to be made jointly by the company and Air Liquide, was subject to certain
preconditions, one of which was the approval of the U.S. Federal Trade
Commission (FTC).
During ten months of discussions with the FTC, the company and Air Liquide made
a number of comprehensive and practical proposals, including divestitures, which
responded to the defined requirements of the FTC. On 10 May 2000, the company
and Air Liquide announced that the FTC had indicated it would not approve the
Offer by 12 May 2000, the date on which the period for satisfying the
preconditions to the Offer would expire, and the Offer was not extended beyond
12 May 2000.
Since the BOC transaction did not occur, certain costs and financing fees that
had been deferred were required to be expensed. In addition, the company and Air
Liquide were obligated to pay BOC a fee of $50 million each since the Offer to
acquire BOC was not made.
The company had entered into various purchased currency options and forward
exchange contracts to hedge the currency exposure related to the proposed
purchase of BOC shares at UK(pound)14.60 per share. Net losses associated with
the change in market value of these contracts were recorded in earnings. The
company purchased U.K. Pound Sterling put options to cap the rate change
exposure of the forward exchange contracts.
The results for the year ended 30 September 2000 included a total charge related
to the BOC transaction of $730.4 million ($456.5 million after-tax, or $2.12 per
share). Of this amount, $594.6 million ($371.6 million after-tax) of charges
were recorded on purchased currency option and forward exchange contracts
entered into to hedge the currency exposure of the transaction, resulting in a
cumulative charge recorded on the currency hedging instruments of $582.0 million
($363.8 million after-tax). The remaining charge of $135.8 million ($84.9
million after-tax) consisted of the BOC fee paid and transaction expenses.
The results for the year ended 30 September 1999 included a net gain of
$7.0 million ($4.4 million after-tax, or $.02 per share) from BOC currency
options, net of expenses.
57
<PAGE>
19. Global Cost Reduction Plan
In fiscal 2000, the company recorded a pretax charge of $55.4 million under the
global cost reduction plan (2000 Plan). The 2000 Plan included 450 position
eliminations in the areas of manufacturing, engineering, distribution, and
overheads, resulting in a charge of $47.9 million for severance and termination
benefits. A charge of $7.5 million was recognized for asset impairments related
to the rationalization of three facilities in Europe. As of 30 September 2000,
163 positions have been eliminated, with completion of the 2000 Plan expected by
June 2001. At 30 September 2000, $23.5 million remained in accrued liabilities.
The total charge of $55.4 million was reflected in the income statement as
follows: cost of sales ($20.6 million); selling and administrative
($25.4 million); research and development ($1.9 million); and other expense
($7.5 million).
In fiscal 1999, the company recorded a pretax charge of $34.2 million under a
global cost reduction plan (1999 Plan). The 1999 Plan consisted of the
elimination of 348 positions. The charge of $34.2 million was reflected in the
income statement as follows: cost of sales ($15.3 million); selling and
administrative ($17.8 million); and research and development ($1.1 million). The
1999 Plan was completed in fiscal 2000 essentially as expected.
20. Supplementary Information
Payables, Trade and Other
--------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
--------------------------------------------------------------------------
Accounts payable, trade $464.5 $441.5
--------------------------------------------------------------------------
Outstanding checks payable in excess
of certain cash balances 48.1 13.8
--------------------------------------------------------------------------
Customer advances 65.8 50.5
--------------------------------------------------------------------------
$578.4 $505.8
--------------------------------------------------------------------------
Accrued Liabilities
--------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
--------------------------------------------------------------------------
Accrued payroll and employee benefits $116.5 $ 83.0
--------------------------------------------------------------------------
Accrued interest expense 77.3 44.9
--------------------------------------------------------------------------
Other accrued liabilities 163.4 279.1
--------------------------------------------------------------------------
$357.2 $407.0
--------------------------------------------------------------------------
Short-Term Borrowings
--------------------------------------------------------------------------
30 September [ millions of dollars ] 2000 1999
--------------------------------------------------------------------------
Bank obligations $104.5 $ 41.8
--------------------------------------------------------------------------
Commercial paper 143.0 363.0
--------------------------------------------------------------------------
Notes payable--other 2.2 2.8
--------------------------------------------------------------------------
$249.7 $407.6
--------------------------------------------------------------------------
The weighted average interest rate of short-term commercial paper outstanding as
of 30 September 2000 and 1999 was 6.8% and 5.3%, respectively.
