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<SEC-DOCUMENT>0000950123-03-013730.txt : 20031212
<SEC-HEADER>0000950123-03-013730.hdr.sgml : 20031212
<ACCEPTANCE-DATETIME>20031212132935
ACCESSION NUMBER: 0000950123-03-013730
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 16
CONFORMED PERIOD OF REPORT: 20030930
FILED AS OF DATE: 20031212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AIR PRODUCTS & CHEMICALS INC /DE/
CENTRAL INDEX KEY: 0000002969
STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810]
IRS NUMBER: 231274455
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-04534
FILM NUMBER: 031051349
BUSINESS ADDRESS:
STREET 1: 7201 HAMILTON BLVD
CITY: ALLENTOWN
STATE: PA
ZIP: 18195-1501
BUSINESS PHONE: 6104814911
MAIL ADDRESS:
STREET 1: 7201 HAMILTON BLVD
CITY: ALLENTOWN
STATE: PA
ZIP: 18195-1501
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>y92114e10vk.txt
<DESCRIPTION>AIR PRODUCTS AND CHEMICALS, INC.
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
30 SEPTEMBER 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-1274455
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 481-4911
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, par value $1.00 per share New York and Pacific
Preferred Stock Purchase Rights New York and Pacific
8-3/4% Debentures Due 2021 New York
-----------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES[X] NO[ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on 31 March 2003 was $9.3 billion. For purposes of the foregoing
calculations (i) all directors and/or executive officers have been deemed to be
affiliates, but the registrant disclaims that any such director and/or executive
officer is an affiliate and (ii) registrant's grantor trust, described under
Item 12 of this Report, is deemed a non-affiliate.
The number of shares of Common Stock outstanding as of 4 December 2003 was
227,265,870.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended 30 September 2003.
With the exception of those portions that are incorporated by reference into
Parts I, II, and IV of this Form 10-K, the Annual Report is not deemed to be
filed.
Proxy Statement for Annual Meeting of Shareholders to be held 22 January
2004 . . . Part III.
================================================================================
<PAGE>
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current
expectations at the time the document was originally prepared regarding
important risk factors. Management does not anticipate publicly updating any of
its expectations except as part of the quarterly earnings announcement process.
Actual results may differ materially from those forward-looking statements
expressed. In addition to important risk factors and uncertainties referred to
in the Management's Discussion and Analysis, which is included under Item 7
herein, factors that might cause forward-looking statements to differ materially
from actual results include those specifically referenced as future events or
outcomes that the Company anticipates, as well as, among other things, overall
economic and business conditions different than those currently anticipated and
demand for the Company's goods and services during that time; competitive
factors in the industries in which it competes; interruption in ordinary sources
of supply; the ability to recover increased energy and raw material costs from
customers; spikes in the pricing of natural gas; changes in government
regulations; consequences of acts of war or terrorism impacting the United
States and other markets; the success of implementing cost reduction programs;
the timing, impact, and other uncertainties of future acquisitions or
divestitures; significant fluctuations in interest rates and foreign currencies;
the impact of tax and other legislation and regulations in jurisdictions in
which the Company and its affiliates operate; and the timing and rate at which
tax credits can be utilized.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I........................................................................... 1
ITEM 1. Business............................................................. 1
GASES.............................................................. 1
CHEMICALS.......................................................... 2
Performance Materials............................................. 3
Chemical Intermediates............................................ 3
EQUIPMENT.......................................................... 3
GENERAL............................................................ 4
Foreign Operations................................................ 4
Technology Development............................................ 4
Raw Materials and Energy.......................................... 5
Environmental Controls............................................ 6
Competition....................................................... 6
Insurance......................................................... 7
Employees......................................................... 7
Available Information............................................. 7
Executive Officers of the Company................................. 8
ITEM 2. Properties........................................................... 9
Gases............................................................. 9
Chemicals......................................................... 9
Equipment......................................................... 10
ITEM 3. Legal Proceedings.................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders.................. 10
PART II.......................................................................... 10
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
ITEM 6. Selected Financial Data.............................................. 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................. 11
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk........... 11
ITEM 8. Financial Statements and Supplementary Data.......................... 11
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................. 11
ITEM 9A. Controls and Procedures.............................................. 12
PART III......................................................................... 12
ITEM 10. Directors and Executive Officers of the Registrant................... 12
ITEM 11. Executive Compensation............................................... 12
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................... 12
ITEM 13. Certain Relationships and Related Transactions....................... 15
ITEM 14. Principal Accountant Fees and Services............................... 15
PART IV.......................................................................... 15
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 15
SIGNATURES....................................................................... 16
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE....................................... 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE............................. 19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS.................................. 20
INDEX TO EXHIBITS................................................................ 21
</TABLE>
iii
<PAGE>
PART I
ITEM 1. BUSINESS.
Through internal development and by acquisitions, Air Products and
Chemicals, Inc. has established an internationally recognized industrial gas and
related industrial process equipment business and developed strong positions as
a producer of certain chemicals.
The gases business segment recovers and distributes industrial gases such
as oxygen, nitrogen, argon, and hydrogen, and a variety of medical and specialty
gases. The chemicals business segment produces and markets performance materials
and chemical intermediates. The equipment business segment supplies cryogenic
and other process equipment and related engineering services.
Financial information concerning the Company's business segments appears
in Note 20 to the Consolidated Financial Statements included under Item 8
herein, which information is incorporated herein by reference, as are all other
specific references herein to information appearing in such 2003 Financial
Review Section of the Annual Report.
As used in this Report, the term "Air Products" or "Company" includes
subsidiaries and predecessors of the registrant or its subsidiaries, unless the
context indicates otherwise.
GASES
The principal industrial gases sold by the Company are oxygen, nitrogen,
argon (primarily recovered by the cryogenic distillation of air), hydrogen,
carbon monoxide, carbon dioxide (purchased, purified, or recovered through the
processing of natural gas or the by-product streams from process plants),
synthesis gas (combined streams of hydrogen and carbon monoxide), and helium
(purchased or refined from crude helium). Medical and specialty gases are
manufactured or blended by the Company or purchased for resale. The gases
segment also includes the Company's global healthcare, power generation, and
flue gas treatment businesses.
The Company's gas business involves three principal modes of supply:
"On-site/pipeline" supply -- For large volume or "tonnage" users of
industrial gases, a plant is built adjacent to, on, or near the customer's
facility -- hence the term "on-site". Alternatively, the gases are delivered
through a pipeline from nearby locations. Supply is generally made under
long-term contracts, typically five to twenty years in duration. In numerous
areas -- the Houston (Texas) Ship Channel including the Port Arthur, Texas,
area; "Silicon Valley," California; Los Angeles, California; Phoenix, Arizona;
Decatur, Alabama; Central Louisiana; Rotterdam, the Netherlands; Korea;
Singapore; Taiwan; Malaysia; and Brazil -- Air Products' hydrogen, oxygen,
carbon monoxide, or nitrogen gas pipelines serve multiple customers from one or
more centrally located plants. Industrial gas companies in which the Company has
less than controlling interests have pipelines in Thailand, Singapore, and South
Africa.
Liquid bulk supply -- Smaller volumes of industrial gas products are
delivered to thousands of customers in liquid or gaseous form by tanker trucks
or tube trailers. These liquid bulk customers use equipment designed and
installed by Air Products to store the product near the point of use, normally
in liquid state, and vaporize the product into gaseous state for their use as
needed. Some customers are also supplied by small on-site generators using
noncryogenic technology based on adsorption and membrane technology which, in
certain circumstances, the Company sells to its customers. Liquid bulk
customers' contract terms normally are from three to five years.
Packaged gases supply -- Industrial and various specialty and medical
gases are also delivered in cylinders, dewars, and lecture bottle sizes. During
fiscal year 2002, the Company divested its U.S. packaged gas business except for
electronics gases and helium used in magnetic resonance imaging. During fiscal
year 2003, the Company divested similar businesses in Canada and Puerto Rico.
The Company continues to operate packaged gas businesses in Europe, Asia, and
Brazil.
Oxygen, nitrogen, argon, and hydrogen sold to liquid bulk customers are
usually recovered or generated at large "stand-alone" facilities located near
industrial areas or high-tech centers, or at small noncryogenic generators, or
are taken from on-site plants used primarily to supply tonnage users. On-site
plants are frequently designed to have more capacity than is required by their
principal customer to recover additional product that is liquefied for sale to a
liquid bulk market. Air Products also designs and builds systems for recovering
oxygen, hydrogen, nitrogen, carbon monoxide, and low dew point gases using
adsorption technology.
1
<PAGE>
Sales of atmospheric gases -- oxygen, nitrogen, and argon -- constituted
approximately 25 percent of Air Products' consolidated sales in fiscal year
2003, 26 percent in fiscal year 2002, and 24 percent in fiscal year 2001. Sales
of industrial gases -- principally oxygen, nitrogen, and hydrogen -- to the
chemical process industry and the electronics industry, the largest consuming
industries, were approximately 22 percent and 13 percent, respectively, of Air
Products' consolidated sales in fiscal year 2003.
Other important consumers of Air Products' industrial and specialty gases
are the basic steel industry, the oil industry (which uses inert nitrogen for
oil well stimulation and field pressurization and hydrogen and oxygen for
refining), and the food industry (which uses liquid nitrogen for food freezing).
Air Products believes that it is the largest liquefier of hydrogen, which it
supplies to many customers, including the National Aeronautics and Space
Administration for its space shuttle program.
The global healthcare business of Air Products is directed at two main
markets: institutional and homecare. The institutional market uses medical gases
in hospitals, clinics, and nursing homes, as well as helium for use in magnetic
resonance imaging. The homecare business involves the delivery of respiratory
therapy services, infusion services, and home medical equipment to patients in
their homes in Europe, South America, and principally in the eastern United
States.
Specialty gases include fluorine products, rare gases such as xenon,
krypton, and neon, and more common gases of high purity or gases that are
precisely blended as mixtures. Specialty chemicals for use by the electronics
industry include silane, arsine, silicon tetrafluoride, nitrogen trifluoride,
carbon tetrafluoride, hexafluoromethane, and tungsten hexafluoride. These gases
and chemicals are used in numerous industries and in electronic and laboratory
applications. In certain circumstances the Company sells equipment related to
the use, handling, and storage of such specialty gases and specialty chemicals.
Sales of industrial gases and sales of specialty products to the
electronics industry and others are made principally through regional offices in
the United States, Europe, South America, Africa, and Asia.
During the year Air Products expanded its role in the electronics
chemicals business through the acquisition of the Electronic Materials and
Services Business of Ashland, Inc. Electronic materials are used in the
semiconductor manufacturing and the photolithography process.
Electricity and hydrocarbons, including natural gas as a feedstock for
producing certain gases, are important to Air Products' gas business. See "Raw
Materials and Energy." The Company's large truck fleet, which delivers products
to liquid bulk customers, requires a readily available supply of gasoline or
diesel fuel. Also, environmental and health laws and regulations will continue
to affect the Company's gas businesses. See "Environmental Controls."
Air Products operates and has 50 percent interests in a 49-megawatt
fluidized-bed coal-fired power generation facility in Stockton, California and
in a 24-megawatt gas-fired combined cycle power generation facility near
Rotterdam, the Netherlands. A 112-megawatt gas-fueled power generation facility,
in which the Company has a 48.8 percent interest, operates in Thailand and
supplies electricity to a state-owned electricity generating authority and steam
and electricity to an Air Products industrial gases affiliate. Additional
information with respect to the Company's power generation and flue gas
treatment businesses is included in Notes 5, 8, and 18 to the Consolidated
Financial Statements included under Item 8 herein.
CHEMICALS
The Company's chemicals businesses consist of performance materials and
chemical intermediates, where the Company is able to differentiate itself by the
performance of its products in the customer's application, the technical service
that the Company provides, and the scale of production and the production
technology employed by the Company.
Chemical sales are supported from various locations in the United States,
Europe, Asia, and Africa, and through sales representatives or distributors in
most industrialized countries. Dry products are delivered in railcars, trucks,
drums, bags, and cartons. Liquid products are delivered by barge, rail tank
cars, tank trailers, drums and pails, and, at one location, by pipeline.
The chemicals business depends on adequate energy sources, including
natural gas as a feedstock for the production of certain products (see "Raw
Materials and Energy"), and will continue to be affected by various
environmental and health laws and regulations (see "Environmental Controls").
2
<PAGE>
PERFORMANCE MATERIALS
The principal businesses of performance materials are Performance
Polymers, Performance Solutions, and Performance Products. Total sales from the
performance materials business constituted approximately 15 percent of Air
Products' consolidated sales in fiscal year 2003, 17 percent in fiscal year
2002, and 15 percent in fiscal year 2001. Air Products' performance materials
are differentiated from the competition based on their functionality when used
in the customer's products and applications, and by the technical service the
Company provides.
Performance Polymers -- Air Products' polymers are water-based and
water-soluble emulsion products derived primarily from vinyl acetate monomer.
The Company's major emulsions products are vinyl acetate homopolymer emulsions
and AIRFLEX(R) vinyl acetate-ethylene copolymer emulsions. The Company also
produces emulsions that incorporate vinyl chloride and various acrylates in the
polymer. These products are used in adhesives, nonwoven fabric binders, paper
coatings, paints, inks, and carpet backing binder formulations.
Air Products owns 65 percent of a worldwide joint venture with
Wacker-Chemie GmbH that produces polymer emulsions and pressure-sensitive
adhesives. The Company also owns 20 percent of a worldwide joint venture with
Wacker-Chemie GmbH that produces redispersible powders made from polymer
emulsions.
Performance Solutions -- These products are primarily acetylenic alcohols
and amines that are used as performance additives in coatings, lubricants,
electro-deposition processes, agricultural formulations, and corrosion
inhibitors.
Performance Products -- These products include polyurethane catalysts and
surfactants that are used as performance control additives and processing aids
in the production of both flexible and rigid polyurethane foam around the world.
The principal end markets for polyurethane foams include furniture cushioning,
insulation, carpet underlay, bedding, and automobile seating.
These products also include epoxy additives such as polyamides, aromatic
amines, cycloaliphatic amines, reactive diluents, and specialty epoxy resins
that are used as performance additives in epoxy formulations by epoxy
manufacturers worldwide. The end markets for epoxies are coatings, flooring,
adhesives, reinforced composites, and electrical laminates.
CHEMICAL INTERMEDIATES
The chemical intermediates businesses use the Company's proprietary
technology and scale of production to differentiate themselves from the
competition. The principal intermediates sold by the Company include amines and
polyurethane intermediates. The Company also produces nitric acid as a raw
material for its differentiated products. Total third-party sales from the
chemical intermediates businesses constituted 10 percent of Air Products'
consolidated sales in fiscal year 2003, 10 percent in fiscal year 2002, and 10
percent in fiscal year 2001.
Amines -- The Company produces a broad range of amines using ammonia,
methanol, and other alcohol feedstocks purchased from various suppliers.
Substantial quantities of these products are sold under long-term contracts to a
small number of customers. These products are used by the Company's customers as
raw materials in the manufacture of herbicides, pesticides, water treatment
chemicals, animal nutrients, polyurethane coatings, rubber chemicals, and
pharmaceuticals. Additional ammonia is purchased and converted to ammonium
nitrate prills and solutions that are primarily sold to customers as fertilizers
or for other chemical applications. In 2004 the Company will shut down its
methanol and ammonia production facilities and begin purchasing all of its
methanol and ammonia requirements. During the third fiscal quarter, the Company
announced its plan to sell the European methylamines and derivatives business.
Polyurethane Intermediates -- The Company produces dinitrotoluene ("DNT")
and toluene diamine ("TDA") for use as intermediates by the Company's customers
in the manufacture of a major precursor of flexible polyurethane foam. The
principal end markets for flexible polyurethane foams include furniture
cushioning, carpet underlay, bedding, and seating in automobiles. Virtually all
of the Company's production of DNT and TDA is sold under long-term contracts to
a small number of customers.
EQUIPMENT
The Company designs and manufactures equipment for cryogenic air
separation, gas processing, natural gas liquefaction, and hydrogen purification.
Air Products also designs and builds systems for recovering hydrogen, nitrogen,
carbon monoxide, carbon dioxide, and low dew point gases using membrane
technology. This segment further designs and builds cryogenic transportation
containers for liquid helium and hydrogen. Customers include companies involved
in chemical and petrochemical manufacturing, oil and gas recovery and
processing, power generation, and steel and primary
3
<PAGE>
metal production. Additionally, a broad range of plant design, engineering,
procurement, and construction management services is provided for the above
areas. Equipment is manufactured for use by the gases segment and for sale in
industrial markets that include the Company's international industrial gas joint
ventures.
The backlog of orders (including letters of intent) believed to be firm
from other companies and equity affiliates for equipment was approximately $259
million on 30 September 2003, approximately 66 percent of which relates to
cryogenic air separation, as compared with a total backlog of approximately $114
million on 30 September 2002. It is expected that approximately $200 million of
the backlog on 30 September 2003 will be completed during fiscal year 2004.
GENERAL
FOREIGN OPERATIONS
Air Products, through subsidiaries and affiliates, conducts business in
numerous countries outside the United States. The structure of the Air Products
gas business in Europe is comparable to the Company's United States operation,
except in Europe, where the Company is also engaged in the packaged gas
business. Air Products' international business is subject to risks customarily
encountered in foreign operations, including fluctuations in foreign currency
exchange rates and controls, import and export controls, and other economic,
political, and regulatory policies of local governments.
The Company's industrial gas segment, through investments ranging from
wholly owned subsidiaries to minority ownership interests, does business in
approximately 35 countries outside the United States. Majority and wholly owned
industrial gas subsidiaries operate in Argentina, Brazil, Canada, and Mexico,
and throughout Europe and Asia in 15 and ten countries, respectively. There are
50 percent industrial gas joint ventures in Canada and Trinidad and Tobago,
seven countries in Europe, four in Asia, and two in Africa, and less than
controlling interests in Africa, Canada, and Mexico, four countries in Europe,
and five in Asia. The Company has a 50 percent joint venture in the U.K. that is
developing products relating to silicon wafer polishing, chemical mechanical
planarization processes, and hard disk polishing. The Company also has a 50
percent interest in a power generation facility in the Netherlands and a 48.8
percent interest in one in Thailand.
The principal geographic markets for the Company's chemical products are
in 12 countries, with operations in North America, Europe, Asia, Brazil, and
Mexico. Majority and wholly owned subsidiaries operate in Germany, Italy, the
Netherlands, the United Kingdom, Australia, Japan, Korea, China, Taiwan, and
Mexico. The polymer emulsions and pressure-sensitive adhesives joint venture
with Wacker-Chemie GmbH has headquarters in the United States and production
facilities in the United States, Germany, Mexico, and Korea, along with a
technical service center in Shanghai, China. Headquarters for the 20 percent
investment in the redispersible powder venture with Wacker-Chemie GmbH are in
Germany with manufacturing facilities in Germany and the United States. The
Company also has controlling interests in Korea and Taiwan and less than
controlling interests in Japan and Ireland that sell chemicals to the
electronics industry.
Financial information about Air Products' foreign operations and
investments is included in Notes 8, 16, and 20 to the Consolidated Financial
Statements included under Item 8 herein. Information about foreign currency
translation is included in Note 1 to the Consolidated Financial Statements
included under Item 8 herein, under "Foreign Currency," and information on
Company exposure to currency fluctuations is included in Note 6 to the
Consolidated Financial Statements included under Item 8 herein. Export sales
from operations in the United States to unconsolidated customers amounted to
$497 million, $533 million, and $602 million in fiscal years 2003, 2002, and
2001, respectively. Total export sales in fiscal year 2003 included $181 million
in export sales to affiliated customers. The sales to affiliated customers were
primarily equipment sales and electronic specialty materials sales.
TECHNOLOGY DEVELOPMENT
Air Products conducts research and development principally in its
laboratories located in Trexlertown, Pennsylvania, as well as in Carlsbad,
California; Dublin, Ohio; and Easton, Pennsylvania in the U.S.; Basingstoke,
London, and Crewe in the U.K.; Burghausen, Germany; Utrecht, the Netherlands;
San Juan del Rio, Mexico; and Barcelona, Spain. The Company also funds and works
closely on research and development programs with a number of major universities
and conducts research work funded by others, principally the United States
Government.
The Company's market-oriented approach to technology development
encompasses research and development and engineering, as well as commercial
development.
4
<PAGE>
The amount expended by the Company on research and development during
fiscal year 2003 was $121 million, $120 million in fiscal year 2002, and $122
million in fiscal year 2001. The amount expended by the Company on
customer-sponsored research activities during fiscal year 2003 was $15 million,
$18 million in fiscal year 2002, and $19 million in fiscal year 2001.
In the gases and equipment segments, technology development is directed
primarily to developing new and improved processes and equipment for the
production and delivery of industrial gases and cryogenic fluids, developing new
products, and developing new and improved applications for industrial gases. It
is through such applications and improvements that the Company has become a
major supplier to the electronics and chemical process industries, including
gases from air separation, specialty gases, and hydrogen. Additionally,
technology development for the equipment business is directed primarily to
reducing the capital and operating costs of its facilities and to
commercializing new technologies in gas production, liquefaction, and
separation.
In the chemicals segment, technology development is primarily concerned
with new products and applications to strengthen and extend our present
positions in polymer and performance materials. In addition, a major continuing
effort supports the development of new and improved process and manufacturing
technology for chemical intermediates and polymers.
A corporate research group supports the research efforts of the Company's
various businesses. This group includes the Company's Corporate Science and
Technology Center, which conducts research in areas important to the long-term
growth of the Company with focus on performance materials.
As of 1 November 2003, Air Products owned 1,041 United States patents and
1,889 foreign patents. The Company is also licensed under certain patents owned
by others. While the patents and licenses are considered important, Air Products
does not consider its business as a whole to be materially dependent upon any
particular patent or patent license, or group of patents or licenses.
RAW MATERIALS AND ENERGY
The Company manufactures hydrogen, carbon monoxide, synthesis gas, and
carbon dioxide, principally from natural gas. Such products accounted for
approximately 13 percent of the Company's consolidated sales in fiscal year
2003. The Company's principal raw material purchases are chemical intermediates
produced by others from basic petrochemical feedstocks such as olefins and
aromatic hydrocarbons. These feedstocks are generally derived from various
crude oil fractions or from liquids extracted from natural gas. The Company
purchases its chemical intermediates from many sources and generally is not
dependent on one supplier. However, with respect to vinyl acetate monomer that
supports the polymer business, the Company is heavily dependent on a single
supplier under a long-term contract that produces vinyl acetate monomer from
several facilities. The Company characterizes the availability of these
chemical intermediates as generally being readily available. The Company uses
such raw materials in the production of emulsions, amines, polyurethane
intermediates, specialty additives, polyurethane additives, and epoxy
additives. Such products accounted for approximately 26 percent of the
Company's consolidated sales in fiscal year 2003. Natural gas is an energy
source at a number of the Company's facilities. The Company also purchases
ammonia under long-term contracts as a feedstock for several of its chemicals
facilities.
A long-term supplier of sulfuric acid, used in the production of
dinitrotoluene (DNT), emerged from Chapter 11 bankruptcy protection in June
2003. To facilitate the supplier's ability to emerge from bankruptcy and to
continue supplying product to the Company, the Company agreed to participate in
the supplier's financing and has continued to supply additional financing. Total
loans to the supplier at 30 November 2003 were $45.1 million. If the supplier
does not continue to operate, the sales and profitability of the chemicals
segment could be materially impacted on an annual basis because of the Company's
inability to supply all of its customers' base requirements. The Company does
not expect a material loss related to this supplier.
The Company's industrial gas facilities use substantial amounts of
electrical power. Electricity is the largest cost input for the production of
atmospheric gases. Any shortage of electrical power or interruption of its
supply or increase in its price that cannot be passed through to customers for
competitive reasons will adversely affect the liquid bulk gas business of the
Company.
5
<PAGE>
In addition, the Company purchases finished and semi-finished materials
and chemical intermediates from many suppliers. During fiscal year 2003, no
significant difficulties were encountered in obtaining adequate supplies of
energy or raw materials.
ENVIRONMENTAL CONTROLS
The Company is subject to various environmental laws and regulations in
the United States and foreign countries where it has operations. Compliance with
these laws and regulations results in higher capital expenditures and costs.
Additionally, from time to time, the Company is involved in proceedings under
the Comprehensive Environmental Response, Compensation, and Liability Act (the
federal Superfund law), similar state laws, and the Resource Conservation and
Recovery Act (RCRA) relating to the designation of certain sites for
investigation and possible cleanup. Additional information with respect to these
proceedings is included under Item 3, Legal Proceedings, below. The Company's
accounting policies on environmental expenditures are discussed in Note 1 to the
Consolidated Financial Statements included under Item 8 herein.
The amounts charged to earnings on an after-tax basis related to
environmental matters totaled $30 million in 2003, $24 million in 2002, and $22
million in 2001. 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 $30 million in
2004 and $31 million in 2005.
Although precise amounts are difficult to define, the Company estimates
that in fiscal year 2003 it spent approximately $16 million on capital projects
to control pollution versus $14 million in 2002. Capital expenditures to control
pollution in future years are estimated at approximately $17 million in 2004 and
$14 million in 2005.
To the extent long-term contracts have been entered into for supply of
product, such as for the industrial gas on-site business and for certain
chemical products, the cost of any environmental compliance generally is
contractually passed through to the customer.