<TABLE>
<CAPTION>
Other Income, Net
----------------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 4.1 $ 6.4 $ 5.3
----------------------------------------------------------------------------------------------------
Foreign exchange 6.9 (3.0) (8.3)
----------------------------------------------------------------------------------------------------
Gain (loss) on sale of assets and investments 13.4 (3.7) 18.6
----------------------------------------------------------------------------------------------------
Amortization of intangibles (17.9) (18.6) (16.4)
----------------------------------------------------------------------------------------------------
Miscellaneous 21.9 38.6 16.3
----------------------------------------------------------------------------------------------------
$ 28.4 $ 19.7 $15.5
----------------------------------------------------------------------------------------------------
Additional Cash Flow Information
Cash paid for interest and taxes is as follows:
----------------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
----------------------------------------------------------------------------------------------------
Interest (net of amounts capitalized) $164.7 $156.0 $163.1
----------------------------------------------------------------------------------------------------
Taxes (net of refunds) 92.7 148.3 246.2
----------------------------------------------------------------------------------------------------
Significant noncash transactions are as follows:
----------------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
----------------------------------------------------------------------------------------------------
Capital lease additions $ 4.9 $18.5 $ 5.7
----------------------------------------------------------------------------------------------------
Liabilities associated with acquisitions 24.4 7.4 10.0
----------------------------------------------------------------------------------------------------
Exchange of assets -- 19.5 --
----------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
Additional Income Statement Information
Fiscal 2000 results were decreased by a net after-tax loss of $408.4 million, or
$1.89 per share, for special items. The components of special items on a before-
and after-tax basis were: a gain of $126.8 million ($79.1 million after-tax, or
$.37 per share) on the sale of the PVOH business; a charge of $730.4 million
($456.5 million after-tax, or $2.12 per share) for costs related to the BOC
transaction; a charge of $55.4 million ($35.0 million, or $.16 per share) for a
global cost reduction plan; and a gain of $6.3 million ($4.0 million, or $.02
per share) from the sale of packaged gas facilities.
Fiscal 1999 results included several special items which essentially offset at
the net income and earnings per share level. The components of special items on
a before- and after-tax basis were: a gain of $34.9 million ($23.6 million
after-tax, or $.11 per share) on the partial sale of assets related to the
formation of Air Products Polymers, L.P. (a 65% majority-owned venture with
Wacker-Chemie GmbH); expense of $34.2 million ($21.9 million after-tax, or $.10
per share) related to a global cost reduction plan; expense of $10.3 million
($6.4 million after-tax, or $.03 per share) related to chemicals facility
closure costs; and a gain of $7.0 million ($4.4 million after-tax, or $.02 per
share) from BOC currency options, net of expenses.
Fiscal 1998 results were increased by net after-tax income of $58.1 million, or
$.26 per share, for special items. The components of special items on a before-
and after-tax basis were: a gain of $62.6 million ($35.1 million after-tax, or
$.16 per share) on the sale of the company's 50% interest in the American
Ref-Fuel Company; a gain of $28.3 million ($15.4 million after-tax, or $.07 per
share) from a power contract restructuring related to an American Ref-Fuel
project; and a gain of $12.6 million ($7.6 million after-tax, or $.03 per share)
from a cogeneration project contract settlement.