It is the Company's policy to accrue environmental investigatory and
noncapital remediation costs for identified sites when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated.
The potential exposure for such costs is estimated to range from $9 million to a
reasonably possible upper exposure of $21 million. The accrual on the balance
sheet for both 30 September 2003 and 30 September 2002 was $15 million. Actual
costs to be incurred in future periods may vary from the estimates, given
inherent uncertainties in evaluating environmental exposures. Subject to the
imprecision in estimating future environmental costs, the Company does not
expect that any sum it may have to pay in connection with environmental matters
in excess of the amounts recorded or disclosed above would have a materially
adverse effect on its financial condition or results of operations in any one
year.
COMPETITION
The Company's businesses face strong competition from others, some of
which are larger and have greater resources than Air Products.
Air Products' industrial gas business competes in the United States with
three major sellers and with several regional sellers. Competition in industrial
gas markets is based primarily on price, reliability of supply, and furnishing
or developing applications for use of such gases by customers, and in some cases
the provisions of other services or products such as power and steam generation.
Similar competitive situations exist in European and Asian industrial gas
markets in which the Company competes against one or more larger entrenched
competitors in most countries.
The division of the Company's gas business that serves the electronics
industry offers electronic specialty gases, chemicals, services, and equipment.
These products face competition from competitors who vary from product to
product, ranging from niche suppliers having only a single product, to larger
and more vertically integrated chemical companies with greater financial
resources than the Company. Competition in these products is principally on the
basis of price, quality, product performance, and reliability of product supply.
Competition in the institutional market of the global healthcare business
is principally from other large, established industrial gas companies using
business models (long-term product supply agreements) that are similar to those
the companies utilize for other industrial gas supply relationships. Competition
in this market is principally based on price, quality, service, and reliability
of supply. Homecare is served by national and local providers, and in the U.S.
there are over 2,000 regional and local providers. The homecare market is highly
competitive. In the United States reimbursement levels are established by fee
schedules regulated by Medicare and
6
<PAGE>
Medicaid, or by the levels determined by insurance companies. Accordingly, in
the United States, homecare companies compete primarily on the basis of service.
Maintaining competitiveness requires efficient logistics, reimbursement, and
accounts receivable systems. Although the Company intends to acquire additional
homecare companies, there is no guarantee that suitable candidates can be
acquired or that the necessary managed care contracts will be on favorable
terms.
The number of the Company's principal competitors in the chemicals
business varies from product to product, and it is not practical to identify
such competitors because of the broad range of the Company's chemical products
and the markets served, although the Company believes it has a leading or strong
market position in most of its chemical products. For amines the competition is
principally from other large chemical companies that also have the ability to
provide competitive pricing, reliability of supply, technical service
assistance, and quality products and services. The possibility of back
integration by large customers is the major competitive factor for the sale of
polyurethane additives. In its other chemical products, the Company competes
with a large number of chemical companies, some of which are larger, possess
greater financial resources, and are more vertically integrated than the
Company. Competition in these products is principally on the basis of price,
quality, product performance, reliability of product supply, and technical
service assistance.
The Company's equipment business competes in all aspects with a great
number of firms, some of which have greater financial resources than Air
Products. Competition is based primarily on technological performance, service,
technical know-how, price, and performance guarantees.
INSURANCE
The Company's policy is to obtain public liability and property insurance
coverage that is currently available at what management determines to be a fair
and reasonable price. The Company maintains public liability and property
insurance coverage at amounts that management believes are sufficient to meet
the Company's anticipated needs in light of historical experience to cover
future litigation and claims. There is no assurance, however, that the Company
will not incur losses beyond the limits of, or outside the coverage of, its
insurance.
EMPLOYEES
On 30 September 2003, the Company (including majority-owned subsidiaries)
had approximately 18,500 full-time employees, of whom approximately 8,700 were
located outside the United States. The Company has collective bargaining
agreements with unions at various locations that expire on assorted dates over
the next three to four years. In late November 2003, the contract at the
Wilkes-Barre manufacturing facility where hourly employees are represented by
the International Association of Machinists and Aerospace Workers (I.A.M.A.W.)
expired and the workforce went on strike. Contract negotiations had been
conducted with the union's negotiating team, but the union membership rejected
the agreement its leadership had unanimously recommended. The Wilkes-Barre
facility principally manufactures heat exchangers for natural gas liquefaction
and equipment for cryogenic air separation. The Company is negotiating two new
contracts with the Teamsters in Easton, Pennsylvania and with the PACE Union in
Dallas, Texas, as a result of the recent Ashland acquisition. Although there are
no firm dates associated with these later two contracts, the Company hopes to
resolve them sometime in the second fiscal quarter. The Company considers
relations with its employees to be satisfactory, with the exception of the
current strike. The Company does not believe that the impact of any expiring or
expired collective bargaining agreements will result in a material adverse
impact on the Company.
AVAILABLE INFORMATION
All periodic and current reports, registration statements, and other
filings that the Company is required to file with the Securities and Exchange
Commission ("SEC"), including the Company's annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) of the Exchange Act
(the "1934 Act Reports"), are available free of charge through the Company's
Internet website at www.airproducts.com. Such documents are available as soon as
reasonably practicable after electronic filing of the material with the SEC. All
1934 Act Reports filed during the period covered by this Report were available
on the Company's website on the same day as filing.
The public may also read and copy any materials filed by the Company with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC; the address
of that site is www.sec.gov.
7
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers and their respective positions and ages
on 15 December 2003 follow. Except where indicated, each of the executive
officers listed below has been employed by the Company in the position indicated
during the past five fiscal years. Information with respect to offices held is
stated in fiscal years.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Leonard V. Broese
van Groenou 56 Vice President - Human Resources
(D) (became Vice President - Human
Resources in 2001; Vice President -
Human Resources and Procurement of Air
Products Europe prior thereto)
W. Douglas Brown 57 Vice President, General Counsel, and
Secretary
(D) (became Vice President, General
Counsel, and Secretary in 1999; Vice
President - Administration, Gases and
Equipment prior thereto)
Mark L. Bye 47 Group Vice President, Gases and
Equipment
(D) (became Group Vice President, Gases
and Equipment in 2003; President, Air
Products Asia in 2001; and Vice
President, Performance Chemicals
Division in 1998)
Robert E. Gadomski 56 Executive Vice President - Gases and
Equipment
(D) (will retire 1 February 2004) (became
Executive Vice President - Gases and
Equipment in 1999; Executive Vice President
- Chemicals, Asia, and Latin America in
1998)
Paul E. Huck 53 Vice President and Corporate Controller
(became Vice President and Corporate
Controller in 2002; Vice President -
Project Management Office in 2000;
Vice President and Corporate
Controller prior thereto)
John P. Jones III 53 Chairman, President, and Chief Executive
(A)(B)(C)(D) Officer (became Chairman and Chief Executive
Officer in 2000; President and Chief
Operating Officer in 1998)
Arthur T. Katsaros 56 Group Vice President - Engineered
Systems and Development
(D) (became Group Vice President -
Engineered Systems and Development in
2001; Group Vice President, Engineered
Systems and Operations Group prior
thereto)
John F. McGlade 49 Group Vice President, Chemicals
(D) (became Group Vice President,
Chemicals in 2003; Vice President, Chemicals
Group Business Divisions in 2003; Vice
President and General Manager, Performance
Chemicals Division in 2001; and Vice
President and General Manager, Chemical and
Process Industries and Energy Systems prior
thereto)
John R. Owings 54 Vice President and Chief Financial Officer
(D) (became Vice President and Chief
Financial Officer in 2002; Senior Vice
President of Finance, Personal
Communications Segment ($10.5 billion
in net sales), in 2000 for Motorola,
Inc., which provides integrated
communications solutions and embedded
electronic solutions; Senior Vice
President, Director of Finance, Global
Telecom Solutions Segment ($6.5
billion in net sales), in 1998 for
Motorola, Inc.)
</TABLE>
8
<PAGE>
(A) Member, Board of Directors
(B) Member, Executive Committee of the Board of Directors
(C) Member, Finance Committee of the Board of Directors
(D) Member, Corporate Executive Committee
ITEM 2. PROPERTIES.
The principal executive offices of Air Products are located at its
headquarters in Trexlertown, near Allentown, Pennsylvania. Additional
administrative offices are located in owned facilities in Hersham, near London,
England; Brampton, near Toronto, Canada; and Hattingen, Germany. Administrative
offices are also located in leased facilities in the Allentown and Philadelphia
areas in Pennsylvania; Dublin, Ohio; Tokyo, Japan; Hong Kong, the People's
Republic of China; Singapore; Brussels, Belgium; Paris, France; Barcelona,
Spain; and Sao Paulo, Brazil. The management considers the Company's
manufacturing facilities, described in more detail below, to be adequate to
support the business efficiently. The following information with respect to
properties is as of 30 September 2003.
GASES
In the United States, the gases segment has approximately 200 plant
facilities in 45 states, the majority of which recover nitrogen, oxygen, and
argon. The Company has three facilities that produce specialty gases, three
facilities that clean electronic parts, three facilities that produce electronic
chemicals, and 29 facilities that produce and/or recover hydrogen throughout the
United States. Helium is recovered at two plants in Kansas and Texas. There are
19 sales offices located in 10 states. The property on which these plants are
located is owned by Air Products at approximately one-fourth of the locations,
and leased by Air Products at the remaining locations. However, in virtually all
cases, the plant itself is owned and operated by Air Products. Air Products owns
approximately half of its industrial gas sales offices and cylinder distribution
centers, including related real estate, and leases the other half.
Air Products' European plant facilities total 74 and include nine
facilities that recover hydrogen, four facilities that manufacture dissolved
acetylene, two facilities that recover carbon monoxide, and two facilities that
produce electronic chemicals. The majority of European plants recover nitrogen,
oxygen, and argon. In addition, there are five specialty gas centers. There are
114 sales offices and/or cylinder distribution centers in Europe, and several
additional facilities located in Brazil, Canada, Puerto Rico, and the Middle
East.
In Asia the gases segment has approximately 79 plant facilities in eight
countries, including two equipment manufacturing facilities, an electronic
chemicals facility, and seven facilities that produce and/or recover hydrogen.
The property on which these plants are located is owned by Air Products at
approximately one-fifth of the locations, and leased by Air Products at the
remaining locations. There are approximately 40 sales offices and distribution
centers located throughout the region, half of which are owned sites and the
remainder leased. Representative offices are located in Taiwan and in Hong Kong,
Beijing, and Shanghai in the People's Republic of China.
Global healthcare has 152 facilities in the United States, Argentina,
Brazil, Mexico, South Africa, and seven countries in Europe. The majority of the
facilities for global healthcare are leased.
CHEMICALS
The chemicals segment manufactures amines, nitric acid, and ammonia
products at its Pace, Florida facility; alkylamines at its St. Gabriel,
Louisiana facility and its Camacari, Bahia, Brazil facility; polyvinyl acetate
emulsions at its South Brunswick, New Jersey facility; styrene emulsions,
styrene acrylics, polyvinyl acetate acrylics, and polyvinyl acetate emulsions at
its San Juan del Rio facility in Mexico; polyvinyl acetate emulsions at its
Cologne, Germany facility; nitric acid, dinitrotoluene, and toluene diamine at
its Pasadena, Texas facility; polyvinyl acetate emulsions and acetylenic
chemicals at its Calvert City, Kentucky facility; specialty amines at its
Wichita, Kansas facility; methylamines, dimethyl formamide, choline chloride,
and dimethyl amino ethanol at its Teesside, England facility; and epoxy
additives at its facilities in Manchester, England, and Los Angeles, California.
The chemicals segment manufactures polyurethane additives and polyurethane
specialty products (AIRTHANE(R)/VERSATHANE(R)) at its Paulsboro, New Jersey
facility that is leased in part and owned in part. The chemicals segment also
manufactures polyvinyl acetate emulsions at four smaller locations.
The chemicals segment has 12 plant facilities, one sales office, and one
laboratory in the United States, and operates four plants, three
sales/representative offices, and two laboratories in Europe, two laboratories
in Brazil and Japan,
9
<PAGE>
one laboratory in Korea, one plant in each of Mexico and Brazil, two plants in
Korea, and sales offices in Australia, Brazil, Mexico, the People's Republic of
China, Japan, Korea, and Singapore, and representative offices in Beijing,
Shanghai, and Hong Kong in the People's Republic of China. Substantially all of
the chemicals segment's plants and real estate are owned. The Company leases
approximately 75 percent of the offices and 25 percent are owned.
EQUIPMENT
The principal facilities utilized by the equipment segment include six
plants and two sales offices in the United States, two plants and one office in
Europe, one office in Japan, and one sales office in the People's Republic of
China. Air Products owns approximately 50 percent of the facilities and real
estate in this segment and leases the remaining 50 percent.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business Air Products and its subsidiaries are
involved in legal proceedings including proceedings involving governmental
authorities under the Comprehensive Environmental Response, Compensation, and
Liability Act (the federal Superfund law); the Resource Conservation and
Recovery Act (RCRA); and similar state environmental laws relating to the
designation of certain sites for investigation or remediation. Presently there
are approximately 40 sites on which a final settlement has not been reached
where the Company, along with others, has been designated a Potentially
Responsible Party by the Environmental Protection Agency or is otherwise engaged
in investigation or remediation. As previously reported, the Company received
several notices between June 2001 and September 2002 of civil administrative
penalties from the New Jersey Department of Environmental Protection (NJDEP)
alleging various exceedances and discrepancies relating to the air emissions
from the thermal oxidizer at the Company's Paulsboro, New Jersey chemical
production facility. In October 2003, the Company executed a Settlement
Agreement with NJDEP and paid a penalty amount of $111,200 for these notices and
subsequent exceedances.
The Company does not expect that any sums it may have to pay in connection
with these matters would have a materially adverse effect on its consolidated
financial position, nor is there any material additional exposure expected in
any one year in excess of the amounts the Company currently has accrued.
Additional information on the Company's environmental exposure is included under
"Environmental Controls."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, ticker symbol "APD," is listed on the New York
and Pacific Stock Exchanges. Quarterly stock prices, as reported on the New York
Stock Exchange composite tape of transactions, and dividend information for the
last two fiscal years appear below. Cash dividends on Air Products' common stock
are paid quarterly. The Company's objective is to pay dividends consistent with
the reinvestment of earnings necessary for long-term growth. It is the Company's
expectation that comparable cash dividends will continue to be paid in the
future.
<TABLE>
<CAPTION>
Quarterly Stock Information
----------------------------------------------------
2003 High Low Close Dividend
---- ---- --- ----- --------
<S> <C> <C> <C> <C>
First $46.50 $40.34 $42.75 $.21
------ ------ ------ ----
Second 44.20 36.97 41.43 .21
------ ------ ------ ----
Third 44.25 40.72 41.60 .23
------ ------ ------ ----
Fourth 48.78 40.50 45.10 .23
------ ------ ------ ----
$.88
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
2002 High Low Close Dividend
---- ---- --- ----- --------
<S> <C> <C> <C> <C>
First $48.09 $36.15 $46.91 $.20
------ ------ ------ ----
Second 53.52 43.30 51.65 .20
------ ------ ------ ----
Third 52.58 45.59 50.47 .21
------ ------ ------ ----
Fourth 51.66 40.00 42.01 .21
------ ------ ------ ----
$.82
</TABLE>
The Company has authority to issue 25,000,000 shares of preferred stock in
series. The Board of Directors is authorized to designate the series and to fix
the relative voting, dividend, conversion, liquidation, redemption and other
rights, preferences, and limitations as between series. When preferred stock is
issued, holders of Common Stock are subject to the dividend and liquidation
preferences and other prior rights of the preferred stock. There currently is no
preferred stock outstanding. The Company's Transfer Agent and Registrar is
American Stock Transfer and Trust Company, 59 Maiden Lane, New York, New York,
10038, telephone (800) 937-5449, Internet website www.amstock.com, and e-mail
address info@amstock.com.
As of 28 November 2003, there were 11,038 record holders of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The tabular information appearing under "Five-Year Summary of Selected
Financial Data" on page 74 of the 2003 Financial Review Section of the Annual
Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
The textual information appearing under "Management's Discussion and
Analysis" on pages 25 through 42 of the 2003 Financial Review Section of the
Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The textual information appearing under "Market Risks and Sensitivity
Analysis" on pages 38 and 39 of the 2003 Financial Review Section of the Annual
Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and the related notes thereto,
together with the report thereon of KPMG LLP dated 24 October 2003, and the
previously issued Arthur Andersen LLP report dated 26 October 2001, appearing on
pages 44 through 74 of the 2003 Financial Review Section of the Annual Report to
Shareholders, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On 10 May 2002, the Company terminated its engagement of Arthur Andersen
LLP of Philadelphia, Pennsylvania ("Andersen") as independent auditors and
appointed KPMG LLP as its new independent auditors for the fiscal year ending 30
September 2002. This determination followed the Company's decision to seek
proposals from independent public accounting firms to audit the Company's
financial statements and was approved by the Board of Directors upon the
recommendation of the Audit Committee.
Andersen's report on the Company's audited financial statements for each
of the years ended 30 September 2000 and 30 September 2001 did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope, or accounting principles.
During the years ended 30 September 2000 and 30 September 2001, and the
interim period between 30 September 2001 and 10 May 2002, there were no
disagreements between the Company and Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Andersen's
11
<PAGE>
satisfaction, would have caused it to make reference to the subject matter in
connection with its report on the Company's financial statements for those
years. Also, during those two years and interim period, there were no reportable
events as listed in Item 304(a)(1)(v) of Regulation S-K.
Air Products provided Andersen with a copy of the foregoing disclosure.
Andersen's letter dated 10 May 2002, stating its agreement with such statements,
was filed as Exhibit 16 to the Company's Form 8-K filed 10 May 2002, which is
incorporated herein by reference.
During the years ended 30 September 2000 and 30 September 2001, and the
interim period between 30 September 2001 and 10 May 2002, the Company did not
consult with KPMG regarding application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, or any
other matter or reportable event listed in Items 304(a)(2)(i) and (ii) of
Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
Under the supervision of the Chief Executive Officer and Chief Financial
Officer, the Company's management conducted an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
as of 30 September 2003. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of its
disclosure controls and procedures have been effective. There have been no
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of such
evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The biographical information relating to the Company's directors,
appearing on pages 6 through 8 of the Proxy Statement relating to the Company's
2004 Annual Meeting of Shareholders, is incorporated herein by reference.
Biographical information relating to the Company's executive officers is set
forth in Item 1 of Part I of this Report.
Information on Section 16(a) Beneficial Ownership Reporting Compliance,
appearing on page 26 of the Proxy Statement relating to the Company's 2004
Annual Meeting of Shareholders, is incorporated herein by reference.
The Company's existing Code of Conduct, which has applied to all
employees, was recently updated to comply with the requirements of
Sarbanes-Oxley and the New York Stock Exchange, including by clarifying its
application to its principal executive officer, principal financial officer,
principal accounting officer, and directors. The text of the Code of Conduct is
attached as Exhibit 14 to this Annual Report on Form 10-K. The Code of Conduct
can also be found at the Company's Internet website at
www.airproducts.com/responsibility/governance/codeofconduct.htm.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Director Compensation," "Report of the Management
Development and Compensation Committee," "Executive Compensation Tables,"
"Severance and Employment Arrangements," "Change in Control Arrangements," and
"Stock Performance Graph," appearing on pages 13 through 23 of the Proxy
Statement relating to the Company's 2004 Annual Meeting of Shareholders, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of 30 September 2003, about
Company Stock that may be issued upon the exercise of options, warrants, and
rights granted to employees or members of the Board of Directors under the
Company's
12
<PAGE>
existing equity compensation plans, including plans approved by shareholders and
plans that have not been approved by shareholders in reliance on the New York
Stock Exchange's traditional treasury stock or other applicable exception to the
Exchange's listing requirements.
<TABLE>
<CAPTION>
Number of
securities
Number of remaining available
securities to be for future issuance
issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding outstanding (excluding
options, warrants, options, warrants, securities
Plan Category and rights and rights reflected in column (a))
------------- ------------------ ------------------ ------------------------
<S> <C> <C> <C>
Equity compensation
plans approved by
security holders 21,623,096(1) $35.75 10,022,747(2)
Equity compensation
plans not approved
by security holders 6,829,945(3) $35.07 1,500,000(4)
Total 28,453,041 $35.58 11,522,747
</TABLE>
(1) Represents Long-Term Incentive Plan outstanding options and deferred stock
units ("DSUs") that have been granted. DSUs entitle the recipient to one
share of Company common stock upon earn out, which is conditioned on
continued employment during the deferral period and may also be
conditioned on meeting certain performance targets. The deferral period
generally ends upon death, disability, or retirement.
(2) Represents authorized shares that were available for future grants as of
30 September 2003. These shares may be used for options, DSUs, restricted
stock, and other stock based awards to officers, directors, and key
employees.
(3) Represents outstanding options under Global Employee Stock Awards
(3,494,371), the Stock Incentive Plan (2,326,200), the Stock Option Plan
for Directors (112,000), and the U.K. Savings-Related Share Option Schemes
(705,903). This number also includes DSUs under the Deferred Compensation
Plan for Directors (118,865), the Annual Incentive Plan (36,516), and the
Supplementary Savings Plan (36,090). DSUs issued under these plans are
purchased for the fair market value of the underlying shares of stock with
eligible deferred compensation, except for that portion of directors fees
that is paid in DSUs as described above.
(4) The number also includes a reserve of (1,000,000) shares available for
stock option awards under the U.K. Savings-Related Share Option Schemes, a
(250,000) reserve for the Annual Incentive Plan and Supplementary Savings
Plan and (250,000) reserve for the Deferred Compensation Plan for
Directors.
Global Employee Stock Option Awards and Stock Incentive Program - All
stock options under these plans were granted at fair market value on the date of
grant, first become exercisable three years after grant, and terminate ten years
after the date of grant or upon the earlier termination of employment for
reasons other than retirement, disability, death, or involuntary termination due
to Company action necessitated by business conditions. No further awards will be
made under these plans.
Stock Option Plan for Directors - All stock options under this plan were
granted at fair market value on the date of grant. The options become
exercisable in six months after grant and remain exercisable for nine and
one-half years unless the director resigns from our Board after serving for less
than six years (other than because of disability or death). No further awards
will be made under this plan.
The Air Products PLC U.K. Savings-Related Share Option Scheme and the Air
Products Group Limited U.K. Savings-Related Share Option Scheme (together, the
"U.K. Plan") are employee benefit plans for employees of Air Products PLC (and
certain of its U.K. subsidiaries) and Air Products Group Limited (and certain of
its U.K. subsidiaries), respectively
13
<PAGE>
(together, the "U.K. Companies"). Employees participate in the U.K. Plan by
electing to do so during a brief invitation period. An employee who elects to
participate elects a five- or seven-year option period and has amounts of salary
automatically withheld and contributed to a savings account at a bank not
affiliated with the Company. At the end of the five-year savings period, a
tax-free bonus is added to the employee's account. An employee who elects a
seven-year option and retains his savings account for seven years receives a
further bonus at the end of the seventh year. At the end of the option period,
the participant may use his savings to purchase shares of Company Stock at the
fixed option price or receive in cash the amount of his savings and bonus(es).
His election must be made within six months of the close of the option period.
The option price is an amount determined by the directors of the U.K. Company on
the date the option is granted, which may not be less than 90 percent of Market
Value (as defined in the U.K. Plan) on the date of grant.
Deferred Compensation Plan for Directors - Our compensation plan for
non-employee directors mandates that one-half of each director's quarterly
retainer is paid in DSUs. Directors have the opportunity to purchase more DSUs
with up to all of the rest of their retainers and meeting fees. Retainer and
meeting fee dollars (plus dividend equivalents earned on the director's existing
DSU account during the quarter) are converted to DSUs based on the market value
of a share of Company Stock on the second business day preceding the date the
dollars would have been paid to the director. (Retainers and meeting fees are
paid quarterly in arrears.) New directors and directors continuing in office
after our annual meetings were awarded 1,000 DSUs. Each DSU also accrues
dividend equivalents which are equal to the dividends that would have been paid
on a share of stock during the period the DSUs are outstanding. Accumulated
dividend equivalents are converted to DSUs on a quarterly basis. DSUs provide
our directors with the financial equivalent of owning Company Stock
participating in quarterly dividend reinvestment, which they cannot sell until
after they leave our Board, except that DSUs have no voting rights. Directors
may transfer DSUs by gift to family members.
The Annual Incentive Plan is the annual cash bonus plan for executives and
key salaried employees of the Company and its subsidiaries. Terms applicable to
the Plan were approved by shareholders in order to permit the continued
exclusion of compensation payable under it from the deduction limitations
imposed by Section 162(m) of the Internal Revenue Code. The Plan is administered
by the Management Development and Compensation Committee of the Board of
Directors (the "Compensation Committee"). All or a portion of bonuses granted to
a participant may be deferred at the election of the participant or at the
discretion of the Compensation Committee ("Deferred Awards").
The dollar amount of Deferred Awards granted to a participant is initially
credited to an unfunded account that earns interest credits. Participants with
Deferred Awards are periodically permitted while employed by the Company to
irrevocably convert all or a portion of their accounts to an account deemed to
be invested in Company Stock. Upon conversion, the Company Stock account is
credited with deferred stock units ("DSUs") based on the fair market value of a
share of Company Stock on the date of crediting. Dividend equivalents
corresponding to the number of DSUs are credited quarterly to the
interest-bearing account. DSUs are paid after, but no later than ten years
after, termination of employment in shares of Company Stock, unless the
Compensation Committee determines otherwise. Upon a change in control of the
Company, DSUs become payable immediately in cash.
The Company's Supplementary Savings Plan is an unfunded employee
retirement benefit plan available to certain of the Company's U.S.-based
management and other highly compensated employees (and those of its
subsidiaries) whose participation in the Company's Retirement Savings and Stock
Ownership Plan (the "RSSOP") is limited by federal tax laws. Participants may
defer a portion of base salary which cannot be contributed to the RSSOP because
of tax limitations ("Elective Deferrals") and earn matching contributions from
the Company they would have received if their Elective Deferrals had been
contributed to the RSSOP ("Matching Credits"). The dollar amount of Elective
Deferrals and Matching Credits is initially credited to an unfunded account,
which earns interest credits. Participants are periodically permitted while
employed by the Company to irrevocably convert all or a portion of their
interest bearing account to DSUs in a Company Stock account. Conversion and
crediting of earnings to, and payments from, the Company Stock account is the
same as described above as to Deferred Awards granted under the Annual Incentive
Plan.
The information set forth in the sections headed "Persons Owning More than
5% of Air Products Stock as of September 30, 2003," and "Air Products Stock
Beneficially Owned by Officers and Directors as of November 1, 2003," appearing
on pages 24 through 25 of the Proxy Statement relating to the Company's 2004
Annual Meeting of Shareholders, is incorporated herein by reference.
14
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information presented on page 11 of the Proxy Statement relating to
the Company's 2004 Annual Meeting of Shareholders is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report to the
extent below noted:
1. The 2003 Financial Review Section of the Company's 2003 Annual Report
to Shareholders. Information contained therein is not deemed filed except as it
is incorporated by reference into this Report. The following financial
information is incorporated herein by reference:
(PAGE REFERENCES TO 2003 FINANCIAL REVIEW SECTION OF THE ANNUAL REPORT)
<TABLE>
<S> <C>
Management's Discussion and Analysis.................................... 25
Reports of Independent Auditors......................................... 44
Consolidated Income Statements for the three years ended 30 September
2003................................................................... 46
Consolidated Balance Sheets at 30 September 2003 and 2002............... 47
Consolidated Statements of Cash Flows for the three years ended 30
September 2003......................................................... 48
Consolidated Statements of Shareholders' Equity for the three years
ended 30 September 2003................................................ 49
Notes to the Financial Statements....................................... 50
Business Segment and Geographic Information............................. 71
Five-Year Summary of Selected Financial Data............................ 74
</TABLE>
2. The following additional information should be read in conjunction with
the consolidated financial statements in the Company's 2003 Financial Review
Section of the Annual Report to Shareholders:
(PAGE REFERENCES TO THIS REPORT)
<TABLE>
<S> <C>
Report of Independent Auditors on Schedule (KPMG LLP)................ 18
Report of Independent Public Accountants on Schedule (Arthur Andersen
LLP) ............................................................... 19
</TABLE>
Consolidated Schedule for the years ended 30 September 2003, 2002, and 2001
as follows:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER
------
<S> <C>
II Valuation and Qualifying Accounts.............................. 20
</TABLE>
All other schedules are omitted because the required matter or conditions
are not present or because the information required by the Schedules is
submitted as part of the consolidated financial statements and notes thereto.
3. Exhibits.
Exhibits filed as a part of this Annual Report on Form 10-K are listed in
the Index to Exhibits located on page 21 of this Report.
(b) Reports on Form 8-K filed during the quarter ended 30 September
2003:
Current Reports on Form 8-K dated 1 July 2003 (Item 5) and 28 July 2003
(Items 9 and 12) were filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: 12 December 2003
AIR PRODUCTS AND CHEMICALS, INC.
(Registrant)
By: /s/ John R. Owings
-----------------------------------
John R. Owings
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: 12 December 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
------------------- ----
<S> <C>
/s/ John P. Jones III 12 December 2003
- --------------------------------
(John P. Jones III)
Director, Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
/s/ Paul E. Huck 12 December 2003
- --------------------------------
(Paul E. Huck)
Vice President and Corporate Controller
(Principal Accounting Officer)
* 12 December 2003
------------------------------
(Mario L. Baeza)
Director
* 12 December 2003
------------------------------
(Michael J. Donahue)
Director
* 12 December 2003
------------------------------
(Ursula F. Fairbairn)
Director
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
* 12 December 2003
------------------------------
W. Douglas Ford
Director
* 12 December 2003
------------------------------
(Edward E. Hagenlocker)
Director
* 12 December 2003
------------------------------
(James F. Hardymon)
Director
* 12 December 2003
- --------------------------------
(Terrence Murray)
Director
* 12 December 2003
------------------------------
(Charles H. Noski)
Director
* 12 December 2003
------------------------------
(Paula G. Rosput)
Director
* 12 December 2003
------------------------------
(Lawrason D. Thomas)
Director
</TABLE>
* W. Douglas Brown, Vice President, General Counsel, and Secretary, by signing
his name hereto, does sign this document on behalf of the above noted
individuals, pursuant to a power of attorney duly executed by such
individuals, which is filed with the Securities and Exchange Commission
herewith.
/s/ W. Douglas Brown
-----------------------------------
W. Douglas Brown
Attorney-in-Fact
Date: 12 December 2003
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
To the Shareholders and Board of Directors of Air Products and Chemicals,
Inc.:
Under date of 24 October 2003, we reported on the consolidated balance
sheets of Air Products and Chemicals, Inc. and subsidiaries as of 30 September
2003 and 2002, and the related consolidated statements of income, cash flows,
and shareholders' equity for the years then ended as contained in the Annual
Report to Shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in this Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule referred to in Item
15(a)(2) in this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Our report contains an explanatory paragraph relating to the fact that the
financial statements of Air Products and Chemicals, Inc. and subsidiaries for
the year ended 30 September 2001 were audited by other auditors who have ceased
operations. As described in Note 1 to the financial statements, those financial
statements have been revised. We audited the adjustments described in Note 1
that were applied to revise the 2001 financial statements. In addition, as
described in Note 10, the financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," which was adopted as of 1
October 2001. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements of Air Products and Chemicals, Inc.
and subsidiaries other than with respect to such adjustments and disclosures,
and, accordingly, we do not express any opinion or any other form of assurance
on the 2001 financial statements taken as a whole.
KPMG LLP
Philadelphia, Pennsylvania
24 October 2003
18
<PAGE>
The following report is a copy of a previously issued Arthur Andersen LLP
("Andersen") report, and the report has not been reissued by Andersen. The
report of Andersen is included in this annual report on Form 10-K pursuant to
Rule 2-02(e) of Regulation S-X. After reasonable efforts the Company has not
been able to obtain a reissued report from Andersen. Andersen has not consented
to the inclusion of its report in this annual report on Form 10-K. Because
Andersen has not consented to the inclusion of its report in the annual report,
it may be difficult for shareholders to seek remedies against Andersen and
shareholders' ability to seek relief against Andersen may be impaired. See
Exhibit 23.1 for further discussion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To: Air Products and Chemicals, Inc.
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements included in Air
Products and Chemicals, Inc.'s Annual Report to Shareholders, incorporated by
reference in this Form 10-K, and have issued our report thereon dated 26 October
2001. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule referred to in Item 14(a)(2) in this
Form 10-K is the responsibility of the Company's management and is presented for
the purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
26 October 2001
19
<PAGE>
SCHEDULE II
CONSOLIDATED
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended 30 September 2003, 2002, and 2001
<TABLE>
<CAPTION>
Description Other Changes
Additions Increase(Decrease)
------------------------ -------------------------
Balance at Charged Charged Cumulative Balance
Beginning to to other Translation at End of
of period Expense Accounts(1) Adjustment Other(2) Period(3)
--------- ------- ----------- ---------- -------- ---------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Year Ended 30 September 2003
Allowance for doubtful accounts $ 12 $ 12 $ 4 $ 1 $ (7) $ 22
Year Ended 30 September 2002
Allowance for doubtful accounts $ 10 $ 14 $ 1 $ 0 $ (13) $ 12
Year Ended 30 September 2001
Allowance for doubtful accounts $ 13 $ 10 $ 0 $ 0 $ (13) $ 10
</TABLE>
Notes:
[1] Includes primarily collections on accounts previously written off.
[2] Primarily includes write-offs of uncollectible accounts.
[3] Increase in account balance at 30 September 2003 primarily attributed to
the acquisition of American Homecare Supply, LLC.
20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
(3) Articles of Incorporation and By-Laws.
3.1 By-Laws of the Company. (Filed as Exhibit 3.1 to the Company's
Form 8-K Report dated 18 September 1997.)*
3.2 Restated Certificate of Incorporation of the Company. (Filed as
Exhibit 3.2 to the Company's Form 10-K Report for the fiscal year
ended 30 September 1987.)*
3.3 Amendment to the Restated Certificate of Incorporation of the
Company dated 25 January 1996. (Filed as Exhibit 3.3 to the
Company's Form 10-K Report for the fiscal year ended 30 September
1996.)*
(4) Instruments defining the rights of security holders, including
indentures. Upon request of the Securities and Exchange
Commission, the Company hereby undertakes to furnish copies of
the instruments with respect to its long-term debt.
4.1 Rights Agreement, dated as of 19 March 1998, between the Company
and First Chicago Trust Company of New York. (Filed as Exhibit 1
to the Company's Form 8-A Registration Statement dated 19 March
1998, as amended by Form 8-A/A dated 16 July 1998.)*
4.2 Amended and Restated Credit Agreement dated as of 16 September
1999 among the Company, Additional Borrowers parties thereto,
Lenders parties thereto, and The Chase Manhattan Bank (as
amended). (Filed as Exhibit 4.2 to the Company's Form 10-K Report
for the fiscal year ended 30 September 1999.)*
(10) Material Contracts.
10.1 1990 Deferred Stock Plan of the Company, as amended and restated
effective 1 October 1989. (Filed as Exhibit 10.1 to the Company's
Form 10-K Report for the fiscal year ended 30 September 1989.)*
10.2 The Rules of the United Kingdom Savings-Related Share Option
Scheme of the Company as adopted on 24 October 1997, as amended
on 1 October 1999 and 5 November 1999. (Filed as Exhibit 10.2 to
the Company's Form 10-K Report for the fiscal year ended 30
September 2002.)*
10.3 Amended and Restated Supplementary Savings Plan of the Company
effective 1 April 1998, reflecting amendments through 30
September 2002. (Filed as Exhibit 10.3 to the Company's 10-Q
Report for the quarter ending 31 March 2003.)*
10.4 Amended and Restated Supplementary Pension Plan of the Company
effective 1 May 2003. (Filed as Exhibit 10.2 to the Company's
10-Q Report for the quarter ending 31 March 2003.)*
10.5 Stock Option Plan for Directors of the Company, effective 27
January 1994, as amended 21 October 1999. (Filed as Exhibit 10.7
to the Company's Form 10-K Report for the fiscal year ended 30
September 1999.)*
10.6 Letter dated 7 July 1997 concerning pension for an executive
officer. (Filed as Exhibit 10.7(c) to the Company's Form 10-K
Report for the fiscal year ended 30 September 1998.)*
10.7 Air Products and Chemicals, Inc. Severance Plan effective 15
March 1990. (Filed as Exhibit 10.8(a) to the Company's Form 10-K
Report for the fiscal year ended 30 September 1992.)*
10.8 Air Products and Chemicals, Inc. Change of Control Severance Plan
effective 15 March 1990. (Filed as Exhibit 10.8(b) to the
Company's Form 10-K Report for the fiscal year ended 30 September
1992.)*
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
10.9 Amended and Restated Trust Agreement by and between the Company
and PNC Bank, N.A. relating to the Defined Benefit Pension Plans
dated as of 1 August 1999. (Filed as Exhibit 10.13 to the
Company's Form 10-K Report for the fiscal year ended 30 September
1999.)*
10.9(a) Amendment No. 1 to the Amended and Restated Trust Agreement by
and between the Company and PNC Bank, N.A. relating to the
Defined Benefit Pension Plan, adopted 1 January 2000. (Filed as
Exhibit 10.13(a) to the Company's Form 10-K Report for the fiscal
year ended 30 September 2000.)*
10.10 Amended and Restated Trust Agreement by and between the Company
and PNC Bank, N.A. relating to the Supplementary Savings Plan
dated as of 1 August 1999. (Filed as Exhibit 10.14 to the
Company's Form 10-K Report for the fiscal year ended 30 September
1999.)*
10.10(a) Amendment No. 1 to the Amended and Restated Trust Agreement by
and between the Company and PNC Bank, N.A. relating to the
Supplementary Savings Plan, adopted 1 January 2000. (Filed as
Exhibit 10.14(a) to the Company's Form 10-K Report for the fiscal
year ended 30 September 2000.)*
10.11 Form of Severance Agreements that the Company has with each of
its U.S. Executive Officers. (Filed as Exhibit 10.16 to the
Company's Form 10-K Report for the fiscal year ended 30 September
1999.)*
10.12 Form of Severance Agreement that the Company has with one
European Executive Officer dated 16 September 1999. (Filed as
Exhibit 10.1 to the Company's Form 10-Q Report for the quarter
ending 31 March 2001.)*
10.13 Amendment to form of Severance Agreement with one European
Executive Officer dated 26 February 2001. (Filed as Exhibit 10.2
to the Company's Form 10-Q Report for the quarter ending 31 March
2001.)*
10.14 Letter dated 19 April 2000, covering pension for a European
Executive Officer. (Filed as Exhibit 10.3 to the Company's Form
10-Q Report for the quarter ending 31 March 2001.)*
10.15 Amended and Restated Long Term Incentive Plan of the Company,
effective 23 January 2003. (Filed as Exhibit 10.2 to the
Company's Form 10-Q Report for the quarter ending 31 March
2003.)*
10.16 Amended and Restated Annual Incentive Plan of the Company,
effective 1 October 2001. (Filed as Exhibit 10.2 to the Company's
Form 10-Q Report for the quarter ending 31 March 2002.)*
10.17 Resolutions approving an amendment to the Compensation Program
for Directors of the Company, effective 1 October 2002. (Filed as
Exhibit 10.2 to the Company's Form 10-Q Report for the quarter
ending 31 December 2002.)*
10.18 Amended and Restated Deferred Compensation Plan for Directors of
the Company, effective 20 September 2001. (Filed as Exhibit 10.4
to the Company's Form 10-Q Report for the quarter ending 31 March
2002.)*
10.18(a) Resolutions approving an amendment to the Deferred Compensation
Plan for Directors of the Company, effective 30 September 2002.
(Filed as Exhibit 10.1 to the Company's Form 10-Q Report for the
quarter ending 31 December 2002.)*
10.19 Employment Agreement. (Filed as Exhibit 10.2 to the Company's
Form 10-Q Report for the quarter ending 30 June 2002.)*
10.20 Stock Incentive Program of the Company effective 1 October 1996.
(Filed as Exhibit 10.21 to the Company's Form 10-K Report for the
fiscal year ended 30 September 2002.)*
10.21 Terms and Conditions of the Global Employee Stock Option Awards
of the Company effective 1 October 1995, 1997, and 1999. (Filed
as Exhibit 10.22 to the Company's Form 10-K Report for the fiscal
year ended 30 September 2002.)*
10.22 Air Products and Chemicals, Inc. Corporate Executive Committee
Retention/Separation Program, effective July 17, 2003.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
10.23 Letter dated 16 September 2003, concerning separation benefits of
a retired executive officer under the Air Products and Chemicals,
Inc. Corporate Executive Committee Retention/Separation Program.
10.24 Letter dated 16 September 2003, concerning separation benefits of
a retiring executive officer under the Air Products and
Chemicals, Inc. Corporate Executive Committee
Retention/Separation Program.
10.25 Form of Severance Agreement that the Company has with one U.S.
Executive Officer, effective 20 November 2003.
12 Computation of Ratios of Earnings to Fixed Charges.
13 2003 Financial Review Section of the Annual Report to
Shareholders for the fiscal year ended 30 September 2003, which
is furnished to the Commission for information only and not filed
except as portions are expressly incorporated by reference in
this Report.
14 Code of Ethics.
18 Letter re Change in Accounting Principles.
21 Subsidiaries of the registrant.
(23) Consents of Experts and Counsel.
23.1 Notice Regarding Consent of Arthur Andersen LLP.
23.2 Independent Auditors' Consent.
24 Power of Attorney.
(31) Rule 13a-14(a)/15d-14(a) Certifications.
31.1 Certification by the Principal Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by the Principal Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification by the Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>
*Previously filed as indicated and incorporated herein by reference.
Exhibits incorporated by reference are located in SEC File No. 1-4534.
23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>3
<FILENAME>y92114exv10w22.txt
<DESCRIPTION>RETENTION/SEPARATION PROGRAM
<TEXT>
<PAGE>
Exhibit 10.22
AIR PRODUCTS AND CHEMICALS, INC.
CORPORATE EXECUTIVE COMMITTEE
RETENTION/SEPARATION PROGRAM
<PAGE>
ARTICLE I
PURPOSE AND TERM OF PLAN
Section 1.01 Purpose. Air Products and Chemicals, Inc. hereby
establishes the Air Products and Chemicals, Inc. Corporate Executive Committee
Retention/Separation Program (the "Plan") for the purpose of assisting Air
Products in retaining and, where appropriate, facilitating the planned
separations of Covered Executives (as defined below) and, in certain cases,
providing severance benefits to a Covered Executive.
Section 1.02 Term of the Plan. The Plan, as set forth herein,
shall be effective July 17, 2003. The Plan will continue until such time as the
Committee (as defined below) acting in its sole discretion, elects to modify,
supercede or terminate the Plan in accordance with, and subject to, the
provisions of Article V.
ARTICLE II
DEFINITIONS
Section 2.01 "Administrator" shall mean the CEO, who shall
administer the Plan in accordance with its terms.
Section 2.02 "Air Products" shall mean Air Products and Chemicals,
Inc.
Section 2.03 "Benefit" or "Benefits" shall mean any or all of the
benefits that a Covered Executive is entitled to receive pursuant to Article III
of the Plan.
Section 2.04 "Bonus" shall mean 100% of the midpoint target bonus
for a Covered Executive's salary grade, determined as of the Covered Executive's
Employment Termination Date under the grant guidelines for the Air Products
Annual Incentive Plan or similar successor or substitute annual incentive plan
or program. For purposes of Section 3.01(b), such Bonus shall be prorated by
multiplying the amount of the Bonus by a fraction, the numerator of which is the
number of days in the current Plan Year through the Covered Executive's
Employment Termination Date, and the denominator of which is 365.
Section 2.05 "CEO" shall mean the Chief Executive Officer of Air
Products.
Section 2.06 "Change in Control" shall be as defined under the
Company's standard change in control agreement for senior executives or, if
applicable, the change in control agreement that is in effect for a Covered
Executive at the time of the Change in Control.
Section 2.07 "Committee" shall mean the Management Development and
Compensation Committee of the Air Products Board of Directors, that may act on
behalf of the Company with respect to the Plan as provided in the Plan.
Section 2.08 "Company" shall mean Air Products and any
Subsidiaries which have adopted the Plan with the approval of the Committee. The
term "Company" shall include
-1-
<PAGE>
any Subsidiary which had adopted the Plan or any successor to Air Products such
as a corporation succeeding to the business of Air Products or any Subsidiary,
by merger, consolidation or liquidation, or purchase of assets or stock or
similar transaction.
Section 2.09 "Covered Executive" shall mean each individual who
has been appointed by the CEO to serve as a member of the Corporate Executive
Committee or any similar, successor group of Company-wide policy-making
"executive officers" as such term is defined under the Securities Exchange Act
of 1934, other than an individual who is a party to an individual employment
agreement (or other individual agreement providing for severance benefits
excluding an agreement that applies solely in the event of a Change in Control)
with the Company approved by the Air Products Board of Directors or the
Committee.
Section 2.10 "Disability" shall be as defined under the Company's
long-term disability plan.
Section 2.11 "Employment Termination Date" shall mean the date
specified or agreed to by the CEO in writing on which the active employment
relationship between the Covered Executive and the Company is to be and in fact
is terminated.
Section 2.12 "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
Section 2.13 "Long-Term Incentive Plan" shall mean the Air
Products Long-Term Incentive Plan approved by Air Products' shareholders most
recently on 23 January 2003, together with all predecessor and similar successor
or substitute intermediate and/or long-term incentive compensation plan or
program.
Section 2.14 "Plan" shall mean the Air Products and Chemicals,
Inc. Corporate Executive Committee Retention/Severance Program, as set forth
herein, and as the same may from time to time be amended.
Section 2.15 "Plan Year" shall mean each period commencing on
October 1 during which the Plan is in effect and ending on the subsequent
September 30.
Section 2.16 "Salary" shall mean an amount equal to the annual
rate of a Covered Executive's base salary payable to the Covered Executive in
all capacities with the Company and its Subsidiaries or affiliates for the Plan
Year in which a Covered Executive's Employment Termination Date occurs.
Section 2.17 "Subsidiary" shall mean any corporation in which Air
Products owns, directly or indirectly, more than 50% of the voting securities.
-2-
<PAGE>
ARTICLE III
ENTITLEMENT TO AND DESCRIPTION OF BENEFITS
Section 3.01 Cash Benefits. Upon a Covered Executive's Employment
Termination Date and his satisfaction of the conditions specified in Section
3.03 of the Plan, the Covered Executive shall be entitled to receive the
following Benefits as well as those referred to under Section 3.02: (a) a cash
severance Benefit equal to the aggregate of the Covered Executive's Salary plus
Bonus, (b) an amount equivalent to and in lieu of the Covered Executive's Bonus
for the year in which the Employment Termination Date occurs, (c) any accrued
but unpaid vacation pay, any similar unpaid items that have accrued and to which
the Covered Executive has become entitled as of his Employment Termination Date,
including declared but unpaid bonuses and unreimbursed employee business
expenses, and (d) a stipend to cover miscellaneous transition expenses including
outplacement assistance and legal fees, such stipend to be an amount determined
by the Administrator, in his discretion, acting on behalf of the Company.
Section 3.02 Long-Term Incentive Plan Benefits. In addition to the
Benefits payable under Section 3.01, a Covered Executive's outstanding Long-Term
Incentive Plan awards shall be treated as follows:
(a) All stock options and stock appreciation rights which
have been outstanding for at least one year prior to the Covered Executive's
Employment Termination Date shall continue to vest in accordance with their
normal vesting schedule (if not fully vested as of the Employment Termination
Date) and shall remain in effect for the remainder of their stated term, as set
forth in the agreements governing such awards, in each case as if the Covered
Executive had continued in employment following the Employment Termination Date.
(b) All unearned performance shares or other awards with
performance-based earnout or vesting shall earn out or vest consistent with the
decision made by or on behalf of the Company for other senior executives for the
relevant cycle and shall be paid out within 30 days of earn out or vesting.
(c) All awards, including career shares and earned-out
deferred performance shares, which are subject to time-based vesting or other
non-performance-based conditions, shall be paid out within 30 days of the
Covered Executive's Employment Termination Date (or, if later, the end of the
revocation period of the release described in Section 3.03).
Section 3.03 Conditions to Entitlement to Benefit. To be eligible
to receive any Benefits under the Plan after the Covered Executive's Employment
Termination Date has been set, a Covered Executive must (a) continue in his then
current office and perform such duties for the Company as are typically related
to the Covered Executive's position (or such other position as the CEO
reasonably requests) including identifying, recruiting and/or transitioning the
Covered Executive's successor, in all events performing all assigned duties in
the manner reasonably directed by the CEO in his sole discretion, and cease his
employment on the Employment Termination Date; (b) execute a release and
discharge of the Company, in
-3-
<PAGE>
substantially the form attached hereto as Appendix A, from any and all claims,
demands or causes of action (other than as provided in said Appendix A); and (c)
execute a noncompetition, nonsolicitation, and nondisparagement agreement that
extends for the two-year period following the Covered Executive's Employment
Termination Date in substantially the form attached hereto as Appendix B, with
such changes therein as the Administrator shall determine, in his discretion,
acting on behalf of the Company. No Benefits due hereunder shall be paid to a
Covered Executive who has not complied in all respects with the requirements of
this Section 3.03.
Section 3.04 Method of Payment. The cash Benefits to which a
Covered Executive is entitled, as determined pursuant to Section 3.01 hereof,
shall be paid in a lump sum, subject to all employment and withholding taxes
applicable to the type of payments made. In general, payments shall be made
within 30 days after the Covered Executive's Employment Termination Date or, if
later, after the expiration of any revocation period for the release signed by
the Covered Executive pursuant to Section 3.03. Long-Term Incentive Plan awards,
referred to in Section 3.02, will be paid in the form, and subject to applicable
withholding, as provided in the respective award agreements.
Section 3.05 Death or Disability. If a Covered Executive incurs
Disability or dies before the Employment Termination Date has been set, no Plan
payments or other benefits will be due and owing to the Executive or, in the
case of his death, to his estate or beneficiary.