Summary by Quarter
This table summarizes the unaudited results of operations for each quarter of
fiscal 2000 and fiscal 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
[ millions of dollars, except per share ] First Second Third Fourth
-----------------------------------------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $1,264.4 $1,347.2 $1,406.4 $1,449.1
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 196.2 218.9[c][d] 186.4[f] 229.3
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 50.6[a] 47.6[b][c][d] (192.5)[e][f] 218.5[g]
-----------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share .24 .22 (.90) 1.02
-----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share .23[a] .22[b][c][d] (.90)[e][f] 1.01[g]
-----------------------------------------------------------------------------------------------------------------------------------
Dividends per common share .18 .18 .19 .19
-----------------------------------------------------------------------------------------------------------------------------------
Price per common share: high 33 14/16 37 39 1/16 38 1/8
-----------------------------------------------------------------------------------------------------------------------------------
low 25 11/16 23 27 9/16 29 1/4
-----------------------------------------------------------------------------------------------------------------------------------
1999
-----------------------------------------------------------------------------------------------------------------------------------
Sales $1,274.6 $1,253.3 $1,237.8 $1,254.4
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 189.0[h] 182.7[j] 167.7[k] 185.3
-----------------------------------------------------------------------------------------------------------------------------------
Net income 126.4[h][i] 106.9[j] 94.6[k] 122.6[l][m]
-----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share .60 .51 .45 .58
-----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share .59[h][i] .50[j] .44[k] .57[l][m]
-----------------------------------------------------------------------------------------------------------------------------------
Dividends per common share .17 .17 .18 .18
-----------------------------------------------------------------------------------------------------------------------------------
Price per common share: high 40 15/16 41 49 1/8 43
-----------------------------------------------------------------------------------------------------------------------------------
low 29 7/8 30 5/8 33 13/16 27 15/16
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[a] Includes an after-tax charge of $70.6 million, or $.33 per share, related
to the BOC transaction.
[b] Includes an after-tax charge of $84.1 million, or $.39 per share, related
to the BOC transaction.
[c] Includes a charge of $8.7 million ($5.5 million after-tax, or $.03 per
share) for a global cost reduction plan.
[d] Includes a gain of $6.3 million ($4.0 million after-tax, or $.02 per share)
on the sale of packaged gas facilities.
[e] Includes an after-tax charge of $301.8 million, or $1.39 per share, related
to the BOC transaction.
[f] Includes a charge of $46.7 million ($29.5 million after-tax, or $.14 per
share) for a global cost reduction plan.
[g] Includes an after-tax gain of $79.1 million, or $.37 per share, on the sale
of the PVOH business.
[h] Includes a charge of $20.3 million ($12.9 million after-tax, or $.06 per
share) for a global cost reduction plan.
[i] Includes an after-tax gain of $21.4 million, or $.10 per share, on the
formation of Air Products Polymers, L.P.
[j] Includes a charge of $10.3 million ($6.4 million after-tax, or $.03 per
share) related to chemicals facility closure costs.
[k] Includes a charge of $13.9 million ($9.0 million after-tax, or $.04 per
share) for a global cost reduction plan.
[l] Includes an after-tax gain of $2.4 million, or $.01 per share, on the
formation of Air Products Polymers, L.P.
[m] Includes an after-tax gain of $4.4 million, or $.02 per share, from BOC
currency options, net of expenses.
59
<PAGE>
21. Business Segment and Geographic Information
The company's segments are organized based on differences in products. The
company has three operating segments consisting of gases, chemicals, and
equipment.
The company's gases segment includes its industrial gases, power generation, and
flue gas treatment businesses. The company is a leading international supplier
of industrial and specialty gas products. Principal products of the industrial
gases business are oxygen, nitrogen, argon, hydrogen, carbon monoxide, synthesis
gas, and helium. The largest market segments are chemical processing, refining,
metal production, electronics, food processing, and medical gases. The company
has its strongest industrial gas market positions in the United States and
Europe.
The gases segment also includes the company's power generation and flue gas
treatment businesses. The company constructed, operates, and has a 50% interest
in power generation facilities in California, Pennsylvania, Florida, Rotterdam,
and Thailand.
The company's chemicals segment consists of six principal businesses organized
around two divisions: performance chemicals and chemical intermediates. The PVOH
business was sold in September 2000.
(2000 Sales by Business Segment and 2000 Sales by Geography graphs go here.)