If a Covered Executive incurs Disability or dies after his Employment
Termination Date has been set but not attained, the Administrator shall cause
any Benefits due under the Plan to be paid to the Covered Executive or, in the
case of his death, to the Covered Executive's designated beneficiary or to his
estate; provided, however, that if the Covered Executive dies after he has
retired prior to attaining the Employment Termination Date, no Benefits shall be
due and owing under the Plan to the Covered Executive's designated beneficiary,
his estate, or any other person. For this purpose, "retire" means to have
separated from employment and begun to receive an immediate pension benefit
under a Company-sponsored defined benefit pension plan.
A Covered Executive's beneficiary designation shall be made in the
manner, and at the time, prescribed by the Administrator in his sole discretion.
In the absence of an effective beneficiary designation hereunder, the Covered
Executive's estate shall be deemed to be the designated beneficiary.
Section 3.06 Change in Control. In the event of a Change in
Control of the Company, the change in control agreement applicable to the
Covered Executive shall continue in full force and effect and the Plan shall be
null and void; and, if the Change in Control occurs after the Employment
Termination Date has been set but before the Employment Termination Date, the
change in control agreement applicable to the Covered Executive shall continue
in full force and effect and the Employment Termination Date under the Plan
shall be treated under the change in control agreement as the Covered
Executive's "Termination Date" for other than death, "Disability" or "Cause", as
such terms appearing in quotations are defined in the change in control
agreement, and the Plan shall be null and void.
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<PAGE>
ARTICLE IV
ADMINISTRATION
Section 4.01 Authority and Duties. It shall be the duty of the
Administrator, on the basis of information supplied to him by the Company, to
determine the entitlement of each Covered Executive to Benefits under the Plan,
to calculate the amount of the cash Benefits payable to each such Covered
Executive, and to determine the manner and time of payment of the Benefits
consistent with the provisions hereof. The Company shall make such payments as
the Administrator determines to be due to Covered Executives. The Administrator
shall have the full power and authority to construe, interpret and administer
the Plan, to correct deficiencies therein, and to supply omissions. All
decisions, actions, and interpretations of the Administrator shall be final,
binding, and conclusive upon the parties.
Section 4.02 Expenses of the Administrator. All reasonable
expenses of the Administrator shall be paid or reimbursed by the Company upon
proper documentation. The Company shall indemnify and defend the Administrator
against personal liability for actions taken in good faith in the discharge of
his duties.
Section 4.03 Actions of the Administrator. Whenever a
determination is required of the Administrator under the Plan, such
determination shall be made solely at the discretion of the Administrator. In
addition, the exercise of discretion by the Administrator need not be uniformly
applied to similarly situated Covered Executives and shall be final and binding
on each Covered Executive or beneficiary(ies) to whom the determination is
directed.
ARTICLE V
AMENDMENT AND TERMINATION
The Company, acting through the Committee, retains the right,
at any time and from time to time, to amend, suspend, or terminate the Plan in
whole or in part, for any reason, and, except as provided below, without either
the consent of or the prior notification to any Covered Executive.
Notwithstanding the foregoing, no such amendment, suspension or termination
shall (a) give the Company the right to recover any amount paid to a Covered
Executive prior to the date of such action, (b) cause the cessation and
discontinuance of payments of Benefits to any person or persons under the Plan
already receiving Benefits, or (c) be effective to terminate or reduce the
Benefits or prospective Benefits of any Covered Executive whose Employment
Termination Date has been set as of the date of such amendment, suspension or
termination (unless the express written consent of the Covered Executive has
been obtained with respect thereto).
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<PAGE>
ARTICLE VI
DUTIES OF THE COMPANY
Section 6.01 Records. The Company shall supply to the
Administrator all records and information necessary to the performance of the
Administrator's duties.
Section 6.02 Discretion. Any decisions, actions or interpretations
to be made under the Plan by the Board, the Committee, the Company, or the
Administrator, acting on behalf of the Company, shall be made in its or their
respective sole discretion, not in any fiduciary capacity and need not be
uniformly applied to similarly situated individuals and shall be final, binding
and conclusive upon all parties.
ARTICLE VII
CLAIMS PROCEDURES
Section 7.01 Application for Benefits. A person who believes that
he is being denied a Benefit to which he is entitled under the Plan (hereinafter
referred to as a "Claimant") may file a written request with the Administrator
setting forth the claim. A notice denying or granting the claim shall be
provided to the Claimant within ninety (90) days after the Administrator's
receipt of the claim, unless special circumstances require an extension of time
for processing the claim. If such an extension is required, notice of the
extension shall be furnished by the Administrator to the Claimant within the
initial 90-day period and in no event shall such extension exceed a period of
ninety (90) days from the end of the initial 90-day period. Any extension notice
shall indicate the special circumstances requiring the extension and the date on
which the Administrator expects to render a decision on the claim.
If the claim is denied in whole or part, the Claimant shall be provided
a written or electronic notice, using language calculated to be understood by
the Claimant, setting forth (a) the specific reason or reasons for such denial
and the specific reference to relevant provisions of the Plan upon which such
denial is based, (b) a description of any additional material or information
necessary for the Claimant to perfect his claim and an explanation why such
material or such information is necessary, (c) appropriate information as to the
steps to be taken if the Claimant wishes to submit the claim for review and the
time limits for requesting a review, and (d) the Claimant's right to bring an
action for benefits under ERISA Section 502 following an adverse benefit
determination on review.
Section 7.02 Appeals of Denied Claims for Benefits. Within sixty
(60) days after receipt by the Claimant of the notice described above, the
Claimant may request in writing that the Administrator review the determination.
The Claimant or his duly authorized representative may review, upon request and
without charge, copies of all documents, records, and other information relevant
to his claim and submit documents, records, or written comments for
consideration by the Administrator. If the Claimant does not request a review of
the initial determination within such 60-day period, the Claimant shall be
barred and stopped from challenging the determination.
-6-
<PAGE>
The decision on review normally shall be made within sixty (60) days of
the Administrator's receipt of the request for review. If an extension of time
is required due to special circumstances, the Claimant shall be notified by the
Administrator prior to the termination of the initial 60-day period, and in no
event shall such extension exceed a period of sixty (60) days from the end of
the initial 60-day period. The extension notice shall indicate the special
circumstances requiring extension of time and the date by which the
Administrator expects to render a decision on the claim. The decision on review
shall be given to the Claimant within the applicable time limit discussed above.
All decisions on review shall be final and binding with respect to all concerned
parties. The decision on review shall set forth, in a manner calculated to be
understood by the Claimant (a) the specific reasons for the decision and shall
include references to the relevant Plan provisions upon which the decision is
based, (b) the Claimant's right to receive, upon request and free of charge,
reasonable access to and copies of all documents, records, and other
information, relevant to his benefits, and (c) the Claimant's right to bring a
civil action under ERISA Section 502(a).
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Nonalienation of Benefits. None of the payments,
Benefits or rights of any Covered Executive shall be subject to any claim of any
creditor, and, in particular, to the fullest extent permitted by law, all such
payments, Benefits and rights shall be free from attachment, garnishment,
trustee's process, or any other legal or equitable process available to any
creditor of such Covered Executive. No Covered Executive shall have the right to
alienate, anticipate, commute, pledge, encumber or assign any of the Benefits or
payments which he may expect to receive, contingently or otherwise, under the
Plan.
Section 8.02 No Contract of Employment. Neither the establishment
of the Plan, nor any modification thereof, nor the creation of any fund, trust
or account, nor the payment of any Benefits shall be construed as giving any
Covered Executive, or any person whosoever, the right to be retained in the
service of the Company, and all Covered Executives shall remain subject to
discharge to the same extent as if the Plan had never been adopted.
Section 8.03 Entire Agreement. Except as may be provided in an
executive change in control severance agreement (or, if applicable, the change
in control agreement that is in effect for a Covered Executive at the time of a
Change in Control) between the Company and a Covered Executive, this Plan
document, as it may be amended by the Committee, and the documents specifically
referenced herein, or in such amendment, shall constitute the entire agreement
between the Company and the Covered Executive with respect to the Benefits
promised hereunder and no other agreements, representations, oral or otherwise,
express or implied, with respect to such benefits shall be binding on the
Company.
Section 8.04 Severability of Provisions. If any provision of the
Plan shall be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provisions hereof, and the Plan shall be construed
and enforced as if such provisions had not been included.
-7-
<PAGE>
Section 8.05 Successors, Heirs, Assigns, and Personal
Representatives. The Plan shall be binding upon the heirs, executors,
administrators, successors and assigns of the parties, including each Covered
Executive, present and future.
Section 8.06 Headings and Captions. The headings and captions
herein are provided for reference and convenience only, shall not be considered
part of the Plan, and shall not be employed in the construction of the Plan.
Section 8.07 Gender and Number. Except where otherwise clearly
indicated by context, the masculine and the neuter shall include the feminine
and the neuter, the singular shall include the plural, and vice-versa.
Section 8.08 Unfunded Plan. The Plan shall not be funded. The
Company may, but shall not be required to, set aside or earmark an amount
necessary to provide the Benefits specified herein (including the establishment
of trusts). In any event, no Covered Executive shall have any right to, or
interest in, any assets of the Company.
Section 8.09 Payments to Incompetent Persons, Etc. Any Benefit
payable to or for the Benefit of a minor, an incompetent person or other person
incapable of receipting therefor shall be deemed paid when paid to such person's
guardian or to the party providing or reasonably appearing to provide for the
care of such person, and such payment shall fully discharge the Company, the
Administrator and all other parties with respect thereto.
Section 8.10 Lost Payees. A Benefit shall be deemed forfeited if
the Administrator is unable to locate a Covered Executive to whom a Benefit is
due. Such Benefit shall be reinstated if application is made by the Covered
Executive for the forfeited Benefit while the Plan is in operation.
Section 8.11 Controlling Law and Nature of Plan. The Plan shall be
construed and enforced according to the laws of the Commonwealth of Pennsylvania
to the extent not preempted by Federal law. The Plan is not intended to be
included in the definitions of "employee pension benefit plan" and "pension
plan" set forth under Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). Rather, the Plan is intended to meet the
descriptive requirements of a plan constituting a "severance pay plan" within
the meaning of regulations published by the Secretary of Labor at Title 29, Code
of Federal Regulations, Section 2510.3-2(b). Accordingly, the Benefits paid by
the Plan are not deferred compensation.
-8-
<PAGE>
APPENDIX A
GENERAL RELEASE
1. I, ____________________ (the "Executive"), for and in
consideration of (a) certain severance benefits to be paid and provided to me by
Air Products and Chemicals, Inc. (the "Company") under the Air Products and
Chemicals, Inc. Corporate Executive Committee Retention/Separation Program (the
"Plan") and (b) the Company's execution of a release in favor of the Executive,
on the date this General Release becomes irrevocable, substantially in the form
attached hereto as Annex 1, and conditioned upon such payments and provisions,
do hereby REMISE, RELEASE, AND FOREVER DISCHARGE Air Products and Chemicals,
Inc. (the "Company") and each of its past or present subsidiaries and
affiliates, its and their past or present officers, directors, shareholders,
employees and agents, their respective successors and assigns, heirs, executors
and administrators, the pension and employee benefit plans of the Company, or of
its past or present subsidiaries or affiliates, and the past or present
trustees, administrators, agents, or employees of the pension and employee
benefit plans (hereinafter collectively included within the term the "Company"),
acting in any capacity whatsoever, of and from any and all manner of actions and
causes of actions, suits, debts, claims and demands whatsoever in law or in
equity, which I ever had, now have, or hereafter may have, or which my heirs,
executors or administrators hereafter may have, by reason of any matter, cause
or thing whatsoever from the beginning of my employment with the Company to the
date of these presents and particularly, but without limitation of the foregoing
general terms, any claims arising from or relating in any way to my employment
relationship and the termination of my employment relationship with the Company,
including but not limited to, any claims which have been asserted, could have
been asserted, or could be asserted now or in the future under any federal,
state or local laws, including any claims under the Pennsylvania Human Relations
Act, 43 PA. C.S.A. Sections 951 et seq., as amended, the Rehabilitation Act of
1973, 29 USC Sections 701 et seq., as amended, Title VII of the Civil Rights Act
of 1964, 42 USC Sections 2000e et seq., as amended, the Civil Rights Act of
1991, 2 USC Sections 60/ et seq., as applicable, the Age Discrimination in
Employment Act of 1967, 29 USC Sections 621 et seq., as amended ("ADEA"), the
Americans with Disabilities Act, 29 USC Sections 706 et seq., and the Employee
Retirement Income Security Act of 1974, 29 USC Sections 301 et seq., as amended,
any contracts between the Company and me and any common law claims now or
hereafter recognized and all claims for counsel fees and costs; provided,
however, that this Release shall not apply to any entitlements under the terms
of the Plan or under any other plans or programs of the Company in which I
participated and under which I have accrued and become entitled to a benefit
other than under any Company separation or severance plan or programs.
Notwithstanding the foregoing, I understand that I shall be indemnified by the
Company as to any liability, cost or expense for which I would have been
indemnified during employment, in accordance with the Company's certificate of
incorporation or insurance coverages in force for employees of the Company
serving in executive capacities for actions taken on behalf of the Company
within the scope of my employment by the Company.
2. Subject to the limitations of paragraph 1 above, I
expressly waive all rights afforded by any statute which expressly limits the
effect of a release with respect to
-9-
<PAGE>
unknown claims. I understand the significance of this release of unknown claims
and the waiver of statutory protection against a release of unknown claims.
3. I hereby agree and recognize that my employment by
the Company was/will be permanently and irrevocably severed on
___________________, 20__ and the Company has no obligation, contractual or
otherwise to me to hire, rehire or reemploy me in the future. I acknowledge that
the terms of the Plan provide me with payments and benefits which are in
addition to any amounts to which I otherwise would have been entitled.
4. I hereby agree and acknowledge that the payments and
benefits provided by the Company are to bring about an amicable resolution of my
employment arrangements and are not to be construed as an admission of any
violation of any federal, state or local statute or regulation, or of any duty
owed by the Company and that the Plan was, and this Release is, executed
voluntarily to provide an amicable resolution of my employment relationship with
the Company.
5. I hereby acknowledge that nothing in this Release
shall prohibit or restrict me from: (i) making any disclosure of information
required by law; (ii) providing information to, or testifying or otherwise
assisting in any investigation or proceeding brought by, any federal regulatory
or law enforcement agency or legislative body, any self-regulatory organization,
or the Company's designated legal, compliance or human resources officers; or
(iii) filing, testifying, participating in or otherwise assisting in a
proceeding relating to an alleged violation of any federal, state or municipal
law relating to fraud, or any rule or regulation of the Securities and Exchange
Commission or any self-regulatory organization.
6. I hereby certify that I have read the terms of this
Release, that I have been advised by the Company to discuss it with my attorney,
that I have received the advice of counsel and that I understand its terms and
effects. I acknowledge, further, that I am executing this Release of my own
volition with a full understanding of its terms and effects and with the
intention of releasing all claims recited herein in exchange for the
consideration described in the Agreement, which I acknowledge is adequate and
satisfactory to me. None of the above named persons, nor their agents,
representatives, or attorneys have made any representations to me concerning the
terms or effects of this Release other than those contained herein.
7. I hereby acknowledge that I have been informed that I
have the right to consider this Release for a period of 21 days prior to
execution. I also understand that I have the right to revoke this Release for a
period of seven days following execution by giving written notice to the Company
at 7201 Hamilton Boulevard, Allentown Pennsylvania 18195-1501, Attention:
General Counsel.
8. I hereby further acknowledge that the terms of
Appendix B of the Plan continue to apply for the balance of the time periods
provided therein and that I will abide by and fully perform such obligations.
-10-
<PAGE>
Intending to be legally bound hereby, I execute the foregoing
Release this ___ day of _____________, 20 ___.
___________________________ ________________________
Witness Executive
-11-
<PAGE>
ANNEX 1
GENERAL RELEASE
1. Air Products and Chemicals, Inc. (the "Company") on
its behalf and on behalf of its subsidiaries and affiliates, their officers,
directors, partners, employees and agents, their respective successors and
assigns, heirs, executors and administrators (hereinafter collectively included
within the term "Company"), for and in consideration of ____________________
(the "Executive") executing the general release of claims against the Company
dated _______________ (the "Executive's Release of the Company"), and other good
and valuable consideration, does hereby REMISE, RELEASE, AND FOREVER DISCHARGE
the Executive, his assigns, heirs, executors and administrators (hereinafter
collectively included within the term "Executive"), acting in any capacity
whatsoever, of and from any and all manner of actions and causes of actions,
suits, debts, claims and demands whatsoever in law or in equity, which it ever
had, now have, or hereafter may have, by reason of any matter, cause or thing
whatsoever from the beginning of the Executive's employment with the Company to
the date of this Release arising from or relating in any way to the Executive's
employment relationship and the termination of his employment relationship with
the Company, including but not limited to, any claims which have been asserted,
could have been asserted, or could be asserted now or in the future under any
federal, state or local laws, any contracts between the Company and the
Executive, other than the Executive's Release of the Company, the Executive's
Noncompetition, Nonsolicitation, and Nondisparagement Agreement with the
Company, and the Employee Patent and Confidential Information Agreement entered
into by the Executive on _______________, and any common law claims now or
hereafter recognized and all claims for counsel fees and costs, but in no event
shall this release apply to any action attributable to a criminal act or to an
action outside the scope of the Executive's employment.
2. Subject to the limitations of paragraph 1 above, the
Company expressly waives all rights afforded by any statute which expressly
limits the effect of a release with respect to unknown claims. The Company
understands the significance of this release of unknown claims and the waiver of
statutory protection against a release of unknown claims.
3. The Company hereby certifies that it has been advised
by counsel in the preparation and review of this Release.
Intending to be legally bound hereby, Air Products and
Chemicals, Inc. executes the foregoing Release this ____ day of ____________,
20__.
_______________________________ By:________________________
Witness
-12-
<PAGE>
APPENDIX B
NONCOMPETITION, NONSOLICITATION, AND NONDISPARAGEMENT AGREEMENT
I, ____________________ (the "Executive"), for and in
consideration of (a) certain severance benefits to be paid and provided to me by
Air Products and Chemicals, Inc. (the "Company") under the Air Products and
Chemicals, Inc. Corporate Executive Committee Retention/Separation Program (the
"Plan"), and (b) the Company's execution of a release in favor of the Executive,
I, the Executive, hereby covenant and agree as follows:
1. The Executive acknowledges that the Company is
generally engaged in business throughout the world. During the Executive's
employment by the Company and for two years after the Executive's Employment
Termination Date (as defined in the Plan), the Executive agrees that he will
not, unless acting with the prior written consent of the Company, directly or
indirectly, own, manage, control, or participate in the ownership, management or
control of, or be employed or engaged by, or otherwise affiliated or associated
with, as an officer, director, employee, consultant, independent contractor or
otherwise, any other corporation, partnership, proprietorship, firm,
association, or other business entity, or otherwise engage in any business which
is engaged in any manner anywhere in any business which, as of the Employment
Termination Date, is engaged in by the Company, has been reviewed with the Board
for development to be owned or managed by the Company, and/or has been divested
by the Company but as to which the Company has an obligation to refrain from
involvement, but only for so long as such restriction applies to the Company;
provided, however, that the ownership of not more than 5% of the equity of a
publicly traded entity shall not be deemed to be a violation of this paragraph.
2. The Executive also agrees that he will not, directly
or indirectly, during the period described in paragraph (1), induce any person
who is an employee, officer, director, or agent of the Company, to terminate
such relationship, or employ, assist in employing or otherwise be associated in
business with any present or former employee or officer of the Company,
including without limitation those who commence such positions with the Company
after the Employment Termination Date.
3. For the purposes of this Agreement, the term
"Company" shall be deemed to include Air Products and the subsidiaries and
affiliates of Air Products.
4. The Executive acknowledges and agrees that the
restrictions contained in this Agreement are reasonable and necessary to protect
and preserve the legitimate interests, properties, goodwill and business of the
Company, that the Company would not have entered into this Agreement in the
absence of such restrictions and that irreparable injury will be suffered by the
Company should the Executive breach the provisions of this Section. The
Executive represents and acknowledges that (i) the Executive has been advised by
the Company to consult the Executive's own legal counsel in respect of this
Agreement, (ii) the Executive has consulted with and been advised by his own
counsel in respect of this Agreement, and (iii) the Executive
-13-
<PAGE>
has had full opportunity, prior to execution of this Agreement, to review
thoroughly this Agreement with the Executive's counsel.
5. The Executive further acknowledges and agrees that a
breach of the restrictions in this Agreement will not be adequately compensated
by monetary damages. The Executive agrees that the Company shall be entitled to
(i) preliminary and permanent injunctive relief, without the necessity of
proving actual damages, or posting of a bond, (ii) an equitable accounting of
all earnings, profits and other benefits arising from any violation of this
Agreement, and (iii) enforce the terms, including requiring forfeitures, under
other plans, programs and agreements under which the Executive has been granted
a benefit contingent on a covenant similar to those contained in this Agreement,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that the provisions of this
Agreement should ever be adjudicated to exceed the limitations permitted by
applicable law in any jurisdiction, it is the intention of the parties that the
provision shall be amended to the extent of the maximum limitations permitted by
applicable law, that such amendment shall apply only within the jurisdiction of
the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.
6. If the Executive breaches his obligations under this
Agreement, he agrees that suit may be brought, and that he consents to personal
jurisdiction, in the United States District Court for the Eastern District of
Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Allentown, Pennsylvania;
consents to the non-exclusive jurisdiction of any such court in any such suit,
action or proceeding; and waives any objection which he may have to the laying
of venue of any such suit, action or proceeding in any such court. The Executive
also irrevocably and unconditionally consents to the service of any process,
pleadings, notices or other papers.
7. Executive further agrees, covenants, and promises
that he will not in any way communicate the terms of this Agreement to any
person other than his immediate family and his attorney and financial consultant
or when necessary to advise a third party of his obligations under this
Agreement. Notwithstanding the foregoing, the Company and Executive also agree
that for a period of two years following the Employment Termination Date,
Executive will provide and that at all times after the date hereof the Company
may similarly provide, with prior written notice to Executive, a copy of this
Agreement to any business or enterprise (i) which Executive may directly or
indirectly own, manage, operate, finance, join, control or of which he may
participate in the ownership, management, operation, financing, or control, or
(ii) with which Executive may be connected as an officer, director, employee,
partner, principal, agent, representative, consultant, or otherwise, or in
connection with which Executive may use or permit to be used Executive's name.
Executive agrees not to disparage the name, business reputation, or business
practices of the Company or its subsidiaries or affiliates, or its or their
officers, employees, or directors, and the Company agrees not to disparage the
name or business reputation of Executive.
8. The Executive hereby expressly acknowledges and
agrees that (i) the provisions of the Employee Patent and Confidential
Information Agreement entered into by him on _______________, shall continue to
apply in accordance with its terms, and (ii) the
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<PAGE>
provisions of the Executive's outstanding incentive award agreements granted
under the Company's Long-Term Incentive Plan, as defined in the Plan, shall
continue to apply in accordance with their terms except as otherwise provided in
Section 3.02 of the Plan and except that, for purposes of interpreting the
provisions of the first indented clause of Section 2 of the "Conditions"(as
defined in, and as set forth in Exhibit A to, each of the Executive's award
agreements under the Long-Term Incentive Plan), "in Competition with the
Company" shall be construed as provided in this Agreement.
9. No failure or delay on the part of the Company in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power preclude any
further or other exercise thereof or the exercise of any other right or power
hereunder. No modification or waiver of any provision of this Agreement or
consent to any departure by any party therefrom shall in any event be effective
until the same shall be in writing and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on any party in any case shall entitle such party to any
other or further notice or demand in similar or other circumstances.
10. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Pennsylvania without giving effect to its
conflict of laws provisions. This Agreement shall extend to and enure to the
benefit of the respective successors and assigns of the Company.
Intending to be legally bound hereby, I execute the
Noncompetition, Nonsolicitation, and Nondisparagement Agreement this ___ day of
_____________, 20 ___.
___________________________ _________________________
Witness Executive
-15-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>4
<FILENAME>y92114exv10w23.txt
<DESCRIPTION>LETTER DATED 16 SEPTEMBER 2003
<TEXT>
<PAGE>
Exhibit 10.23
16 September 2003
Mr. Andrew E. Cummins
1902 Woods Hollow Lane
Allentown, PA 18103-9274
Dear Andy:
This letter is written regarding your retirement from employment with
Air Products.
Air Products appreciates your loyal service over the years and your
commitment to continue in your current position performing the duties of that
position as expected of you by the Board of Directors (the "Board") and the
Chief Executive Officer until your last day of employment on 31 October 2003
(your "employment termination date"). Air Products is willing to provide you
with benefits under the Air Products and Chemicals, Inc. Corporate Executive
Committee Retention/Separation Program (the "Plan"), the terms of which are
summarized in Exhibit A to this letter. The Management Development and
Compensation Committee of the Board has determined to amend the Plan with
respect to you so that your cash severance benefit under the Plan shall be
$1,059,450 which is equivalent to 1.5 times (rather than the Plan's normal one
times) the sum of your base salary as of your employment termination date plus
100% of the midpoint target bonus for your salary grade level in the fiscal year
of your employment termination date; and, further, so that you will not receive
any amount in lieu of a prorated bonus for fiscal year 2004. In addition, the
Plan Administrator has determined that your foregoing cash severance benefit, a
transition stipend of $40,000, and career shares and earned but deferred
performance shares which are subject to time-based vesting or other conditions
unrelated to Company performance, will all be paid to you in early January 2004.
Payment of Plan benefits mentioned in this letter is conditioned upon
and will be made in consideration of, among other things, your signing the
General Release and the Noncompetition, Nonsolicitation, and Nondisparagement
Agreement (together, the "Agreements"), which are Exhibits B and C to this
letter. You must sign and date both copies of the Agreements and return one copy
of this entire ten-page package to me. Please take at least 21 days to read
these materials carefully before deciding to execute the Agreements (after which
you will have 7 days in which
<PAGE>
Mr. Andrew E. Cummins
16 September 2003
Page 2
to change your mind and revoke the General Release). If you have any questions
regarding this letter or the Plan benefits, please contact me. If you have any
questions regarding the Plan or the Agreements, Air Products will be pleased to
answer them, but advises you to discuss the Agreements with your personal lawyer
and rely upon her or his advice.
Very truly yours,
/s/ Leonard V. Broese van Groenou
Leonard V. Broese van Groenou
Vice President - Human Resources
<PAGE>
Exhibit A
SUMMARY
AIR PRODUCTS AND CHEMICALS, INC. (THE "COMPANY")
CEC RETENTION/SEPARATION PROGRAM (THE "PLAN")
Executives who serve on the Company's Corporate Executive Committee ("CEC") will
become entitled to Plan benefits following termination of employment with the
Company if they end their employment on the date specified or agreed to by the
Chief Executive Officer (the "Employment Termination Date"). Once the Employment
Termination Date is set, the Company cannot terminate or adversely amend the
Plan as it applies to the Executive, and the Executive must (i) continue in his
current office and perform such duties for the Company as are typically related
to his position (or such other position as the Chief Executive Officer
reasonably requests) and to assist in the identification, recruitment, and/or
transitioning of his successor, performing all assigned duties in the manner
reasonably directed by the Chief Executive Officer, in his sole discretion; (ii)
cease employment with the Company on the Employment Termination Date; and (iii)
sign (and not revoke) a general release of all claims against the Company and a
two-year noncompete agreement. In consideration of and subject to complying with
the foregoing, the Executive will receive the following payments and treatment
of outstanding stock awards, as well as a release of claims by the Company
against him.
CASH PAYMENTS FOLLOWING THE EMPLOYMENT TERMINATION DATE, THE EFFECTIVE DATE OF
THE GENERAL RELEASE, AND THE SIGNING OF THE NONCOMPETITION, NONSOLICITATION, AND
NONDISPARAGEMENT AGREEMENT
- - A severance Benefit equivalent to one times base Salary plus 100% Bonus at
midpoint/target for the Executive's salary grade.
- - An amount representing a 100% target Bonus for the Executive's salary
grade at the Employment Termination Date, "prorated", i.e., multiplied by
a fraction the numerator of which is the number of days in the current
fiscal year through the Employment Termination Date and the denominator of
which is 365.
- - Accrued but unpaid cash compensation which will include but not be limited
to base Salary through the Employment Termination Date, (any accrued but
unpaid vacation pay, and similar unpaid items that have accrued or to
which the Executive has become entitled as of the Employment Termination
Date, including declared but unpaid bonuses and unreimbursed employee
business expenses.
- - A stipend to cover the Executive's reasonable miscellaneous transition
expenses including for outplacement assistance and legal fees.
A-1
<PAGE>
TREATMENT OF THE EXECUTIVE'S OUTSTANDING LONG-TERM INCENTIVE PLAN AWARDS
- - All stock options and stock appreciation rights which have been
outstanding for at least one year prior to the Employment Termination Date
will continue to vest according to their normal vesting schedule and
remain in effect for the stated term.
- - All unearned performance shares or other awards with performance-based
vesting or earnout will earn out consistent with the decision made by or
on behalf of the Company for other senior executives for the respective
cycle and be paid out promptly after earn out or vesting.
- - All awards, including career shares and earned but deferred performance
shares, which are subject to time-based vesting or other conditions
unrelated to Company performance, will be paid out promptly.
DISABILITY OR DEATH
- - Before the Employment Termination Date has been set: No Plan payments or
other benefits will be due and owing to the Executive or, in the case of
his death, to his estate or beneficiary.
- - After the Employment Termination Date has been set but not yet attained:
All Plan payments and other benefits will be made and provided to the
Executive or, in the case of his death, to his estate or beneficiary
unless the Executive retires prior to the date of his death, in which case
no Plan payments or other benefits will be made or provided to his
beneficiary or to his estate. For this purpose, "retire" means to have
separated from employment and begun to receive an immediate pension
benefit under the Company's defined-benefit Pension Plan for Salaried
Employees and Supplementary Pension Plan.
CHANGE IN CONTROL ("CIC") AGREEMENT
- - Upon a defined CIC, the Company's CIC severance agreement or other CIC
arrangements in effect at the time, if any, will supercede and replace the
Plan.
All capitalized terms included in this Plan Summary have the meanings specified
in the full Plan text, a copy of which will be provided to a Covered Executive
upon request to the Company's Vice President - Human Resources. The Covered
Executive agrees that the Plan text (as it may be amended for the Covered
Executive as stated in the letter from the Vice President - Human Resources to
which this Plan Summary is attached) and all determinations made by persons
referred to in the Plan text govern all rights and responsibilities related to
or created by the Plan.
A-2
<PAGE>
Exhibit B
GENERAL RELEASE
1. I, ____________________ (the "Executive"), for and in
consideration of (a) certain severance benefits to be paid and provided to me by
Air Products and Chemicals, Inc. (the "Company") under the Air Products and
Chemicals, Inc. Corporate Executive Committee Retention/Separation Program (the
"Plan") and (b) the Company's execution of a release in favor of the Executive,
on the date this General Release becomes irrevocable, substantially in the form
attached hereto as Annex 1, and conditioned upon such payments and provisions,
do hereby REMISE, RELEASE, AND FOREVER DISCHARGE Air Products and Chemicals,
Inc. (the "Company") and each of its past or present subsidiaries and
affiliates, its and their past or present officers, directors, shareholders,
employees and agents, their respective successors and assigns, heirs, executors
and administrators, the pension and employee benefit plans of the Company, or of
its past or present subsidiaries or affiliates, and the past or present
trustees, administrators, agents, or employees of the pension and employee
benefit plans (hereinafter collectively included within the term the "Company"),
acting in any capacity whatsoever, of and from any and all manner of actions and
causes of actions, suits, debts, claims and demands whatsoever in law or in
equity, which I ever had, now have, or hereafter may have, or which my heirs,
executors or administrators hereafter may have, by reason of any matter, cause
or thing whatsoever from the beginning of my employment with the Company to the
date of these presents and particularly, but without limitation of the foregoing
general terms, any claims arising from or relating in any way to my employment
relationship and the termination of my employment relationship with the Company,
including but not limited to, any claims which have been asserted, could have
been asserted, or could be asserted now or in the future under any federal,
state or local laws, including any claims under the Pennsylvania Human Relations
Act, 43 PA. C.S.A. Sections 951 et seq., as amended, the Rehabilitation Act of
1973, 29 USC Sections 701 et seq., as amended, Title VII of the Civil Rights Act
of 1964, 42 USC Sections 2000e et seq., as amended, the Civil Rights Act of
1991, 2 USC Sections 60/ et seq., as applicable, the Age Discrimination in
Employment Act of 1967, 29 USC Sections 621 et seq., as amended ("ADEA"), the
Americans With Disabilities Act, 29 USC Sections 706 et seq., and the Employee
Retirement Income Security Act of 1974, 29 USC Sections 301 et seq., as amended,
any contracts between the Company and me and any common law claims now or
hereafter recognized and all claims for counsel fees and costs; provided,
however, that this Release shall not apply to any entitlements under the terms
of the Plan or under any other plans or programs of the Company in which I
participated and under which I have accrued and become entitled to a benefit
other than under any Company separation or severance plan or programs.
Notwithstanding the foregoing, I understand that I shall be indemnified by the
Company as to any liability, cost or expense for which I would have been
indemnified during employment, in accordance with the Company's certificate of
B-1
<PAGE>
incorporation or insurance coverages for employees of the Company serving in
executive capacities for actions taken on behalf of the Company within the scope
of my employment by the Company.
2. Subject to the limitations of paragraph 1 above, I
expressly waive all rights afforded by any statute which expressly limits the
effect of a release with respect to unknown claims. I understand the
significance of this release of unknown claims and the waiver of statutory
protection against a release of unknown claims.
3. I hereby agree and recognize that my employment by the
Company was/will be permanently and irrevocably severed on ___________________,
20__ and the Company has no obligation, contractual or otherwise to me to hire,
rehire or reemploy me in the future. I acknowledge that the terms of the Plan
provide me with payments and benefits which are in addition to any amounts to
which I otherwise would have been entitled.
4. I hereby agree and acknowledge that the payments and
benefits provided by the Company are to bring about an amicable resolution of my
employment arrangements and are not to be construed as an admission of any
violation of any federal, state or local statute or regulation, or of any duty
owed by the Company and that the Plan was, and this Release is, executed
voluntarily to provide an amicable resolution of my employment relationship with
the Company.
5. I hereby acknowledge that nothing in this Release
shall prohibit or restrict me from: (i) making any disclosure of information
required by law; (ii) providing information to, or testifying or otherwise
assisting in any investigation or proceeding brought by, any federal regulatory
or law enforcement agency or legislative body, any self-regulatory organization,
or the Company's designated legal, compliance or human resources officers; or
(iii) filing, testifying, participating in or otherwise assisting in a
proceeding relating to an alleged violation of any federal, state or municipal
law relating to fraud, or any rule or regulation of the Securities and Exchange
Commission or any self-regulatory organization.
6. I hereby certify that I have read the terms of this
Release, that I have been advised by the Company to discuss it with my attorney,
that I have received the advice of counsel and that I understand its terms and
effects. I acknowledge, further, that I am executing this Release of my own
volition with a full understanding of its terms and effects and with the
intention of releasing all claims recited herein in exchange for the
consideration described in the Agreement, which I acknowledge is adequate and
satisfactory to me. None of the above named persons, nor their agents,
representatives, or attorneys have made any representations to me concerning the
terms or effects of this Release other than those contained herein.
B-2
<PAGE>
7. I hereby acknowledge that I have been informed that I
have the right to consider this Release for a period of 21 days prior to
execution. I also understand that I have the right to revoke this Release for a
period of seven days following execution by giving written notice to the Company
at 7201 Hamilton Boulevard, Allentown Pennsylvania 18195-1501, Attention:
General Counsel.
8. I hereby further acknowledge that the terms of
Appendix B of the Plan continue to apply for the balance of the time periods
provided therein and that I will abide by and fully perform such obligations.
Intending to be legally bound hereby, I execute the foregoing
Release this ___ day of _____________, 20 ___.
___________________________ ______________________
Witness Executive
B-3
<PAGE>
ANNEX 1
GENERAL RELEASE
1. Air Products and Chemicals, Inc. (the "Company") on
its behalf and on behalf of its subsidiaries and affiliates, their officers,
directors, partners, employees and agents, their respective successors and
assigns, heirs, executors and administrators (hereinafter collectively included
within the term "Company"), for and in consideration of ____________________
(the "Executive") executing the general release of claims against the Company
dated _______________ (the "Executive's Release of the Company"), and other good
and valuable consideration, does hereby REMISE, RELEASE, AND FOREVER DISCHARGE
the Executive, his assigns, heirs, executors and administrators (hereinafter
collectively included within the term "Executive"), acting in any capacity
whatsoever, of and from any and all manner of actions and causes of actions,
suits, debts, claims and demands whatsoever in law or in equity, which it ever
had, now have, or hereafter may have, by reason of any matter, cause or thing
whatsoever from the beginning of the Executive's employment with the Company to
the date of this Release arising from or relating in any way to the Executive's
employment relationship and the termination of his employment relationship with
the Company, including but not limited to, any claims which have been asserted,
could have been asserted, or could be asserted now or in the future under any
federal, state or local laws, any contracts between the Company and the
Executive, other than the Executive's Release of the Company, the Executive's
Noncompetition, Nonsolicitation, and Nondisparagement Agreement with the
Company, and the Employee Patent and Confidential Information Agreement entered
into by the Executive on _______________, and any common law claims now or
hereafter recognized and all claims for counsel fees and costs, but in no event
shall this release apply to any action attributable to a criminal act or to an
action outside the scope of the Executive's employment.
2. Subject to the limitations of paragraph 1 above, the
Company expressly waives all rights afforded by any statute which expressly
limits the effect of a release with respect to unknown claims. The Company
understands the significance of this release of unknown claims and the waiver of
statutory protection against a release of unknown claims.
3. The Company hereby certifies that it has been advised
by counsel in the preparation and review of this Release.
Intending to be legally bound hereby, Air Products and
Chemicals, Inc. executes the foregoing Release this ____ day of ____________,
20__.
_______________________________ By:________________________
Witness
B-4
<PAGE>
Exhibit C
NONCOMPETITION, NONSOLICITATION, AND NONDISPARAGEMENT AGREEMENT
I, ____________________ (the "Executive"), for and in
consideration of (a) certain severance benefits to be paid and provided to me by
Air Products and Chemicals, Inc. (the "Company") under the Air Products and
Chemicals, Inc. Corporate Executive Committee Retention/Separation Program (the
"Plan"), and (b) the Company's execution of a release in favor of the Executive,
I, the Executive, hereby covenant and agree as follows:
1. The Executive acknowledges that the Company is
generally engaged in business throughout the world. During the Executive's
employment by the Company and for two years after the Executive's Employment
Termination Date (as defined in the Plan), the Executive agrees that he will
not, unless acting with the prior written consent of the Company, directly or
indirectly, own, manage, control, or participate in the ownership, management or
control of, or be employed or engaged by, or otherwise affiliated or associated
with, as an officer, director, employee, consultant, independent contractor or
otherwise, any other corporation, partnership, proprietorship, firm,
association, or other business entity, or otherwise engage in any business which
is engaged in any manner anywhere in any business which, as of the Employment
Termination Date, is engaged in by the Company, has been reviewed with the Board
for development to be owned or managed by the Company, and/or has been divested
by the Company but as to which the Company has an obligation to refrain from
involvement, but only for so long as such restriction applies to the Company;
provided, however, that the ownership of not more than 5% of the equity of a
publicly traded entity shall not be deemed to be a violation of this paragraph.
2. The Executive also agrees that he will not, directly
or indirectly, during the period described in paragraph (1), induce any person
who is an employee, officer, director, or agent of the Company, to terminate
such relationship, or employ, assist in employing or otherwise be associated in
business with any present or former employee or officer of the Company,
including without limitation those who commence such positions with the Company
after the Employment Termination Date.
3. For the purposes of this Agreement, the term
"Company" shall be deemed to include Air Products and the subsidiaries and
affiliates of Air Products.
4. The Executive acknowledges and agrees that the
restrictions contained in this Agreement are reasonable and necessary to protect
and preserve the legitimate interests, properties, goodwill and business of the
Company, that the
C-1
<PAGE>
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
the Executive breach the provisions of this Section. The Executive represents
and acknowledges that (i) the Executive has been advised by the Company to
consult the Executive's own legal counsel in respect of this Agreement, (ii) the
Executive has consulted with and been advised by his own counsel in respect of
this Agreement, and (iii) the Executive has had full opportunity, prior to
execution of this Agreement, to review thoroughly this Agreement with the
Executive's counsel.
5. The Executive further acknowledges and agrees that a
breach of the restrictions in this Agreement will not be adequately compensated
by monetary damages. The Executive agrees that the Company shall be entitled to
(i) preliminary and permanent injunctive relief, without the necessity of
proving actual damages, or posting of a bond, (ii) an equitable accounting of
all earnings, profits and other benefits arising from any violation of this
Agreement, and (iii) enforce the terms, including requiring forfeitures, under
other plans, programs and agreements under which the Executive has been granted
a benefit contingent on a covenant similar to those contained in this Agreement,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that the provisions of this
Agreement should ever be adjudicated to exceed the limitations permitted by
applicable law in any jurisdiction, it is the intention of the parties that the
provision shall be amended to the extent of the maximum limitations permitted by
applicable law, that such amendment shall apply only within the jurisdiction of
the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.
6. If the Executive breaches his obligations under this
Agreement, he agrees that suit may be brought, and that he consents to personal
jurisdiction, in the United States District Court for the Eastern District of
Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Allentown, Pennsylvania;
consents to the non-exclusive jurisdiction of any such court in any such suit,
action or proceeding; and waives any objection which he may have to the laying
of venue of any such suit, action or proceeding in any such court. The Executive
also irrevocably and unconditionally consents to the service of any process,
pleadings, notices or other papers.
7. Executive further agrees, covenants, and promises
that he will not in any way communicate the terms of this Agreement to any
person other than his immediate family and his attorney and financial consultant
or when necessary to advise a third party of his obligations under this
Agreement. Notwithstanding the foregoing, the Company and Executive also agree
that for a period of two years following the Employment Termination Date,
Executive will provide and that at all times after the date hereof the Company
may similarly provide, with prior written notice to Executive, a copy of this
Agreement to any business or enterprise (i) which Executive may directly or
indirectly own, manage, operate, finance, join, control or of which he may
participate in the ownership, management, operation, financing, or
C-2
<PAGE>
control, or (ii) with which Executive may be connected as an officer, director,
employee, partner, principal, agent, representative, consultant, or otherwise,
or in connection with which Executive may use or permit to be used Executive's
name. Executive agrees not to disparage the name, business reputation, or
business practices of the Company or its subsidiaries or affiliates, or its or
their officers, employees, or directors, and the Company agrees not to disparage
the name or business reputation of Executive.
8. The Executive hereby expressly acknowledges and
agrees that (i) the provisions of the Employee Patent and Confidential
Information Agreement entered into by him on _______________, shall continue to
apply in accordance with its terms, and (ii) the provisions of the Executive's
outstanding incentive award agreements granted under the Company's Long-Term
Incentive Plan, as defined in the Plan, shall continue to apply in accordance
with their terms except as otherwise provided in Section 3.02 of the Plan and
except that, for purposes of interpreting the provisions of the first indented
clause of Section 2 of the "Conditions"(as defined in, and as set forth in
Exhibit A to, each of the Executive's award agreements under the Long-Term
Incentive Plan), "in Competition with the Company" shall be construed as
provided in this Agreement.
9. No failure or delay on the part of the Company in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power preclude any
further or other exercise thereof or the exercise of any other right or power
hereunder. No modification or waiver of any provision of this Agreement or
consent to any departure by any party therefrom shall in any event be effective
until the same shall be in writing and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on any party in any case shall entitle such party to any
other or further notice or demand in similar or other circumstances.
10. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Pennsylvania without giving effect to its
conflict of laws provisions. This Agreement shall extend to and enure to the
benefit of the respective successors and assigns of the Company.
Intending to be legally bound hereby, I execute the
Noncompetition, Nonsolicitation, and Nondisparagement Agreement this ___ day of
_____________, 20 ___.
_______________________ ____________________
Witness Executive
C-3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>5
<FILENAME>y92114exv10w24.txt
<DESCRIPTION>LETTER DATED 16 SEPTEMBER 2003
<TEXT>
<PAGE>
Exhibit 10.24
16 September 2003
Mr. Robert E. Gadomski
2332 Spring Valley Road
Bethlehem, PA 18015
Dear Bob:
This letter is written regarding your retirement from employment with
Air Products.
Air Products appreciates your loyal service over the years and your
commitment to continue in your current position performing the duties of that
position as expected of you by the Board of Directors (the "Board") and the
Chief Executive Officer until your last day of employment and retirement on 4
January 2004 (your "employment termination date"). Air Products is willing to
provide you with benefits under the Air Products and Chemicals, Inc. Corporate
Executive Committee Retention/Separation Program (the "Plan"), the terms of
which are summarized in Exhibit A to this letter. The Management Development and
Compensation Committee of the Board has determined to amend the Plan with
respect to you so that your cash severance benefit under the Plan shall be
equivalent to two times (rather than the Plan's normal one times) the sum of
your base salary as of your employment termination date plus 100% of the
midpoint target bonus for your salary grade level in the fiscal year of your
employment termination date; and, further, so that your stock option granted for
the fiscal year of your employment termination date will continue to vest and
remain in effect for its stated term following such date. Your transition
stipend will be $40,000.
In response to questions you have raised, this is to confirm that: (a)
your cash severance Benefit of $2,262,700, amount in lieu of a prorated, 100%
target Bonus for fiscal year 2004, i.e., $119,500, and $40,000 transition
stipend, along with accrued but unpaid cash compensation and Long-Term Incentive
Plans career shares and earned but deferred performance shares referenced in the
Plan as amended by this letter (the "Amended Plan"), will be paid to you
promptly, but in no event later than 30 days after, the later of your employment
termination date and seven days following your execution of the Second Release
(referred to later in this letter); (b) your obligation to assist the Chief
Executive Officer in the identification, recruitment, and transitioning of your
successor, which is a condition to receiving your severance benefits under the
Amended Plan, ceases as of your employment termination date; and (c) the intent
of
<PAGE>
Mr. Robert E. Gadomski
16 September 2003
Page 2
Section 8(ii) of your Noncompetition, Nonsolicitation, and Employment Agreement
attached as Exhibit C to this letter is that such Agreement shall govern the
interpretation of the noncompetition conditions applicable to your outstanding
awards under the Long-Term Incentive Plan (which are set forth in the first
indented clause of Section 2 of the statement of "Conditions" attached to this
letter as Exhibit D).
Payment of Plan benefits mentioned in this letter is conditioned upon
and will be made in consideration of, among other things, your signing the
General Release and the Noncompetition, Nonsolicitation, and Nondisparagement
Agreement (together, the "Agreements"), which are Exhibits B and C to this
letter (as well as upon your executing, and not revoking as provided therein,
another written release containing substantially the same provisions as
described in Exhibit B to this letter, prior to the 22nd day following your
employment termination date (the "Second Release"), in consideration of which
the Company shall execute a second release in favor of you on the date the
Second Release becomes irrevocable, in the form attached to Exhibit B to this
letter). You must sign and date both copies of the Agreements and return one
copy of this entire 12 page package to me. Please take at least 21 days to read
these materials carefully before deciding to execute the Agreements (after which
you will have 7 days in which to change your mind and revoke the General
Release). If you have any questions regarding this letter or the Plan benefits,
please contact me. If you have any questions regarding the Plan or the
Agreements, Air Products will be pleased to answer them, but advises you to
discuss the Agreements with your personal lawyer and rely upon her or his
advice.
Very truly yours,
/s/ Leonard V. Broese van Groenou
Leonard V. Broese van Groenou
Vice President - Human Resources
<PAGE>
Exhibit A
SUMMARY
AIR PRODUCTS AND CHEMICALS, INC. (THE "COMPANY")
CEC RETENTION/SEPARATION PROGRAM (THE "PLAN")
Executives who serve on the Company's Corporate Executive Committee ("CEC") will
become entitled to Plan benefits following termination of employment with the
Company if they end their employment on the date specified or agreed to by the
Chief Executive Officer (the "Employment Termination Date"). Once the Employment
Termination Date is set, the Company cannot terminate or adversely amend the
Plan as it applies to the Executive, and the Executive must (i) continue in his
current office and perform such duties for the Company as are typically related
to his position (or such other position as the Chief Executive Officer
reasonably requests) and to assist in the identification, recruitment, and/or
transitioning of his successor, performing all assigned duties in the manner
reasonably directed by the Chief Executive Officer, in his sole discretion; (ii)
cease employment with the Company on the Employment Termination Date; and (iii)
sign (and not revoke) a general release of all claims against the Company and a
two-year noncompete agreement. In consideration of and subject to complying with
the foregoing, the Executive will receive the following payments and treatment
of outstanding stock awards, as well as a release of claims by the Company
against him.
CASH PAYMENTS FOLLOWING THE EMPLOYMENT TERMINATION DATE, THE EFFECTIVE DATE OF
THE GENERAL RELEASE, AND THE SIGNING OF THE NONCOMPETITION, NONSOLICITATION, AND
NONDISPARAGEMENT AGREEMENT
- - A severance Benefit equivalent to one times base Salary plus 100% Bonus at
midpoint/target for the Executive's salary grade.
- - An amount representing a 100% target Bonus for the Executive's salary
grade at the Employment Termination Date, "prorated", i.e., multiplied by
a fraction the numerator of which is the number of days in the current
fiscal year through the Employment Termination Date and the denominator of
which is 365.
- - Accrued but unpaid cash compensation which will include but not be limited
to base Salary through the Employment Termination Date, any accrued but
unpaid vacation pay, and similar unpaid items that have accrued or to
which the Executive has become entitled as of the Employment Termination
Date, including declared but unpaid bonuses and unreimbursed employee
business expenses.
- - A stipend to cover the Executive's reasonable miscellaneous transition
expenses including for outplacement assistance and legal fees.
A-1
<PAGE>
TREATMENT OF THE EXECUTIVE'S OUTSTANDING LONG-TERM INCENTIVE PLAN AWARDS
- - All stock options and stock appreciation rights which have been
outstanding for at least one year prior to the Employment Termination Date
will continue to vest according to their normal vesting schedule and
remain in effect for the stated term.