Principal businesses of performance chemicals are emulsions, specialty
additives, polyurethane additives, and epoxy additives. Principal chemical
intermediates are amines and polyurethane intermediates. The company also
produces certain industrial chemicals. The end markets for the company's
chemical products are extensive, including adhesive, textile, paper, building
products, agriculture, and furniture. Principal geographic markets for the
company's chemical products are North America, Europe, Asia, Brazil, and Mexico.
The equipment segment designs and manufactures cryogenic and gas processing
equipment for air separation, gas processing, natural gas liquefaction, and
hydrogen purification. The segment also designs and builds systems for
recovering gases using membrane technology. Equipment is sold worldwide to
companies involved in chemical and petrochemical manufacturing, oil and gas
recovery and processing, power generation, and steel and primary metal
production. Equipment is also manufactured for the company's industrial gas
business. Another important market, particularly for air separation equipment,
is the company's international industrial gas joint ventures.
The accounting policies of the segments are the same as those described in Note
1. The company evaluates the performance of segments based upon reported segment
operating income. Operating income of the business segments includes general
corporate expenses. Corporate expenses not allocated to the segments (primarily
long-term research and development and interest expense) are included in the
reconciliation of the reportable segments' operating income to the company's
consolidated income before income taxes. Intersegment sales are not material and
are recorded at selling prices that approximate market prices. Equipment
manufactured for the company's industrial gas business is generally transferred
at cost and not reflected as an intersegment sale. Corporate assets are
primarily cash, corporate facilities, deferred financial expense, and other
nonallocated assets. Long-lived assets include investment in net assets of and
advances to equity affiliates, net plant and equipment, and goodwill.
60
<PAGE>
<TABLE>
<CAPTION>
Business segment information is shown below:
------------------------------------------------------------------------------------------------------------------------------------
Segment All Consolidated
[ millions of dollars ] Gases Chemicals Equipment Totals Other Totals
----------------------------------------------------------------------------------------------------------------------------------
2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $3,465.5 $1,772.8 $228.8 $5,467.1 $ -- $5,467.1
----------------------------------------------------------------------------------------------------------------------------------
Operating income 673.1 182.1 9.9 865.1 (34.3) 830.8
----------------------------------------------------------------------------------------------------------------------------------
Operating income--excluding special items 698.8 197.7 16.8 913.3 (33.4) 879.9
----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 455.9 127.8 6.5 590.2 3.4 593.6
----------------------------------------------------------------------------------------------------------------------------------
Equity affiliates' income 73.6 12.5 2.0 88.1 (.5) 87.6
----------------------------------------------------------------------------------------------------------------------------------
Gain on sale of polyvinyl alcohol business -- 126.8 -- 126.8 -- 126.8
----------------------------------------------------------------------------------------------------------------------------------
Loss on currency hedges related to BOC
transaction and expenses -- -- -- -- (730.4) (730.4)
----------------------------------------------------------------------------------------------------------------------------------
Segment assets:
----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 5,823.7 1,453.8 234.1 7,511.6 292.3 7,803.9
----------------------------------------------------------------------------------------------------------------------------------
Investment in and advances to equity affiliates 412.3 51.4 2.5 466.2 .4 466.6
----------------------------------------------------------------------------------------------------------------------------------
Total segment assets 6,236.0 1,505.2 236.6 7,977.8 292.7 8,270.5
----------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets 711.3 93.6 .5 805.4 44.3 849.7
----------------------------------------------------------------------------------------------------------------------------------
Operating return on net assets[a] 12.1% 12.3% 7.1% 12.1% -- 11.1%
----------------------------------------------------------------------------------------------------------------------------------
1999
----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $2,996.4 $1,657.4 $366.3 $5,020.1 $ -- $5,020.1
----------------------------------------------------------------------------------------------------------------------------------
Operating income 521.9 193.7 34.7 750.3 (25.6) 724.7
----------------------------------------------------------------------------------------------------------------------------------
Operating income--excluding special items 548.9 208.0 37.4 794.3 (25.1) 769.2
----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 403.1 128.8 9.4 541.3 4.5 545.8
----------------------------------------------------------------------------------------------------------------------------------
Equity affiliates' income 46.8 12.4 1.6 60.8 .7 61.5
----------------------------------------------------------------------------------------------------------------------------------
Net gain on formation of polymer venture -- 34.9 -- 34.9 -- 34.9
----------------------------------------------------------------------------------------------------------------------------------
Segment assets:
----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 5,438.3 1,626.2 265.0 7,329.5 384.6 7,714.1
----------------------------------------------------------------------------------------------------------------------------------
Investment in and advances to equity affiliates 459.3 61.3 .8 521.4 -- 521.4
----------------------------------------------------------------------------------------------------------------------------------
Total segment assets 5,897.6 1,687.5 265.8 7,850.9 384.6 8,235.5
----------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets 904.8 158.8 14.6 1,078.2 27.4 1,105.6
----------------------------------------------------------------------------------------------------------------------------------
Operating return on net assets[a] 10.4% 12.9% 13.0% 11.1% -- 10.4%
----------------------------------------------------------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $2,950.1 $1,539.2 $429.7 $4,919.0 $ -- $4,919.0
----------------------------------------------------------------------------------------------------------------------------------
Operating income 565.0 247.2 59.2 871.4 (25.7) 845.7
----------------------------------------------------------------------------------------------------------------------------------
Operating income--excluding special items 565.0 247.2 59.2 871.4 (25.7) 845.7
----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 384.8 111.8 7.8 504.4 1.4 505.8
----------------------------------------------------------------------------------------------------------------------------------
Equity affiliates' income 33.3 .6 1.9 35.8 2.2 38.0
----------------------------------------------------------------------------------------------------------------------------------
Gain on American Ref-Fuel sale and contract
settlements 12.6 -- -- 12.6 90.9 103.5
----------------------------------------------------------------------------------------------------------------------------------
Segment assets:
----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 5,103.5 1,527.3 279.3 6,910.1 217.5 7,127.6
----------------------------------------------------------------------------------------------------------------------------------
Investment in and advances to equity affiliates 358.6 2.4 .2 361.2 .8 362.0
----------------------------------------------------------------------------------------------------------------------------------
Total segment assets 5,462.1 1,529.7 279.5 7,271.3 218.3 7,489.6
----------------------------------------------------------------------------------------------------------------------------------
Expenditures for long-lived assets 630.3 315.8 16.5 962.6 15.6 978.2
----------------------------------------------------------------------------------------------------------------------------------
Operating return on net assets[a] 11.5% 17.7% 19.5% 13.1% -- 12.3%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
A reconciliation of the totals reported for the operating segments to the
applicable line items on the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
Operating Income to Consolidated Income Before Income Taxes and Minority Interest
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total segment operating income $ 865.1 $ 750.3 $871.4
-----------------------------------------------------------------------------------------------------------------------------
Corporate research and development (31.0) (29.4) (25.8)
-----------------------------------------------------------------------------------------------------------------------------
Other corporate income (expense) (3.3) 3.8 .1
-----------------------------------------------------------------------------------------------------------------------------
Consolidated operating income 830.8 724.7 845.7
Equity affiliates' income 87.6 61.5 38.0
-----------------------------------------------------------------------------------------------------------------------------
Gain on sale of polyvinyl alcohol business 126.8 -- --
-----------------------------------------------------------------------------------------------------------------------------
Gain (loss) on currency hedges related to BOC transaction and expenses (730.4) 7.0 --
-----------------------------------------------------------------------------------------------------------------------------
Net gain on formation of polymer venture -- 34.9 --
-----------------------------------------------------------------------------------------------------------------------------
Gain on American Ref-Fuel sale and contract settlements -- -- 103.5
-----------------------------------------------------------------------------------------------------------------------------
Interest expense (196.7) (159.1) (162.8)
-----------------------------------------------------------------------------------------------------------------------------
Consolidated income before income taxes and minority interest $ 118.1 $ 669.0 $ 824.4
Segment Assets to Total Assets
-----------------------------------------------------------------------------------------------------------------------------
Total segment assets $7,977.8 $7,850.9 $7,271.3
-----------------------------------------------------------------------------------------------------------------------------
Corporate assets 292.7 384.6 218.3
-----------------------------------------------------------------------------------------------------------------------------
Total assets $8,270.5 $8,235.5 $7,489.6
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
[a] Operating return on net assets (ORONA) is calculated as the rolling
four-quarter sum of operating income divided by the rolling five-quarter
average of total assets less investments in equity affiliates. The ORONA
calculation for fiscal 2000 excluded a charge of $55.4 million for a global
cost reduction plan and a gain of $6.3 million from the sale of packaged
gas facilities. The ORONA calculation for fiscal 1999 excluded expense of
$34.2 million related to a global cost reduction plan and expense of $10.3
million related to chemical facility closure costs.