- - All unearned performance shares or other awards with performance-based
vesting or earnout will earn out consistent with the decision made by or
on behalf of the Company for other senior executives for the respective
cycle and be paid out promptly after earn out or vesting.
- - All awards, including career shares and earned but deferred performance
shares, which are subject to time-based vesting or other conditions
unrelated to Company performance, will be paid out promptly.
DISABILITY OR DEATH
- - Before the Employment Termination Date has been set: No Plan payments or
other benefits will be due and owing to the Executive or, in the case of
his death, to his estate or beneficiary.
- - After the Employment Termination Date has been set but not yet attained:
All Plan payments and other benefits will be made and provided to the
Executive or, in the case of his death, to his estate or beneficiary
unless the Executive retires prior to the date of his death, in which case
no Plan payments or other benefits will be made or provided to his
beneficiary or to his estate. For this purpose, "retire" means to have
separated from employment and begun to receive an immediate pension
benefit under the Company's defined-benefit Pension Plan for Salaried
Employees and Supplementary Pension Plan.
CHANGE IN CONTROL ("CIC") AGREEMENT
- - Upon a defined CIC, the Company's CIC severance agreement or other CIC
arrangements in effect at the time, if any, will supercede and replace the
Plan.
All capitalized terms included in this Plan Summary have the meanings specified
in the full Plan text, a copy of which will be provided to a Covered Executive
upon request to the Company's Vice President - Human Resources. The Covered
Executive agrees that the Plan text (as it may be amended for the Covered
Executive as stated in the letter from the Vice President - Human Resources to
which this Plan Summary is attached) and all determinations made by persons
referred to in the Plan text govern all rights and responsibilities related to
or created by the Plan.
A-2
<PAGE>
Exhibit B
GENERAL RELEASE
1. I, ROBERT E. GADOMSKI (the "Executive"), for and in
consideration of (a) certain severance benefits to be paid and provided to me by
Air Products and Chemicals, Inc. (the "Company") under the Air Products and
Chemicals, Inc. Corporate Executive Committee Retention/Separation Program, as
amended as provided in the letter dated 16 September 2003, to which this General
Release is attached (the "Plan") and (b) the Company's execution of a release in
favor of the Executive, on the date this General Release becomes irrevocable,
substantially in the form attached hereto as Annex 1, and conditioned upon such
payments and provisions, do hereby REMISE, RELEASE, AND FOREVER DISCHARGE Air
Products and Chemicals, Inc. (the "Company") and each of its past or present
subsidiaries and affiliates, its and their past or present officers, directors,
shareholders, employees and agents, their respective successors and assigns,
heirs, executors and administrators, the pension and employee benefit plans of
the Company, or of its past or present subsidiaries or affiliates, and the past
or present trustees, administrators, agents, or employees of the pension and
employee benefit plans (hereinafter collectively included within the term the
"Company"), acting in any capacity whatsoever, of and from any and all manner of
actions and causes of actions, suits, debts, claims and demands whatsoever in
law or in equity, which I ever had, now have, or hereafter may have, or which my
heirs, executors or administrators hereafter may have, by reason of any matter,
cause or thing whatsoever from the beginning of my employment with the Company
to the date hereof and particularly, but without limitation of the foregoing
general terms, any claims arising from or relating in any way to my employment
relationship and the termination of my employment relationship with the Company,
including but not limited to, any claims which have been asserted, could have
been asserted, or could be asserted now or in the future under any federal,
state or local laws, including any claims under the Pennsylvania Human Relations
Act, 43 PA. C.S.A. Sections 951 et seq., as amended, the Rehabilitation Act of
1973, 29 USC Sections 701 et seq., as amended, Title VII of the Civil Rights Act
of 1964, 42 USC Sections 2000e et seq., as amended, the Civil Rights Act of
1991, 2 USC Sections 60/ et seq., as applicable, the Age Discrimination in
Employment Act of 1967, 29 USC Sections 621 et seq., as amended ("ADEA"), the
Americans With Disabilities Act, 29 USC Sections 706 et seq., and the Employee
Retirement Income Security Act of 1974, 29 USC Sections 301 et seq., as amended,
any contracts between the Company and me and any common law claims now or
hereafter recognized and all claims for counsel fees and costs; provided,
however, that this Release shall not apply to any entitlements under the terms
of the Plan or under any other plans or programs of the Company in which I
participated and under which I have accrued and become entitled to a benefit
other than under any Company separation or severance plan or programs.
Notwithstanding the foregoing, I understand that I shall be indemnified by the
Company as to any liability, cost or expense for which I would have been
indemnified during
B-1
<PAGE>
employment, in accordance with the Company's certificate of incorporation or
insurance coverages for employees of the Company serving in executive capacities
for actions taken on behalf of the Company within the scope of my employment by
the Company.
2. Subject to the limitations of paragraph 1 above, I
expressly waive all rights afforded by any statute which expressly limits the
effect of a release with respect to unknown claims. I understand the
significance of this release of unknown claims and the waiver of statutory
protection against a release of unknown claims.
3. I hereby agree and recognize that my employment by
the Company was/will be permanently and irrevocably severed on 4 January 2004
and the Company has no obligation, contractual or otherwise to me to hire,
rehire or reemploy me in the future. I acknowledge that the terms of the Plan
provide me with payments and benefits which are in addition to any amounts to
which I otherwise would have been entitled.
4. I hereby agree and acknowledge that the payments and
benefits provided by the Company are to bring about an amicable resolution of my
employment arrangements and are not to be construed as an admission of any
violation of any federal, state or local statute or regulation, or of any duty
owed by the Company and that the Plan was, and this Release is, executed
voluntarily to provide an amicable resolution of my employment relationship with
the Company.
5. I hereby acknowledge that nothing in this Release
shall prohibit or restrict me from: (i) making any disclosure of information
required by law; (ii) providing information to, or testifying or otherwise
assisting in any investigation or proceeding brought by, any federal regulatory
or law enforcement agency or legislative body, any self-regulatory organization,
or the Company's designated legal, compliance or human resources officers; or
(iii) filing, testifying, participating in or otherwise assisting in a
proceeding relating to an alleged violation of any federal, state or municipal
law relating to fraud, or any rule or regulation of the Securities and Exchange
Commission or any self-regulatory organization.
6. I hereby certify that I have read the terms of this
Release, that I have been advised by the Company to discuss it with my attorney,
that I have received the advice of counsel and that I understand its terms and
effects. I acknowledge, further, that I am executing this Release of my own
volition with a full understanding of its terms and effects and with the
intention of releasing all claims recited herein in exchange for the
consideration described in the Agreement, which I acknowledge is adequate and
satisfactory to me. None of the above named persons, nor their agents,
representatives, or attorneys have made any representations to me concerning the
terms or effects of this Release other than those contained herein.
B-2
<PAGE>
7. I hereby acknowledge that I have been informed that I
have the right to consider this Release for a period of 21 days prior to
execution. I also understand that I have the right to revoke this Release for a
period of seven days following execution by giving written notice to the Company
at 7201 Hamilton Boulevard, Allentown Pennsylvania 18195-1501, Attention:
General Counsel.
8. I hereby further acknowledge that the terms of
Appendix B of the Plan continue to apply for the balance of the time periods
provided therein and that I will abide by and fully perform such obligations.
Intending to be legally bound hereby, I execute the foregoing
Release this ___ day of _____________, 20 ___.
_______________________ ________________________
Witness Executive
Robert E. Gadomski
B-3
<PAGE>
ANNEX 1
GENERAL RELEASE
1. Air Products and Chemicals, Inc. (the "Company") on
its behalf and on behalf of its subsidiaries and affiliates, their officers,
directors, partners, employees and agents, their respective successors and
assigns, heirs, executors and administrators (hereinafter collectively included
within the term "Company"), for and in consideration of ROBERT E. GADOMSKI (the
"Executive") executing the general release of claims against the Company dated
_______________ (the "Executive's Release of the Company"), and other good and
valuable consideration, does hereby REMISE, RELEASE, AND FOREVER DISCHARGE the
Executive, his assigns, heirs, executors and administrators (hereinafter
collectively included within the term "Executive"), acting in any capacity
whatsoever, of and from any and all manner of actions and causes of actions,
suits, debts, claims and demands whatsoever in law or in equity, which it ever
had, now have, or hereafter may have, by reason of any matter, cause or thing
whatsoever from the beginning of the Executive's employment with the Company to
the date of this Release arising from or relating in any way to the Executive's
employment relationship and the termination of his employment relationship with
the Company, including but not limited to, any claims which have been asserted,
could have been asserted, or could be asserted now or in the future under any
federal, state or local laws, any contracts between the Company and the
Executive, other than the Executive's Release of the Company, the Executive's
Noncompetition, Nonsolicitation, and Nondisparagement Agreement with the
Company, and the Employee Patent and Confidential Information Agreement entered
into by the Executive on 31 August 1970, and any common law claims now or
hereafter recognized and all claims for counsel fees and costs, but in no event
shall this release apply to any action attributable to a criminal act or to an
action outside the scope of the Executive's employment.
2. Subject to the limitations of paragraph 1 above, the
Company expressly waives all rights afforded by any statute which expressly
limits the effect of a release with respect to unknown claims. The Company
understands the significance of this release of unknown claims and the waiver of
statutory protection against a release of unknown claims.
3. The Company hereby certifies that it has been advised
by counsel in the preparation and review of this Release.
Intending to be legally bound hereby, Air Products and
Chemicals, Inc. executes the foregoing Release this ____ day of ____________,
20__.
_______________________________ By:______________________________
Witness Leonard V. Broese van Groenou
Vice President - Human Resources
B-4
<PAGE>
Exhibit C
NONCOMPETITION, NONSOLICITATION, AND NONDISPARAGEMENT
AGREEMENT (THE "AGREEMENT")
I, ROBERT E. GADOMSKI (the "Executive"), for and in
consideration of (a) certain severance benefits to be paid and provided to me by
Air Products and Chemicals, Inc. (the "Company") under the Air Products and
Chemicals, Inc. Corporate Executive Committee Retention/Separation Program, as
amended as provided in the letter dated 16 September 2003 to which this
Agreement is attached (the "Plan"), and (b) the Company's execution of a release
in favor of the Executive, I, the Executive, hereby covenant and agree as
follows:
1. The Executive acknowledges that the Company is
generally engaged in business throughout the world. During the Executive's
employment by the Company and for two years after the Executive's Employment
Termination Date (as defined in the Plan), the Executive agrees that he will
not, unless acting with the prior written consent of the Company, directly or
indirectly, own, manage, control, or participate in the ownership, management or
control of, or be employed or engaged by, or otherwise affiliated or associated
with, as an officer, director, employee, consultant, independent contractor or
otherwise, (i) Bayer Corporation, BASF Corporation, Dow Chemical Co., Imperial
Chemical Industries, PLC, Forbo Group, Rohm & Haas Co., Lyondell Chemical
Company, National Starch and Chemical Company, Wacker Group, and Celanese AG; or
(ii) any other corporation, partnership, proprietorship, firm, association, or
other business entity which is (a) engaged in any manner anywhere in industrial
gases activities as its primary business, including without limitation Airgas,
Inc., BOC Group, Air Liquide Group, Nippon Sanson Corporation, Air Water Inc.,
Praxair, Inc., and Linde, or (b) which is engaged in any manner anywhere in
Europe, the United States, Mexico, or Canada in the medical home healthcare
business; provided, however, that the ownership of not more than 5% of the
equity of a publicly traded entity shall not be deemed to be a violation of this
paragraph.
2. The Executive also agrees that he will not, directly
or indirectly, during the period described in paragraph (1), induce any person
who is an employee, officer, director, or agent of the Company, to terminate
such relationship, or employ, assist in employing or otherwise be associated in
business with any present or former employee or officer of the Company,
including without limitation those who commence such positions with the Company
after the Employment Termination Date.
3. For the purposes of this Agreement, the term
"Company" shall be deemed to include Air Products and the subsidiaries and
affiliates of Air Products.
C-1
<PAGE>
4. The Executive acknowledges and agrees that the
restrictions contained in this Agreement are reasonable and necessary to protect
and preserve the legitimate interests, properties, goodwill and business of the
Company, that the Company would not have entered into this Agreement in the
absence of such restrictions and that irreparable injury will be suffered by the
Company should the Executive breach the provisions of this Section. The
Executive represents and acknowledges that (i) the Executive has been advised by
the Company to consult the Executive's own legal counsel in respect of this
Agreement, (ii) the Executive has consulted with and been advised by his own
counsel in respect of this Agreement, and (iii) the Executive has had full
opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with the Executive's counsel.
5. The Executive further acknowledges and agrees that a
breach of the restrictions in this Agreement will not be adequately compensated
by monetary damages. The Executive agrees that the Company shall be entitled to
(i) preliminary and permanent injunctive relief, without the necessity of
proving actual damages, or posting of a bond, (ii) an equitable accounting of
all earnings, profits and other benefits arising from any violation of this
Agreement, and (iii) enforce the terms, including requiring forfeitures, under
other plans, programs and agreements under which the Executive has been granted
a benefit contingent on a covenant similar to those contained in this Agreement,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that the provisions of this
Agreement should ever be adjudicated to exceed the limitations permitted by
applicable law in any jurisdiction, it is the intention of the parties that the
provision shall be amended to the extent of the maximum limitations permitted by
applicable law, that such amendment shall apply only within the jurisdiction of
the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.
6. If the Executive breaches his obligations under this
Agreement, he agrees that suit may be brought, and that he consents to personal
jurisdiction, in the United States District Court for the Eastern District of
Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Allentown, Pennsylvania;
consents to the non-exclusive jurisdiction of any such court in any such suit,
action or proceeding; and waives any objection which he may have to the laying
of venue of any such suit, action or proceeding in any such court. The Executive
also irrevocably and unconditionally consents to the service of any process,
pleadings, notices or other papers.
7. Executive further agrees, covenants, and promises
that he will not in any way communicate the terms of this Agreement to any
person other than his immediate family and his attorney and financial consultant
or when necessary to advise a third party of his obligations under this
Agreement. Notwithstanding the foregoing, the Company and Executive also agree
that for a period of two years following the Employment Termination Date,
Executive will provide and that at all times after the date hereof the Company
may similarly provide, with prior written
C-2
<PAGE>
notice to Executive, a copy of this Agreement to any business or enterprise (i)
which Executive may directly or indirectly own, manage, operate, finance, join,
control or of which he may participate in the ownership, management, operation,
financing, or control, or (ii) with which Executive may be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant, or otherwise, or in connection with which Executive may use or
permit to be used Executive's name. Executive agrees not to disparage the name,
business reputation, or business practices of the Company or its subsidiaries or
affiliates, or its or their officers, employees, or directors, and the Company
agrees not to disparage the name or reputation of Executive.
8. The Executive hereby expressly acknowledges and
agrees that (i) the provisions of the Employee Patent and Confidential
Information Agreement entered into by him on 31 August 1970, shall continue to
apply in accordance with its terms, and (ii) the provisions of the Executive's
outstanding incentive award agreements granted under the Company's Long-Term
Incentive Plan, as defined in the Plan, shall continue to apply in accordance
with their terms except as otherwise provided in Section 3.02 of the Plan and
except that, for purposes of interpreting the provisions of the first indented
clause of Section 2 of the "Conditions"(as defined in, and as set forth in
Exhibit A to, each of the Executive's award agreements under the Long-Term
Incentive Plan), "in Competition with the Company" shall be construed as
provided in this Agreement.
9. No failure or delay on the part of the Company in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power preclude any
further or other exercise thereof or the exercise of any other right or power
hereunder. No modification or waiver of any provision of this Agreement or
consent to any departure by any party therefrom shall in any event be effective
until the same shall be in writing and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on any party in any case shall entitle such party to any
other or further notice or demand in similar or other circumstances.
10. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Pennsylvania without giving effect to its
conflict of laws provisions. This Agreement shall extend to and enure to the
benefit of the respective successors and assigns of the Company.
Intending to be legally bound hereby, I execute the
Noncompetition, Nonsolicitation, and Nondisparagement Agreement this ___ day of
_____________, 20 ___.
_________________________ ________________________
Witness Executive
Robert E. Gadomski
C-3
<PAGE>
Exhibit D
2003 AWARDS UNDER THE PLAN ARE SUBJECT TO THE FOLLOWING CONDITIONS:
1. You continue to comply with the terms of your employee patent and trade
secret agreement and with all other agreements with, and obligations and
duties to, the Company and any of its subsidiaries and affiliates
(together, the "Company"), and refrain from conducting yourself in a
manner adversely affecting the Company;
2. Without limiting the generality of the foregoing, while employed by the
Company and for two years following your separation from service with the
Company for any reason, you
Refrain from engaging in any activity in competition with the Company,
whether as an officer, director, employee, consultant, advisor, agent,
broker, independent contractor, partner, shareholder, or principal of
any corporations, partnership, proprietorship, firm, association,
person, or other entity;
Refrain from undertaking any employment or activity wherein the
fulfillment of your duties would call upon you to reveal, to make
judgments on, or otherwise to use any "confidential information" of the
Company;
Refrain from directly or indirectly, either for yourself or for any
other person, diverting or taking away or attempting to divert or take
away (or calling on or soliciting or attempting to call on or solicit)
any of the Company's customers or patrons, including but not limited to
those upon whom you called or whom you solicited or with whom you
became acquainted while employed by the Company;
Refrain from directly or indirectly or by action in concert with
others, inducing or influencing (or seeking to induce or influence) any
person who is engaged (as an employee, agent, independent contractor,
or otherwise) by the Company to terminate his or her employment or
engagement.
IF, IN THE COMMITTEE'S SOLE DISCRETION, IT IS DETERMINED THAT YOU HAVE BREACHED
ANY OF THE FOREGOING CONDITIONS, AFTER NOTICE BY REGISTERED MAIL DIRECTED TO
YOUR LAST KNOWN ADDRESS, ALL OF YOUR OUTSTANDING AWARDS UNDER THE PLAN WILL BE
COMPLETELY TERMINATED. NOTWITHSTANDING ANY OTHER PROVISIONS HEREOF, FOLLOWING OR
IN CONNECTION WITH A CHANGE IN CONTROL, THE FOREGOING CONDITIONS SHALL LAPSE AND
BE OF NO FURTHER FORCE OR EFFECT.
D-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>6
<FILENAME>y92114exv10w25.txt
<DESCRIPTION>FORM OF SEVERANCE AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.25
SEVERANCE AGREEMENT
THIS AGREEMENT by and between Air Products and Chemicals,
Inc., a Delaware corporation (hereinafter "Air Products" or the "Company"), with
its principal office in Allentown, Pennsylvania, and John P. Jones III (the
"Executive"), an individual residing at 220 North Main Street, Allentown,
Pennsylvania, 18104, dated and effective as of November 20, 2003.
WHEREAS, the Executive is the Chairman, Chief Executive
Officer and President of the Company and has made and is expected to continue to
make major contributions to the short and long term profitability, growth, and
financial strength of the Company; and
WHEREAS, the Management Development and Compensation Committee
of the Board of Directors of Air Products has determined that it is in the best
interests of the Company and its shareholders to take appropriate steps to
encourage the continued attention and dedication of the Executive to his
assigned duties without distraction; and
WHEREAS, in consideration of the Executive's continued
employment with the Company, the Company desires to provide the Executive with
certain compensation and benefits set forth in this Agreement to ameliorate the
financial and career impact on the Executive were the Executive's employment
with the Company to be terminated under certain circumstances.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Defined Terms. In addition to terms defined elsewhere herein,
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Benefit" or "Benefits" means any or all of the benefits that
the Executive is entitled to receive pursuant to Section 2 of this Agreement.
(b) "Board" means the Board of Directors of Air Products.
(c) "Bonus" means 100% of the midpoint target bonus for the
Executive's salary grade, determined as of the Executive's Employment
Termination Date under the grant guidelines for the Air Products Annual
Incentive Plan or similar successor or substitute annual incentive plan or
program.
(d) "Cause" means:
(i) the willful and continued failure by the Executive to
substantially perform his duties with the Company (other than any such failure
resulting from his
<PAGE>
Disability or occurring after the issuance by the Executive of a notice of
Constructive Termination) over a period of not less than thirty days after a
demand for substantial performance is delivered to the Executive by the Board
which identifies the manner in which the Board believes that the Executive has
not substantially performed his duties; or
(ii) the willful misconduct of the Executive materially
and demonstrably injurious to the Company (including ,without limitation, any
willful breach by the Executive of Appendix B of this Agreement as if in effect
at the time the willful misconduct took place); provided that no act or failure
to act on the Executive's part will be considered willful if done, or omitted to
be done, by him in good faith and with reasonable belief that his action or
omission was in the best interest of the Company.
(e) "Change in Control" means "change in control" as such term is
defined in that certain severance agreement between the Executive and the
Company dated September 16, 1999 (the "CIC Agreement").
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means the Management Development and Compensation
Committee of the Board, that may act on behalf of the Company with respect to
the Agreement as provided herein.
(h) "Company" means Air Products and Chemicals, Inc. The term
"Company" shall include any Subsidiary or any successor to Air Products such as
a corporation succeeding to the business of Air Products or any Subsidiary, by
merger, consolidation or liquidation, or purchase of assets or stock or similar
transaction.
(i) "Constructive Termination" means the termination of the
Executive's employment with the Company by the Executive as a result of one of
the following events, without the Executive's express written consent unless the
event is remedied by the Company within 30 days after receipt of written notice
thereof given by the Executive:
(i) A material change in or failure to hold the titles
and positions of Chairman of the Board and Chief Executive Officer, other than a
circumstance where the Executive continues to serve as a director but
relinquishes the title and position of Chairman of the Board in order for the
Company to comply with applicable law or conform to stock exchange listing
standards;
(ii) A material reduction in overall compensation
opportunity, taking into account combined Salary and Bonus and Long-Term
Incentive Plan compensation as in effect on the date of this Agreement or
thereafter, if higher; or
(iii) A termination of or a material adverse amendment to
this Agreement.
2
<PAGE>
In no event shall the termination of the Executive's employment with the Company
on account of death, voluntary resignation other than on account of Constructive
Termination, Disability or Cause be deemed to be a Constructive Termination.
A termination of employment by the Executive on account of Constructive
Termination shall be effectuated by giving the Company written notice of the
termination, setting forth in reasonable detail the specific conduct of the
Company that constitutes Constructive Termination and the specific provision(s)
of this Agreement on which the Executive relies. A termination of employment by
the Executive on account of Constructive Termination shall be effective as of
the first business day following the end of the Company's 30-day cure period,
unless a later date is agreed upon by the Company and the Executive.
(j) "Disability" means the Executive incurs a permanent disability
within the meaning of the Company's long-term disability plan.
(k) "Employment Termination Date" means the date specified or
agreed to by the Executive or the Committee in writing, as applicable, on which
the active employment relationship between the Executive and the Company is to
be and is in fact terminated.
(l) "Fiscal Year" means each period commencing on October 1 and
ending on the subsequent September 30 during which this Agreement is in effect.
(m) "Involuntary Termination" means the termination of the
Executive's active employment relationship with the Company either: (i) by the
Company for any reason other than Cause, death, or Disability not later than the
thirtieth day following written notice of such termination by the Company to the
Executive; or (ii) on account of a Constructive Termination.
(n) "Long-Term Incentive Plan" means the Air Products Long-Term
Incentive Plan approved by Air Products' shareholders most recently on January
23, 2003, together with all predecessor and similar successor or substitute
intermediate and/or long-term incentive compensation plan or program.
(o) "Salary" means an amount equal to the annual rate of the
Executive's base salary payable to the Executive in all capacities with the
Company and its Subsidiaries or affiliates for the Fiscal Year in which the
Executive's Employment Termination Date occurs.
(p) "Subsidiary" means any corporation in which the Company owns,
directly or indirectly, more than 50% of the voting securities
2. Involuntary Termination. In the event that the Executive's employment
is terminated on account of an Involuntary Termination, upon the Executive's
Employment Termination Date and his satisfaction of the conditions specified in
Section 3, the
3
<PAGE>
Executive shall be entitled to receive the Benefits described in (a) through (c)
below in accordance with the payout provisions of Section 4:
(a) Cash Benefits.
(i) a cash severance Benefit equal to three times the
aggregate of the Executive's Salary plus Bonus,
(ii) an amount in lieu of the Executive's bonus which
would have been paid under the Air Products Annual Incentive Plan or similar
successor or substitute annual incentive plan or program for the Fiscal Year in
which the Employment Termination Date occurs, equal to the Bonus multiplied by a
fraction, the numerator of which is the number of days in the current Fiscal
Year through the Executive's Employment Termination Date, and the denominator of
which is 365,
(iii) any accrued but unpaid vacation pay, any similar
unpaid items that have accrued and to which the Executive has become entitled as
of his Employment Termination Date, including declared but unpaid bonuses and
unreimbursed employee business expenses,
(iv) a $40,000 stipend to cover miscellaneous transition
expenses including outplacement assistance and legal fees incurred at the time
of or in connection with the Involuntary Termination, and
(v) supplemental pension benefits paid by the Company
equal to the excess of (i) those pension benefits calculated by adding three
years of service to the Executive's actual service credited for benefit accrual
purposes under the the Company's Pension Plan for Salaried Employees and
Supplementary Pension Plan (together, the "Pension Plans") and assuming that the
Executive had satisfied as of the Employment Termination Date the age and
service requirements for any early retirement subsidy available under the
Pension Plans over (ii) the Executive's accrued vested pension benefits under
the Pension Plans as of the Employment Termination Date. The supplemental
pension benefits payable hereunder shall be paid at the same time and in the
same form as the Executive elects for his Supplementary Pension Plan benefit.