62
<PAGE>
<TABLE>
<CAPTION>
Geographic information is presented below:
--------------------------------------------------------------------------------------------------------------------
[ millions of dollars ] 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Revenues from External Customers
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $3,628.8 $3,226.9 $3,381.5
--------------------------------------------------------------------------------------------------------------------
United Kingdom 483.8 620.4 583.6
--------------------------------------------------------------------------------------------------------------------
Spain 300.7 319.0 322.0
--------------------------------------------------------------------------------------------------------------------
Other Europe 559.8 564.3 387.7
--------------------------------------------------------------------------------------------------------------------
Total Europe 1,344.3 1,503.7 1,293.3
--------------------------------------------------------------------------------------------------------------------
Canada/Latin America 240.6 202.4 216.6
--------------------------------------------------------------------------------------------------------------------
Asia 253.1 86.8 27.3
--------------------------------------------------------------------------------------------------------------------
All Other .3 .3 .3
--------------------------------------------------------------------------------------------------------------------
Total $5,467.1 $5,020.1 $4,919.0
--------------------------------------------------------------------------------------------------------------------
Long-lived Assets
--------------------------------------------------------------------------------------------------------------------
United States $3,502.2 $3,482.1 $3,160.2
--------------------------------------------------------------------------------------------------------------------
United Kingdom 461.2 513.1 466.4
--------------------------------------------------------------------------------------------------------------------
Spain 339.2 412.2 455.9
--------------------------------------------------------------------------------------------------------------------
Other Europe 723.3 873.4 796.2
--------------------------------------------------------------------------------------------------------------------
Total Europe 1,523.7 1,798.7 1,718.5
--------------------------------------------------------------------------------------------------------------------
Canada/Latin America 325.4 327.0 342.4
--------------------------------------------------------------------------------------------------------------------
Asia 710.2 442.6 243.3
--------------------------------------------------------------------------------------------------------------------
All Other 16.8 14.3 8.6
--------------------------------------------------------------------------------------------------------------------
Total $6,078.3 $6,064.7 $5,473.0
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Geographic information is based on country of origin. Included in United
States revenues are export sales to unconsolidated customers of $557.7 million
in 2000, $528.4 million in 1999, and $649.6 million in 1998. The other Europe
segment operates principally in France, Germany, Netherlands, and Belgium.