(b) Long-Term Incentive Plan Benefits. In addition to the Benefits
payable under (a) above, the Executive's outstanding Long-Term Incentive Plan
awards shall be treated as follows:
(i) All stock options and stock appreciation rights which
are outstanding as of the Executive's Employment Termination Date shall continue
to vest in accordance with their normal vesting schedule (if not fully vested as
of the Employment Termination Date) and shall remain in effect for the remainder
of their stated term, as set forth in the agreements governing such awards, in
each case as if the Executive had continued in employment following the
Employment Termination Date; provided, however, that the number of shares
subject to any stock option granted less than one year
4
<PAGE>
prior to the Employment Termination Date shall be reduced by multiplying the
number of shares by a fraction the numerator of which is the number of days
worked in the Fiscal Year in which the Employment Termination Date occurs and
the denominator of which is 365.
(ii) All unearned performance shares or other awards with
performance-based vesting or earnout shall earn out or vest consistent with the
decision made by or on behalf of the Company for other senior executives for the
relevant cycle and shall be paid out promptly following earn-out or vesting (or,
if later, the end of the revocation period of the release described in Section
3).
(iii) All awards, including career shares and earned but
deferred performance shares, which are subject to time-based vesting or other
non-performance-based conditions, shall be paid out promptly following the
Executive's Employment Termination Date (or, if later, the end of the revocation
period of the release described in Section 3).
(c) Medical Benefits. For the period described in the next
sentence, the Company will provide to the Executive and his dependents benefits
equivalent to those provided by the Company under the medical plan in which the
Executive was participating on the Employment Termination Date; provided,
however, that the Company may elect to pay the Executive cash in lieu of
coverage under such plans or programs in an amount equal to Executive's
after-tax cost of continuing such coverage, where such coverage may not be
continued (or where such continuation would adversely affect the tax status of
the plan or program pursuant to which the coverage is provided). The period
during which any of these benefits shall be provided shall commence on the day
after the revocation period for the release required by Section 3 expires, but
retroactive to the Employment Termination Date, and shall continue until the
earliest of (i) the Executive's death, (ii) the third anniversary of the
Executive's Employment Termination Date, or (iii) the date on which any such
benefit would otherwise have ceased to be provided to the Executive under any
such plans or programs, as in effect on the Executive's Employment Termination
Date had the Executive not incurred an Employment Termination Date. In the event
of the Executive's death during the period specified above, benefits in respect
of the Executive or the Executive's beneficiaries shall be provided in
accordance with the terms of each of the plans or programs applicable to active
employees of the Company. Any continuation of health benefits pursuant to this
subparagraph shall not run concurrent with any continuation rights owed to the
Executive pursuant to the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"), and for purposes of applying COBRA with respect to
the Executive's coverage under any group health plan, the end of coverage under
this subparagraph shall be deemed to be the date of a qualifying event resulting
from the termination of a covered employee.
3. Conditions to Entitlement to Benefit. To be eligible to receive any
Benefits under this Agreement after the Executive's Employment Termination Date
has been set, the Executive must (a) continue in his then current office and
perform such duties for the
5
<PAGE>
Company as are typically related to the Executive's position (or such other
position as the Committee reasonably requests) including identifying, recruiting
and/or transitioning the Executive's successor, in all events performing all
assigned duties in the manner reasonably directed by the Committee, in its sole
discretion, but consistent with his title and position with the Company, and
cease his employment on, and not retire before, the Employment Termination Date;
(b) execute a release and discharge (without revocation) of the Company, in
substantially the form attached hereto as Appendix A, from any and all claims,
demands or causes of action (other than as provided in said Appendix A), within
21 days of its presentation to the Executive; and (c) execute the
Noncompetition, Nonsolicitation, and Nondisparagement Agreement that extends for
the three-year period following the Executive's Employment Termination Date in
substantially the form attached hereto as Appendix B, with such changes therein
as the Committee shall reasonably determine to be required by applicable law or
regulation, or as otherwise mutually agreed. Benefits due hereunder shall be
paid in accordance with Section 4 provided that the Executive has complied in
all respects with the requirements of this Section 3. On the date that the
Executive's release becomes irrevocable, the Company shall execute a release in
favor of the Executive, substantially in the form attached hereto as Annex 1,
with such changes therein as the Committee shall reasonably determine to be
required by applicable law.
4. Method of Payment. The cash Benefits to which the Executive is
entitled, as determined pursuant to Section 2(a) hereof, shall be paid in a lump
sum following the Executive's Employment Termination Date, subject to all
employment and withholding taxes applicable to the type of payments made. In
general, payments shall be made within 30 days after the Executive's Employment
Termination Date or, if later, after the expiration of any revocation period for
the release signed by the Executive pursuant to Section 3. Long-Term Incentive
Plan awards, referred to in Section 3, will be paid in the form, and subject to
applicable withholding, as provided in the respective award agreements.
5. Death or Disability.
(a) If the Executive incurs a Disability or dies before the
Employment Termination Date has been set, no payments or other benefits will be
due and owing under this Agreement to the Executive or, in the case of his
death, to his estate or beneficiary.
(b) If the Executive incurs a Disability or dies after his
Employment Termination Date has been set but not attained, the Committee shall
cause any payments and benefits due under this Agreement to be paid to the
Executive or, in the case of his death, to the Executive's designated
beneficiary or to his estate; provided, however, that if the Executive dies
after he has retired prior to attaining the Employment Termination Date, no
payments and benefits shall be due and owing under this Agreement to the
Executive's designated beneficiary, his estate, or any other person. For this
purpose, "retire" means to have separated from employment and begun to receive
an immediate pension benefit under a Company-sponsored defined benefit pension
plan.
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<PAGE>
The Executive's beneficiary designation shall be made in the manner, and at the
time, prescribed by the Committee in its sole discretion. In the absence of an
effective beneficiary designation hereunder, the Executive's estate shall be
deemed to be the designated beneficiary.
6. Change in Control. In the event of a Change in Control of the Company,
the CIC Agreement shall continue in full force and effect and this Agreement
shall be null and void; and, if the Change in Control occurs after the
Employment Termination Date has been set but before the Employment Termination
Date, the CIC Agreement shall continue in full force and effect and the
Employment Termination Date under this Agreement shall be treated under the CIC
Agreement as the Executive's "Employment Termination Date" for other than death,
"Disability" or "Cause", as such terms appearing in quotations are defined in
the CIC Agreement, and this Agreement shall be null and void.
7. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
for which the Executive may qualify. Vested benefits and other amounts that the
Executive is otherwise entitled to receive on or after the Employment
Termination Date under any plan, policy, practice or program of, or any contract
or agreement with, the Company or any of its affiliated companies shall be
payable in accordance with such plan, policy, practice, program, contract or
agreement, as the case may be, except as explicitly modified by this Agreement.
8. No Mitigation. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and such
amounts shall not be reduced, regardless of whether the Executive obtains other
employment.
9. Successors and Assigns.
(a) This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
7
<PAGE>
10. Arbitration. The Company and the Executive mutually consent to the
resolution by arbitration, in accordance with the National Rules for the
Resolution of Employment Disputes of the American Arbitration Association, to be
held in Philadelphia, Pennsylvania, of all claims or controversies, other than a
claim which is primarily for equitable relief or an injunction to enforce a
right or remedy under Appendix B of this Agreement, arising out of the
Executive's employment (or its termination) that the Company may have against
the Executive or that the Executive may have against the Company or against its
officers, directors, shareholders, employees or agents in their capacity as
such. The parties shall share the fees and costs of the arbitrator and all other
costs in connection with any arbitration and each party shall bear its legal
fees and expenses. Any such arbitration proceedings must be instituted by the
party requesting a resolution within twelve months of the time that party knew,
or should have known, of the dispute as to the events or facts giving rise to
the claims or controversies requiring resolution. The failure to institute
arbitration proceedings within such period shall constitute an absolute bar to
the institution of any proceedings and a waiver of all claims.
11. Legal Fees. The Company agrees to pay all legal fees reasonably
incurred by the Executive in connection with the negotiation and preparation of
this Agreement.
12. Notice. All notices and other communications under this Agreement shall
be in writing and shall be given by hand to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
John P. Jones III
220 North Main Street
Allentown, PA 18104
With a required copy to:
Paul Kimbol, Esquire
Dechert LLP
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
If to the Company:
Air Products and Chemicals, Inc.
7201 Hamilton Boulevard
Allentown, PA 18195-1501
Attention: General Counsel
8
<PAGE>
With a required copy to:
Robert J. Lichtenstein, Esquire
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
or to such other address as either party furnishes to the other in writing in
accordance with this Section 12. Notices and communications shall be effective
when actually received by the addressee.
13. Miscellaneous.
(a) This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Pennsylvania, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(c) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(d) The Executive's or the Company's failure to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(e) This Agreement supersedes and replaces all prior agreements
except the CIC Agreement and the Employee Patent, Copyright and Confidential
Information Agreement attached hereto as Appendix C, and sets forth the entire
understanding among the parties hereto with respect to the subject matter hereof
and cannot be changed, modified, extended or terminated except upon written
amendment approved and executed by the Executive.
(f) This Agreement may be executed in several counterparts, each
of which shall be deemed an original, and said counterparts shall constitute but
one and the same instrument.
9
<PAGE>
(g) The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment to the extent
necessary to the intended preservation of such rights and obligations.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of the Committee, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
AIR PRODUCTS AND CHEMICALS, INC.
By: /s/ James F. Hardymon
----------------------------------
Name: James F. Hardymon
Title: Chairman, Management Development and
Compensation Committee
EXECUTIVE
/s/ John P. Jones III
- -------------------------------------
John P. Jones III
10
<PAGE>
APPENDIX A
GENERAL RELEASE
1. John P. Jones III (the "Executive"), for and in consideration of (a)
certain severance benefits to be paid and provided to the Executive by Air
Products and Chemicals, Inc. (the "Company") under the written severance
agreement between the Company and the Executive dated November 20, 2003 (the
"Severance Agreement") and (b) the Company's execution of a release in favor of
the Executive, on the date this General Release becomes irrevocable,
substantially in the form attached hereto as Annex 1, and conditioned upon such
payments and provisions, does hereby REMISE, RELEASE, AND FOREVER DISCHARGE the
Company, and each of its past or present subsidiaries and affiliates, its and
their past or present officers, directors, shareholders, employees and agents,
their respective successors and assigns, heirs, executors and administrators,
the pension and employee benefit plans of the Company, or of its past or present
subsidiaries or affiliates, and the past or present trustees, administrators,
agents, or employees of the pension and employee benefit plans (hereinafter
collectively included within the term the "Company"), acting in any capacity
whatsoever, of and from any and all manner of actions and causes of actions,
suits, debts, claims and demands whatsoever in law or in equity, which the
Executive ever had, now have, or hereafter may have, or which the Executive's
heirs, executors or administrators hereafter may have, by reason of any matter,
cause or thing whatsoever from the beginning of the Executive's employment with
the Company to the date of this Release and particularly, but without limitation
of the foregoing general terms, any claims arising from or relating in any way
to the Executive's employment relationship and the termination of the
Executive's employment relationship with the Company, including but not limited
to, any claims which have been asserted, could have been asserted, or could be
asserted now or in the future under any federal, state or local laws, including
any claims under the Pennsylvania Human Relations Act, 43 PA. C.S.A. Sections
951 et seq., as amended, the Rehabilitation Act of 1973, 29 USC Sections 701 et
seq., as amended, Title VII of the Civil Rights Act of 1964, 42 USC Sections
2000e et seq., as amended, the Civil Rights Act of 1991, 2 USC Sections 60 et
seq., as applicable, the Age Discrimination in Employment Act of 1967, 29 USC
Sections 621 et seq., as amended ("ADEA"), the Americans with Disabilities Act,
29 USC Sections 706 et seq., and the Employee Retirement Income Security Act of
1974, 29 USC Sections 301 et seq., as amended, any contracts between the Company
and the Executive and any common law claims now or hereafter recognized and all
claims for counsel fees and costs; provided, however, that this Release shall
not apply to any entitlements under the terms of the Severance Agreement or
under any other plans or programs of the Company in which the Executive
participated and under which the Executive has accrued and become entitled to a
benefit other than under any Company separation or severance plan or programs.
Notwithstanding the foregoing, the Executive understands that the Executive
shall be indemnified by the Company as to any liability, cost or expense for
which the Executive would have been entitled to be indemnified during
employment, including for service as a director, in accordance with the
Company's certificate of incorporation or insurance coverages in force for
employees of the Company, as reviewed from time to time generally, in the
future, serving in executive capacities for actions taken on behalf of the
11
<PAGE>
Company within the scope of the Executive's service as a director of and/or
employment by the Company.
2. Subject to the limitations of paragraph 1 above, the Executive
expressly waives all rights afforded by any statute which expressly limits the
effect of a release with respect to unknown claims. The Executive understands
the significance of this release of unknown claims and the waiver of statutory
protection against a release of unknown claims.
3. The Executive hereby agrees and recognizes that his employment by the
Company was/will be permanently and irrevocably severed on ___________________,
20__ and the Company has no obligation, contractual or otherwise to the
Executive to hire, rehire or reemploy the Executive in the future. The Executive
acknowledges that the terms of the Severance Agreement provide him with payments
and benefits which are in addition to any amounts to which the Executive
otherwise would have been entitled.
4. The Executive hereby agrees and acknowledges that the payments and
benefits provided by the Company are to bring about an amicable resolution of
the Executive's employment arrangements and are not to be construed as an
admission of any violation of any federal, state or local statute or regulation,
or of any duty owed by the Company and that the Severance Agreement was, and
this Release is, executed voluntarily to provide an amicable resolution of the
Executive's employment relationship with the Company.
5. The Executive hereby acknowledges that nothing in this Release shall
prohibit or restrict the Executive from: (i) making any disclosure of
information required by law; (ii) providing information to, or testifying or
otherwise assisting in any investigation or proceeding brought by, any federal
regulatory or law enforcement agency or legislative body, any self-regulatory
organization, or the Company's designated legal, compliance or human resources
officers; or (iii) filing, testifying, participating in or otherwise assisting
in a proceeding relating to an alleged violation of any federal, state or
municipal law relating to fraud, or any rule or regulation of the Securities and
Exchange Commission or any self-regulatory organization.
6. The Executive hereby certifies that the Executive has read the terms of
this Release, that the Executive has been advised by the Company to discuss it
with his attorney, that the Executive has received the advice of counsel and
that the Executive understand its terms and effects. The Executive acknowledges,
further, that the Executive is executing this Release of his own volition with a
full understanding of its terms and effects and with the intention of releasing
all claims recited herein in exchange for the consideration described in the
Agreement, which the Executive acknowledges is adequate and satisfactory to his.
None of the above named persons, nor their agents, representatives, or attorneys
have made any representations to the Executive concerning the terms or effects
of this Release other than those contained herein.
7. The Executive hereby acknowledges that the Executive has been informed
that he has the right to consider this Release for a period of 21 days prior to
execution. The
12
<PAGE>
Executive also understands that the Executive has the right to revoke this
Release for a period of seven days following execution by giving written notice
to the Company at 7201 Hamilton Boulevard, Allentown Pennsylvania 18195-1501,
Attention: General Counsel.
8. The Executive hereby further acknowledges that the terms of Appendix B
of the Severance Agreement and the provisions of the Employee Patent, Copyright
and Confidential Information Agreement entered into by him effective as of
November 20, 2003 (a copy of which is attached to the Severance Agreement as
Appendix C) continue to apply for the balance of the time periods provided
therein and that the Executive will abide by and fully perform such obligations.
9. This Release shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania without giving effect to its conflict of laws
provisions.
Intending to be legally bound hereby, the Executive execute the foregoing
Release this ___ day of _____________, 20 ___.
___________________________ ___________________________
Witness Executive
13
<PAGE>
ANNEX 1
GENERAL RELEASE
1. Air Products and Chemicals, Inc. (the "Company") on its behalf and on
behalf of its subsidiaries and affiliates, their officers, directors, partners,
employees and agents, their respective successors and assigns, heirs, executors
and administrators (hereinafter collectively included within the term
"Company"), for and in consideration of John P. Jones III (the "Executive")
executing the general release of claims against the Company dated
_______________ (the "Executive's Release of the Company"), and other good and
valuable consideration, does hereby REMISE, RELEASE, AND FOREVER DISCHARGE the
Executive, his assigns, heirs, executors and administrators (hereinafter
collectively included within the term "Executive"), acting in any capacity
whatsoever, of and from any and all manner of actions and causes of actions,
suits, debts, claims and demands whatsoever in law or in equity, which it ever
had, now have, or hereafter may have, by reason of any matter, cause or thing
whatsoever from the beginning of the Executive's employment with the Company to
the date of this Release arising from or relating in any way to the Executive's
employment relationship and the termination of his employment relationship with
the Company, including but not limited to, any claims which have been asserted,
could have been asserted, or could be asserted now or in the future under any
federal, state or local laws, any contracts between the Company and the
Executive, other than the Executive's Release of the Company, the Executive's
Noncompetition, Nonsolicitation, and Nondisparagement Agreement with the
Company, and the Employee Patent, Copyright and Confidential Information
Agreement entered into by the Executive on November 20, 2003, and any common law
claims now or hereafter recognized and all claims for counsel fees and costs,
but in no event shall this release apply to any action attributable to a
criminal act or to an action which Executive knew or should have known was
outside the scope of the Executive's employment.
2. Subject to the limitations of paragraph 1 above, the Company expressly
waives all rights afforded by any statute which expressly limits the effect of a
release with respect to unknown claims. The Company understands the significance
of this release of unknown claims and the waiver of statutory protection against
a release of unknown claims.
3. The Company hereby certifies that it has been advised by counsel in the
preparation and review of this Release.
4. This Release shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania without giving effect to its conflict of laws
provisions.
Intending to be legally bound hereby, Air Products and Chemicals, Inc. executes
the foregoing Release this ____ day of ____________, 20__.
_______________________________ By:________________________
Witness
14
<PAGE>
APPENDIX B
NONCOMPETITION, NONSOLICITATION, AND NONDISPARAGEMENT
AGREEMENT
John P. Jones III (the "Executive"), for and in consideration of (a) certain
severance benefits to be paid and provided to the Executive by Air Products and
Chemicals, Inc. (the "Company") under the written severance agreement between
the Company and the Executive dated November 20, 2003 (the "Severance
Agreement"), and (b) the Company's execution of a release in favor of the
Executive, hereby covenants and agrees as follows:
1. The Executive acknowledges that the Company is generally engaged in
business throughout the world. During the Executive's employment by the Company
and for three years after the Executive's Employment Termination Date (as
defined in the Severance Agreement), the Executive agrees that he will not,
unless acting with the prior written consent of the Company, directly or
indirectly, own, manage, control, or participate in the ownership, management,
or control of, or be employed or engaged by, or otherwise affiliated or
associated with, as an officer, director, employee, consultant, independent
contractor, or otherwise, any corporation, partnership, proprietorship, firm,
association, or other business entity which is engaged in any manner anywhere in
the industrial gas business, the chemicals business, the home healthcare
business, i.e., the provision by the Company of homecare products and services
related to durable medical equipment, respiratory therapy, infusion services
and/or enteral therapy and related pharmacy services, or any other business
which, as of the Employment Termination Date, is engaged in by the Company, has
been reviewed with the Board for development to be owned or managed by the
Company, and/or has been divested by the Company but as to which the Company has
an obligation to refrain from involvement, but only for so long as such
restriction applies to the Company; provided, however, that (i) with respect to
the Company's chemical business the Executive and the Company agree that he will
be so limited only with respect to Bayer Corporation, BASF Corporation, Imperial
Chemical Industries, PLC, Forbo Group, Rohm & Haas Co., Lyondell Chemical
Company, National Starch and Chemical Company, Wacker Group, and Celanese AG and
such other chemical company or companies which the Company may reasonably
designate as of the Employment Termination Date based on the then business of
the Company in relation to such other entities but consistent with the type of
companies already listed, and (ii) with respect to the Company's home healthcare
business the Executive and the Company agree that he will be so limited only
with respect to Apria Healthcare Group, Lincare/Lincare Holdings Inc., Rotech
Healthcare Inc., American HomePatient, Praxair, and Air Liquide unless and until
the Company generates at least 15% of its gross revenues from the home
healthcare business ; and provided further, however, that the ownership of not
more than 5% of the equity of a publicly-traded entity shall not be deemed to be
a violation of this paragraph.
2. The Executive also agrees that he will not, directly or indirectly,
during the period described in paragraph (1), induce any person who is an
employee, officer, director, or
15
<PAGE>
agent of the Company, to terminate such relationship, or employ, assist in
employing or otherwise be associated in business with any present or former
employee or officer of the Company, including without limitation those who
commence such positions with the Company after the Employment Termination Date.
3. For the purposes of this Agreement, the term "Company" shall be deemed
to include Air Products and the subsidiaries and affiliates of Air Products as
in existence at any relevant date.
4. The Executive acknowledges and agrees that the restrictions contained
in this Agreement are reasonable and necessary to protect and preserve the
legitimate interests, properties, goodwill and business of the Company, that the
Company would not have entered into this Agreement in the absence of such
restrictions and that irreparable injury will be suffered by the Company should
the Executive breach the provisions of this Section. The Executive represents
and acknowledges that (i) the Executive has been advised by the Company to
consult the Executive's own legal counsel in respect of this Agreement, (ii) the
Executive has consulted with and been advised by his own counsel in respect of
this Agreement, and (iii) the Executive has had full opportunity, prior to
execution of this Agreement, to review thoroughly this Agreement with the
Executive's counsel.
5. The Executive further acknowledges and agrees that a breach of the
restrictions in this Agreement will not be adequately compensated by monetary
damages. The Executive agrees that the Company shall be entitled to (i)
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, or posting of a bond, (ii) an equitable accounting of all
earnings, profits and other benefits arising from any violation of this
Agreement, and (iii) enforce the terms, including requiring forfeitures, under
other plans, programs and agreements under which the Executive has been granted
a benefit contingent on a covenant similar to those contained in this Agreement,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that the provisions of this
Agreement should ever be adjudicated to exceed the limitations permitted by
applicable law in any jurisdiction, it is the intention of the parties that the
provision shall be amended to the extent of the maximum limitations permitted by
applicable law, that such amendment shall apply only within the jurisdiction of
the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.
6. If the Executive breaches his obligations under this Agreement, he
agrees that suit may be brought, and that he consents to personal jurisdiction,
in the United States District Court for the Eastern District of Pennsylvania, or
if such court does not have jurisdiction or will not accept jurisdiction, in any
court of general jurisdiction in Allentown, Pennsylvania; consents to the
non-exclusive jurisdiction of any such court in any such suit, action or
proceeding; and waives any objection which he may have to the laying of venue of
any such suit, action or proceeding in any such court. The Executive also
16
<PAGE>
irrevocably and unconditionally consents to the service of any process,
pleadings, notices or other papers.
7. The Executive further agrees, covenants, and promises that he will not
in any way communicate the terms of this Agreement to any person other than his
immediate family and his attorney and financial consultant or when necessary to
advise a third party of his obligations under this Agreement. Notwithstanding
the foregoing, the Company and Executive also agree that for a period of three
years following the Employment Termination Date, the Executive will provide and
that at all times after the date hereof the Company may similarly provide, with
prior written notice to the Executive, a copy of this Agreement to any business
or enterprise (i) which the Executive may directly or indirectly own, manage,
operate, finance, join, control or of which he may participate in the ownership,
management, operation, financing, or control, or (ii) with which the Executive
may be connected as an officer, director, employee, partner, principal, agent,
representative, consultant, or otherwise, or in connection with which the
Executive may use or permit to be used the Executive's name. The Executive
agrees not to disparage the name, business reputation, or business practices of
the Company or its subsidiaries or affiliates, or its or their officers,
employees, or directors, and the Company agrees not to disparage the name or
business reputation of the Executive.
8. The Executive hereby expressly acknowledges and agrees that (i) the
provisions of the Employee Patent, Copyright and Confidential Information
Agreement entered into by him on November 20, 2003 (a copy of which is attached
hereto as Appendix C), shall continue to apply in accordance with its terms, and
(ii) the provisions of the Executive's outstanding incentive award agreements
granted under the Company's Long-Term Incentive Plan, as defined in the
Agreement, shall continue to apply in accordance with their terms except as
otherwise provided in Section 2 of the Severance Agreement and except that, for
purposes of interpreting the provisions of the first indented clause of Section
2 of the "Conditions"(as defined in, and as set forth in Exhibit A to, each of
the Executive's award agreements under the Long-Term Incentive Plan), "in
Competition with the Company" shall be construed as provided in this Agreement.
9. No failure or delay on the part of the Company in exercising any power
or right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power preclude any further or other
exercise thereof or the exercise of any other right or power hereunder. No
modification or waiver of any provision of this Agreement or consent to any
departure by any party therefrom shall in any event be effective until the same
shall be in writing and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on any party in any case shall entitle such party to any other or further
notice or demand in similar or other circumstances.