63
<PAGE>
Eleven-Year Summary of Selected Financial Data
Air Products and Chemicals, Inc. and Subsidiaries
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
[ millions of dollars, except per share ] 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Operating Results
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $5,467 $5,020 $4,919 $4,638
-----------------------------------------------------------------------------------------------------------------------------------
Cost of sales 3,826 3,501 3,317 3,195
-----------------------------------------------------------------------------------------------------------------------------------
Selling and administrative 715 691 660 628
-----------------------------------------------------------------------------------------------------------------------------------
Research and development 124 123 112 114
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 831 725 846 726
-----------------------------------------------------------------------------------------------------------------------------------
Equity affiliates' income[b] 88 62 38 66
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense 197 159 163 161
-----------------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) (14) 203 277 201
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 124[c] 451[d] 547[e] 429
-----------------------------------------------------------------------------------------------------------------------------------
Net income 124[c] 451[d] 547[e] 429
-----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share[j] Continuing operations .58 2.12 2.54 1.95
-----------------------------------------------------------------------------------------------------------------------------------
Net income .58 2.12 2.54 1.95
-----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share[j] Continuing operations .57[c] 2.09[d] 2.48[e] 1.91
-----------------------------------------------------------------------------------------------------------------------------------
Net income .57[c] 2.09[d] 2.48[e] 1.91
-----------------------------------------------------------------------------------------------------------------------------------
Year-End Financial Position
-----------------------------------------------------------------------------------------------------------------------------------
Plant and equipment, at cost $10,311 $10,188 $9,490 $8,727
-----------------------------------------------------------------------------------------------------------------------------------
Total assets 8,271 8,236 7,490 7,244
-----------------------------------------------------------------------------------------------------------------------------------
Working capital 430 (75) 376 500
-----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 2,616 1,962 2,274 2,292
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 2,821 2,962 2,667 2,648
-----------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
-----------------------------------------------------------------------------------------------------------------------------------
Return on sales[k] 2.3% 9.0% 11.1% 9.3%
-----------------------------------------------------------------------------------------------------------------------------------
Return on average shareholders' equity[k] 4.3% 16.1% 20.8% 16.6%
-----------------------------------------------------------------------------------------------------------------------------------
Total debt to sum of total debt and shareholders' equity[l] 51.9% 49.0% 50.3% 48.2%
-----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations to average total debt[l] 37.5% 39.5% 38.6% 40.9%
-----------------------------------------------------------------------------------------------------------------------------------
Interest coverage ratio 1.5 4.6 5.5 4.4
-----------------------------------------------------------------------------------------------------------------------------------
Other Data
-----------------------------------------------------------------------------------------------------------------------------------
For the year: Depreciation $ 576 $ 527 $ 489 $ 459
-----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures[n] 973 1,108 1,001 1,222
-----------------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share[j] .74 .70 .64 .58
-----------------------------------------------------------------------------------------------------------------------------------
Market price range per common share[j] 39-23 49-27 45-29 44-29
-----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding (millions) 213 212 216 220
-----------------------------------------------------------------------------------------------------------------------------------
Average common shares and common stock
equivalent shares outstanding (millions) 216 216 220 225
-----------------------------------------------------------------------------------------------------------------------------------
At year end: Book value per common share[j] 13.17 13.90 12.61 12.05
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders 11,400 11,900 11,500 11,200
-----------------------------------------------------------------------------------------------------------------------------------
Employees 17,500 17,400 16,700 16,400
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[a] Includes a charge of $120.0 million ($76.1 million after-tax, or
$.34 per share) for costs associated with reducing the workforce and for
selected asset write-downs.
[b] Includes related expenses and gain on sale of investment in equity
affiliates. Excludes the gain on the sale of the American Ref-Fuel
Company and contract settlements in 1998.
[c] Includes an after-tax gain of $79.1 million, or $.37 per share, on
the sale of the PVOH business and an after-tax charge of $456.5 million,
or $2.12 per share, for costs related to the BOC transaction.
[d] Includes an after-tax gain of $23.6 million, or $.11 per share, on
the formation of the polymers venture and an after-tax gain of $4.4
million, or $.02 per share, from BOC currency options, net of expenses.
[e] Includes an after-tax gain of $58 million, or $.26 per share, from the sale
of American Ref-Fuel and contract settlements.
[f] Includes an after-tax gain of $41 million, or $.18 per share, from a
settlement associated with leveraged interest rate swap contracts.
[g] Includes an after-tax charge of $75 million, or $.33 per share, for a loss
on certain derivative contracts.
64
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$4,008 $3,865 $3,485 $3,328 $3,217 $2,931 $2,895
-------------------------------------------------------------------------------------------------------------
2,780 2,678 2,455 2,340 2,233 2,030 2,042
-------------------------------------------------------------------------------------------------------------
548 508 446 434 428 411 392
-------------------------------------------------------------------------------------------------------------
114 103 97 92 85 80 72
-------------------------------------------------------------------------------------------------------------
591 602 486 369[a] 481 435 399
-------------------------------------------------------------------------------------------------------------
80 51 28 13 16 13 17
-------------------------------------------------------------------------------------------------------------
129 100 81 81 90 86 83
-------------------------------------------------------------------------------------------------------------
193 185 92 100 130 113 103
-------------------------------------------------------------------------------------------------------------
416[f] 368 234[g] 201[a] 277 249 230
-------------------------------------------------------------------------------------------------------------
416[f] 368 248[h] 201[a] 271[i] 249 230
-------------------------------------------------------------------------------------------------------------
1.86 1.64 1.03 .88 1.23 1.11 1.04
-------------------------------------------------------------------------------------------------------------
1.86 1.64 1.09 .88 1.20 1.11 1.04
-------------------------------------------------------------------------------------------------------------
1.83[f] 1.62 1.01[g] .87[a] 1.20 1.09 1.02
-------------------------------------------------------------------------------------------------------------
1.83[f] 1.62 1.07[h] .87[a] 1.17[i] 1.09 1.02
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
$8,103 $7,350 $6,520 $5,953 $5,785 $5,332 $5,010
-------------------------------------------------------------------------------------------------------------
6,522 5,816 5,036 4,761 4,492 4,228 3,900
-------------------------------------------------------------------------------------------------------------
111 21 101 322 279 117 214
-------------------------------------------------------------------------------------------------------------
1,739 1,194 923 1,016 956 945 954
-------------------------------------------------------------------------------------------------------------
2,574 2,398 2,206 2,102 2,098 1,841 1,688
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
10.4% 9.5% 6.7% 6.0% 8.6% 8.5% 7.9%
-------------------------------------------------------------------------------------------------------------
16.6% 16.1% 10.9% 9.6% 14.0% 14.1% 14.7%
-------------------------------------------------------------------------------------------------------------
46.0% 41.2% 36.0% 37.3% 33.9% 38.1% 38.5%
-------------------------------------------------------------------------------------------------------------
38.5% 48.6% 59.5% 50.3% 52.7% 57.7% 52.7%
-------------------------------------------------------------------------------------------------------------
5.1 5.5 4.5 4.4 5.4 4.2 4.2
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
$ 412 $ 382 $ 353 $ 346[m] $ 340 $ 319 $ 303
-------------------------------------------------------------------------------------------------------------
1,164 969 655 666 485 657 621
-------------------------------------------------------------------------------------------------------------
.53 .51 .47 .45 .41 .38 .35
-------------------------------------------------------------------------------------------------------------
30-24 29-21 25-19 25-18 25-15 18-10 15-11
-------------------------------------------------------------------------------------------------------------
223 224 227 228 226 224 222
-------------------------------------------------------------------------------------------------------------
227 228 231 232 231 228 226
-------------------------------------------------------------------------------------------------------------
11.65 10.74 9.73 9.21 9.25 8.20 7.58
-------------------------------------------------------------------------------------------------------------
11,700 11,800 11,900 11,800 11,100 10,900 11,100
-------------------------------------------------------------------------------------------------------------
15,200 14,800 14,100 15,300 14,500 14,600 14,000
-------------------------------------------------------------------------------------------------------------
</TABLE>
[h] Includes an after-tax charge of $75 million, or $.33 per share, for a loss
on certain derivative contracts and a net gain of $14 million, or $.06 per
share, for the cumulative effect of accounting changes.
[i] Net income for fiscal 1992 includes an extraordinary charge of $6 million,
or $.03 per share, for the early retirement of debt.
[j] Data per common share are based on the average number of shares outstanding
during each year retroactively restated to reflect a two-for-one stock
split in 1998 and 1992, except for book value per common share, which is
based on the number of shares outstanding at the end of each year
retroactively restated.
[k] Financial ratios were calculated using income from continuing operations.
[l] Total debt includes long-term debt, current portion of long-term debt, and
short-term borrowings as of the end of the year.
[m] Depreciation expense in 1993 excludes $56 million associated with asset
write-downs.
[n] Capital expenditures include additions to plant and equipment, investment
in and advances to equity affiliates, acquisitions, and capital lease
additions.
65