10. This Agreement shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania without giving effect to its conflict of laws
provisions.
17
<PAGE>
This Agreement shall extend to and inure to the benefit of the respective
successors and assigns of the Company.
Intending to be legally bound hereby, the Executive execute the Noncompetition,
Nonsolicitation, and Nondisparagement Agreement this ___ day of _____________,
20 ___.
___________________________ ________________________
Witness Executive
18
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[AIR PRODUCTS LOGO]
EMPLOYEE PATENT, COPYRIGHT AND CONFIDENTIAL INFORMATION AGREEMENT
In consideration of my employment by Air Products and Chemicals, Inc., its
divisions, affiliates and subsidiaries (all, collectively, referred to
hereinafter as the Company), I agree that I will:
A. Communicate to the Company promptly and fully in writing, in such format as
the Company may deem appropriate, all inventions made or conceived by me
whether alone or jointly with others from my time of entering the Company's
employ until I leave, and as requested, to assign to the Company those of
such inventions which (1) relate to a field of business, research or
investigation in which the Company has an interest, or (2) result from, or
are suggested by, any work which I may do for or on behalf of the Company;
B. Make and maintain adequate permanent records of all such inventions, in the
form of memoranda, notebook entries, drawings, print-outs or reports
relating thereto, in keeping with then current Company procedures. I agree
that these records, as well as the inventions themselves, shall be and
remain the property of the Company at all times;
C. Cooperate with and assist the Company and its nominees, at their sole
expense, during my employment and thereafter, in securing and protecting
patent rights in which I am a named inventor or other similar rights in the
United States and foreign countries. In this connection, I specifically
agree to execute all papers which the Company deems necessary to protect its
interests including the execution of assignments of invention and to give
evidence and testimony, as may be necessary, to secure and enforce the
Company's rights;
D. Except as the Company may otherwise authorize in writing, not use or
disclose to others, reproduce or copy at any time, except as my Company
duties may require, either during or subsequent to my employment, any
private information of the Company or of others as to whom the Company has
an obligation of confidentiality which may come to my attention or be
developed by me during the course of my employment other than information
which is or becomes public knowledge in a lawful manner;
E. Upon termination of my employment with the Company, deliver to it all
records, data and memoranda of any nature which are in my possession or
control and which relate to my employment or the activities of the Company,
including, for example, notebooks, diaries, reports, photographs, films,
manuals and computer software media.
F. Following termination of my employment, honor and abide by my continuing
obligation of confidentiality. I agree that, in any situation which arises
and involves a question of my freedom to disclose particular information to
a subsequent employer or anyone else, I will contact the Company in writing
and elicit its opinion on my freedom to make such a disclosure.
It is also agreed that:
G. All creative works which I produce during my employment and which relate to
the Company's business or technology shall be considered to have been
prepared for the Company as a part of and in the course of my employment.
Any such work shall be owned by the Company regardless of whether it would
otherwise be considered a work made for hire. Such works shall include,
among other things, computer programs and documentation, non-dramatic
literary works (e.g. professional papers and journal articles), visual arts
(e.g. pictorial, graphic and three dimensional), sound recordings, motion
pictures and other audiovisual works.
H. Nothing in this agreement shall bind me or the Company to any specific
period of service or employment, nor shall the termination of such
employment in any way affect the obligations assumed by me herein. Further,
this agreement replaces any and all prior agreements or understandings
between me and the Company concerning these subjects;
I. This agreement shall bind my heirs, executors, and administrators, and shall
inure to the benefit of the successors and assigns of the Company.
J. I will not disclose to any other employee of the Company any information as
to which I owe a continuing obligation of confidentiality to a previous
employer or client. Any inventions, patented or unpatented, which were made
or conceived by me prior to my employment are excluded from the operation of
this agreement, and I warrant that there are no such inventions, other than
those listed by me in the space provided on the back of this document.
WITNESS: ____________________________ ______________________________(L.S.)
Signature of Employee
DATED:
(LIST INVENTION INFORMATION ON THE BACK OF THIS AGREEMENT.)
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<PAGE>
APPENDIX C
<TABLE>
<CAPTION>
Description Patent Nos. or Assignment or Disposition
of Application Nos. Employee Has Made or
Invention (if any) Will Make of Invention
<S> <C> <C>
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
_______________________ ________________________ _________________________
</TABLE>
20
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>7
<FILENAME>y92114exv12.txt
<DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE>
Exhibit 12
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Year Ended 30 September
----------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income from continuing operations $ 450.5 $ 124.2 $ 465.6 $ 525.4 $ 400.2
Add (deduct):
Provision for income taxes 209.5 (7.5) 196.2 247.5 154.0
Fixed charges, excluding capitalized interest 194.4 232.6 226.5 150.3 150.6
Capitalized interest amortized during the period 6.1 6.6 7.1 7.2 6.5
Undistributed earnings of
less-than-fifty-percent-owned affiliates (44.5) (32.1) (34.3) (42.8) (2.6)
-------- -------- -------- -------- --------
Earnings, as adjusted $ 816.0 $ 323.8 $ 861.1 $ 887.6 $ 708.7
======== ======== ======== ======== ========
FIXED CHARGES:
Interest on indebtedness, including capital lease
obligations $ 175.4 $ 210.3 $ 201.6 $ 126.4 $ 126.9
Capitalized interest 24.7 19.7 8.8 11.7 6.2
Amortization of debt discount premium and expense 1.3 3.1 5.6 2.2 2.1
Portion of rents under operating leases
representative of the interest factor 17.7 19.3 19.3 21.7 21.6
-------- -------- -------- -------- --------
Fixed charges $ 219.1 $ 252.4 $ 235.3 $ 162.0 $ 156.8
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES: 3.7 1.3 3.7 5.5 4.5
======== ======== ======== ======== ========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>8
<FILENAME>y92114exv13.txt
<DESCRIPTION>2003 FINANCIAL REVIEW SECTION OF THE ANNUAL REPORT
<TEXT>
<PAGE>
Exhibit 13
FINANCIAL REVIEW
Contents
25 MANAGEMENT'S DISCUSSION AND ANALYSIS
43 COMPANY RESPONSIBILITY FOR FINANCIAL
STATEMENTS
44 REPORTS OF INDEPENDENT AUDITORS
46 THE FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
50 NOTES TO THE FINANCIAL STATEMENTS
1. MAJOR ACCOUNTING POLICIES
2. NEW ACCOUNTING STANDARDS
3. GLOBAL COST REDUCTION PLANS
4. ACQUISITIONS
5. DIVESTITURES
6. FINANCIAL INSTRUMENTS
7. INVENTORIES
8. SUMMARIZED FINANCIAL INFORMATION OF
EQUITY AFFILIATES
9. PLANT AND EQUIPMENT
10. GOODWILL AND INTANGIBLE ASSETS
11. LONG-TERM DEBT
12. LEASES
13. CAPITAL STOCK
14. STOCK OPTION AND AWARD PLANS
15. EARNINGS PER SHARE
16. INCOME TAXES
17. PENSION AND OTHER POSTRETIREMENT BENEFITS
18. OTHER COMMITMENTS AND CONTINGENCIES
19. SUPPLEMENTAL INFORMATION
20. BUSINESS SEGMENT AND GEOGRAPHIC
INFORMATION
74 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
(millions of dollars, except per share)
All comparisons in the discussion are to the corresponding prior year unless
otherwise stated. All amounts presented are in accordance with accounting
principles generally accepted in the United States of America.
AIR PRODUCTS AND CHEMICALS, INC. AND ITS SUBSIDIARIES (the company) serves
customers in technology, energy, healthcare and industrial markets. The company
offers a broad portfolio of products, services and solutions, providing
atmospheric gases, process and specialty gases, performance materials and
chemical intermediates. Geographically diverse, with operations in over 30
countries, the company has sales of $6.3 billion, assets of $9.4 billion and a
worldwide workforce of 18,500 employees.
2003 OVERVIEW
The company faced significant challenges this year, including: a slow
manufacturing environment, cyclical lows in the Chemicals and Equipment
businesses, high and volatile energy and raw material costs, and an electronics
industry downturn that continued through the first half of the year. However, in
spite of the difficult environment, the company continued to control its costs
and make progress in portfolio management actions. As part of its ongoing
portfolio management activities, the company continued to execute its growth
strategies by entering the U.S. homecare market by acquiring American Homecare
Supply, LLC (AHS) and other small homecare companies and by acquiring the
Electronic Chemicals business of Ashland Specialty Chemical Company. A global
cost reduction plan was announced in the third quarter of the fiscal year, and
the company is on track to achieve associated cost savings. The company
completed the sale of its Canadian packaged gas business and is currently
pursuing the sale of its European methylamines and derivatives business. These
programs implemented to improve the company's businesses were overshadowed by
the weak manufacturing environment and high raw material and energy costs. Going
forward, the company will continue to focus on growth markets, leading market
positions, operating leverage and continued capital discipline. An analysis of
2003 financial results and the company's outlook for 2004 will be discussed
throughout the Management's Discussion and Analysis, which follows.
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
2003 2002 2001
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $ 6,297.3 $ 5,401.2 $ 5,857.8
Cost of sales 4,613.1 3,815.7 4,216.4
Selling and administrative 832.6 704.3 698.7
Research and development 121.1 120.3 121.8
Other (income) expense, net (26.5) (37.1) (31.5)
Global cost reduction plans, net 152.5 23.1 107.0
OPERATING INCOME 604.5 774.9 745.4
Income from equity affiliates,
net of related expenses 84.4 76.2 81.2
Gain on sale of U.S. packaged
gas business -- 55.7 --
Gain on divestiture of interest in
cogeneration facilities -- -- 101.6
Loss on early retirement of debt -- -- (75.8)
Interest expense 123.5 122.3 191.2
Effective tax rate 26.9% 31.4% 29.0%
NET INCOME 397.3 525.4 465.6
BASIC EARNINGS PER SHARE $ 1.81 $ 2.42 $ 2.17
DILUTED EARNINGS PER SHARE $ 1.78 $ 2.36 $ 2.12
================================================================================================
</TABLE>
DISCUSSION OF CONSOLIDATED RESULTS
2003 VS. 2002
Sales increased 17%, or $896.1. Acquisitions, including the U.S. homecare
companies and Ashland's Electronic Chemicals business in 2003 and San Fu Gas
Company, Ltd. (San Fu) in July 2002, accounted for 6% of the increase.
Underlying base business growth accounted for 5% of the increase, principally
from improved volumes in the Chemicals and Gases businesses. The impact of
higher natural gas cost contractually passed through to customers and favorable
currency effects, partially offset by divestitures, accounted for the remaining
sales increase of 6%.
Operating income in 2003 included a net expense of $152.5 for global cost
reduction plans as compared to the prior year, which included a net expense of
$23.1 for global cost reduction plans. Refer to the discussion of global cost
reduction plans on page 27 for details.
Operating income of $604.5 declined $170.4. Operating income in 2003 was
unfavorably impacted by higher global cost reduction plan expenses, higher raw
material and energy costs, higher pension and
25
<PAGE>
Management's Discussion and Analysis CONTINUED
SAP implementation expenses, higher operating costs and lower electronics
specialty material pricing. Favorable operating income variances resulted from
higher gases volumes, the contribution from acquisitions, and favorable currency
effects.
Income from equity affiliates increased 11%, or $8.2 from the prior year.
Favorable adjustments of $23 were recorded related to divestitures recorded in
prior years, partially offset by the impact of consolidating San Fu in the
fourth quarter of 2002 and a one-time tax benefit related to an asset
revaluation at an Italian affiliate recorded in the prior year.
Net income was $397.3, or $1.78 diluted earnings per share, as compared to net
income of $525.4, or $2.36 diluted earnings per share. Income before the
cumulative effect of an accounting change for the company's adoption of
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations," was $400.2, or $1.79 diluted earnings per share
in 2003. Current year results included a net expense for global cost reduction
plans ($96.5 after-tax, or $.43 per share). Prior year results included a gain
on the sale of the U.S. packaged gas business ($25.7 after-tax, or $.12 per
share) and a net expense for global cost reduction plans ($14.1 after-tax, or
$.07 per share). Interest expense increased slightly from the prior year while
the effective tax rate of 26.9% was lower than the prior year of 31.4%.
2002 VS. 2001
Sales in 2002 decreased $456.6, or 8%. Acquisitions, including San Fu in July
2002, accounted for a 2% increase in sales. Underlying base business sales
declined 3%, reflecting difficult economic conditions for the manufacturing
sector. Gases sales declined, due principally to lower shipments to the
electronics industry. Chemicals sales declined, due principally to lower selling
prices. Somewhat offsetting these impacts, Equipment sales grew, reflecting
increased activity in liquefied natural gas (LNG) heat exchangers and helium
containers. The impact of lower natural gas cost contractually passed through to
customers and divestitures, slightly offset by favorable currency, accounted for
the remaining sales decrease of 7%.
Operating income in 2002 increased $29.5. Operating income in 2002 included a
net expense of $23.1 for global cost reduction plans as compared to the prior
year, which included a net expense of $107.0 for global cost reduction plans.
Operating income in 2002 benefited from reduced costs from productivity efforts,
constrained spending, higher Performance Materials volumes and increased
Equipment activity.
Currency and exchange-related effects had a slightly favorable impact on
operating income. Depressed conditions in the global electronics market and in
the North American steel industry combined with higher maintenance spending in
Energy and Process Industries (EPI--formerly Chemical Process Industries)
negatively impacted operating income.
In 2002, equity affiliates' income declined $5.0, or 6%. The divestiture of
investments in two cogeneration facilities in the fourth quarter of 2001 and
lower electronics results more than offset the improved profitability of the
global polymers joint venture and the one-time tax benefit related to an asset
revaluation at an Italian affiliate.
Net income was $525.4, or $2.36 diluted earnings per share, as compared to net
income of $465.6, or $2.12 diluted earnings per share. 2002 results included a
gain on the sale of the U.S. packaged gas business ($25.7 after-tax, or $.12 per
share) and a net expense for global cost reduction plans ($14.1 after-tax, or
$.07 per share). 2001 results included a net expense for global cost reduction
plans ($65.9 after-tax, or $.30 per share). The 2002 results benefited from a
significant reduction in interest expense due principally to lower average debt
outstanding. The 2002 effective tax rate was 31.4% compared to 29.0% in 2001.
2004 OUTLOOK
As we enter 2004, recent economic data and sales trends appear to indicate an
early stage of economic recovery in most of the company's end markets. However,
at this time, it is still too early to predict the pace at which these markets
will grow in the near term. Other factors, such as potential volatility in
energy and currency markets, also limit visibility and forecasting accuracy.
Given this uncertainty, and in line with current economic outlooks, we are
placing a broad range on fiscal year 2004 domestic manufacturing growth of
between 2% and 6%, with broader ranges in individual sectors, in particular the
global electronics market. The company anticipates sequential improvement in
silicon processed by the semiconductor industry at about the double-digit level,
and flat-panel display growth is expected to exceed silicon growth. The company
anticipates benefits in 2004 from its portfolio management actions taken to
build its market positions in its key growth platforms. The Ashland Electronic
Chemicals and U.S. homecare acquisitions are expected to be accretive to
earnings in 2004. The company's outlook for 2004 anticipates relative stability
in currencies and in raw material costs and includes the shutdown of a methanol
production facility and the startup of a long-term purchased methanol
26
<PAGE>
supply arrangement in the second half of the fiscal year, which should
materially reduce chemical raw material cost volatility. The company also
expects cost savings in certain areas from the actions associated with the 2003
global cost reduction plan and expects a level of expense in 2004 on SAP system
implementation and operation similar to the level in 2003. Pension expenses are
expected to be higher in 2004 due to lower discount rate and lower long-term
asset return assumptions. The company's outlook for the Equipment segment is for
improvement in 2004 based on an anticipation of receiving two to four new LNG
heat exchanger orders during the year, which should increase segment
profitability in the latter quarters. The company plans to continue to drive
portfolio management and cost reduction actions throughout the year, and any
potential up-front costs associated with such actions could negatively impact
the company's earnings in 2004 while providing benefits in the following years.
SELLING AND ADMINISTRATIVE EXPENSE (S&A)
2003 VS. 2002
S&A increased 18%, or $128.3. The impact of acquisitions and currency effects,
partially offset by divestitures, accounted for two-thirds of this increase. In
addition, S&A increased due to cost inflation, SAP implementation and pension
expenses. These increases in S&A were partially offset by lower incentive
compensation costs and improved productivity.
2002 VS. 2001
S&A in 2002 increased slightly as the impact of acquisitions, currency effects
and spending on SAP increased expense levels which were offset by productivity
improvements and the divestiture of the U.S. packaged gas business.
2004 OUTLOOK
S&A will increase in 2004 primarily as a result of acquisitions, particularly
Ashland's Electronic Chemicals business acquired on 29 August 2003, the full
year impact of U.S. homecare acquisitions made during 2003 and planned U.S.
homecare acquisitions for 2004. The homecare business has a significantly higher
level of S&A, as a percent of sales, than the average mix of the company's
current businesses. In addition, the company expects increases in S&A due to
inflation and higher pension expense. Partially offsetting these impacts, the
company expects to realize cost savings from the global cost reduction plan
initiated in the third quarter of 2003, savings in businesses where SAP was
implemented in 2003 and other productivity initiatives.
OTHER (INCOME) EXPENSE, NET
2003 VS. 2002
Other income of $26.5 declined $10.6. Amortization expense increased by $6.5,
resulting primarily from the intangible assets associated with the U.S.
homecare companies acquired in 2003. Results in 2002 included higher favorable
impacts from the sale of investments.
2002 VS. 2001
Other income of $37.1 increased $5.6. Amortization expense declined $15.6 in
2002, principally as a result of no longer amortizing goodwill with the adoption
of SFAS No. 142. Results in 2002 included higher favorable impacts from the sale
of investments. Results in 2001 included favorable insurance settlements.
Note 19 to the consolidated financial statements displays the details of other
(income) expense.
GLOBAL COST REDUCTION PLANS
2003 PLAN
In 2003, the company recorded an expense of $152.7 for a global cost reduction
plan (2003 Plan). This expense included $56.8 for severance and pension-related
benefits and $95.9 for asset disposals and facility closures in the Gases and
Chemicals segments. The results for 2003 also included the reversal of the
balance of the 2002 Plan accrual of $.2.
During the third quarter of 2003, the company completed a capacity utilization
analysis in several businesses in the Gases segment. To reduce capacity and
costs, several facilities ceased operation as of 30 June 2003. An expense of
$37.6 was recognized for the closure of these facilities, net of expected
recovery from disposal. A decision was made to terminate several incomplete
capacity expansion projects. An expense of $13.0 was recognized for the cost of
terminating these projects, net of expected recovery from disposal and
redeployment. An expense of $3.6 was also recognized for the planned sale of two
real estate properties and the termination of several leases for small
facilities. These expenses were principally in the North American merchant and
tonnage businesses, with a modest amount in the Electronics business.
The rationalization of excess capacity in certain products resulted in a
decision to exit certain Chemical Intermediates operations. Late in the quarter
ended 30 June 2003, the company decided to pursue the sale of its European
methylamines and derivatives business. The company expects to complete the sale
by 30 June 2004. Expected proceeds from the sale were determined and a loss was
recognized for the
27
<PAGE>
Management's Discussion and Analysis CONTINUED
difference between the carrying value of the assets and the expected net
proceeds from the sale. Additional expenses for the closure of the methanol and
ammonia plants in Pensacola, Florida, which made products for internal
consumption, were also recognized. The total expense for these actions was
$41.7.
In addition to the capacity reduction initiatives, the company continues to
implement cost reduction and productivity-related efforts. The divestitures,
the capacity reductions and the cost control initiatives will result in the
elimination of 461 positions from the company. The company will complete the
2003 Plan by 30 June 2004. Approximately 30% of the position reductions relates
to capacity rationalization and divestitures. An additional 40% relates to
ongoing productivity efforts and balancing engineering resources with project
activity and the remaining 30% relates to a reduction in the number of
management positions.
Cost savings from the 2003 Plan realized in 2003 were approximately $3. Cost
savings of $38 are expected in 2004. Beyond 2004, the company expects the 2003
Plan to provide annualized cost savings of $59, of which the majority is related
to reduced personnel costs. As a result of actions taken in the 2003 and prior
years' global cost reduction plans, operating income in 2003 included $27 of
incremental benefits over those realized in 2002.
2002 PLAN
In 2002, the company recorded an expense of $30.8 for a global cost reduction
plan (2002 Plan), including U.S. packaged gas divestiture-related reductions.
This expense included $27.1 for severance and pension-related benefits and $3.7
for asset impairments related to the planned sale or closure of two small
chemical facilities. The 2002 Plan included 333 position eliminations in the
areas of manufacturing, engineering, distribution and overheads. The 2002 Plan
was completed as expected in March 2003. The results for 2002 also included the
reversal of the balance of the accrual for the 2001 Plan of $7.7.
Cost savings from the 2002 Plan realized in 2002 were approximately $3. Cost
savings of $16 were realized in 2003. Beyond 2003, the company expects the 2002
Plan to provide annualized incremental cost savings of $17, of which the
majority is related to reduced personnel costs. As a result of actions taken in
the 2002 and prior years' global cost reduction plans, operating income in 2002
included $29 of incremental benefits over those realized in 2001.
2001 PLAN
In 2001, the company recorded an expense of $109.2 for a global cost reduction
plan (2001 Plan). This expense included $79.6 for severance benefits and pension
plan settlements and $29.6 for asset impairments and related restructuring
charges. The 2001 Plan included 670 position eliminations in the areas of
manufacturing, engineering, distribution and overheads. The company decided to
divest several small facilities, which required a write-down of the net carrying
value to the estimated net realizable value. The net carrying value of the
assets to be disposed of was $11.1 and $27.7 in the Gases and Chemicals
segments, respectively. The 2001 Plan was completed in 2002, with 644 positions
eliminated and total expenses of $101.5 incurred. The results for 2001 also
included the reversal of the balance of the accrual for the 2000 Plan of $2.2.
Cost savings from the 2001 Plan realized in 2001 were approximately $2. Cost
savings of $22 were realized in 2002. Beyond 2002, the 2001 Plan reduced costs
by $33 per year, of which the majority is related to reduced personnel costs.
Note 3 to the consolidated financial statements provides additional details on
the global cost reduction plan expenses by segment.
INTEREST EXPENSE
<TABLE>
<CAPTION>
2003 2002 2001
- ---------------------------------------------------------------
<S> <C> <C> <C>
Interest incurred $ 127.7 $ 131.7 $ 197.2
Less: interest capitalized 4.2 9.4 6.0
- ---------------------------------------------------------------
Interest expense $ 123.5 $ 122.3 $ 191.2
===============================================================
</TABLE>
2003 VS. 2002
Interest expense increased $1.2. This increase resulted from the impact of a
weaker U.S. dollar on the translation of foreign currency interest and lower
capitalized interest, partially offset by lower average interest rates and a
lower average debt balance excluding currency effects.
2002 VS. 2001
Interest expense declined $68.9. About two-thirds of this variance was due to
lower average debt outstanding and the remainder due principally to lower
interest rates in 2002.
2004 OUTLOOK
The company expects a modest decrease in interest expense, due primarily to the
expectation of a lower debt portfolio average interest rate in 2004. The 2004
estimate excludes the possible effects of any future acquisitions, any change in
stock repurchase policy or any change in risk management policy.
28
<PAGE>
EFFECTIVE TAX RATE
The effective tax rate equals the income tax provision divided by income before
taxes less minority interest.
2003 VS. 2002
The 2003 effective tax rate was 26.9% compared to 31.4%. The difference in the
rates was due to higher tax credits and adjustments in 2003 and the
nondeductible costs included in the sale of the U.S. packaged gas business in
2002.
2002 VS. 2001
The 2002 effective tax rate was 31.4% compared to 29.0%. The higher rate was due
to the nondeductible costs included in the sale of the U.S. packaged gas
business in 2002.
2004 OUTLOOK
The company expects the effective tax rate to increase to 30%, principally
attributable to higher income. This estimate is based on current tax law, the
current estimate of earnings and the expected distribution of income among
various tax jurisdictions.
SEGMENT ANALYSIS
A description of the products, services and markets for each of the business
segments is included in Note 20 to the consolidated financial statements.
GASES
The Gases segment involves three principal modes of supply: on-site/pipeline,
liquid bulk and packaged gas. About one-third of the overall Gases sales come
from the on-site and pipeline supply mode, which generally has long-term cost
pass-through type contracts, lending an attractive degree of stability to Gases
results. Liquid bulk products make up about one-third of overall Gases sales
and, while volume-sensitive, generally have three- to five-year contracts that
provide price stability. The remainder of sales is made up of specialty and
industrial cylinder gas supply for electronics, medical/homecare and other
industries.
Electricity is the largest cost input for the production of atmospheric gases.
Natural gas is the principal raw material for hydrogen, the vast majority of
which is delivered through on-site and pipeline supply arrangements. The company
mitigates adverse energy impacts in the Gases segment through its cost
pass-through structures as well as price increases.
<TABLE>
<CAPTION>
GASES 2003 2002 2001
- -------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 4,438.3 $ 3,673.9 $ 4,084.6
Operating income 584.8 614.0 654.9
Equity affiliates' income 58.3 61.9 71.7
===================================================================
</TABLE>
2003 VS. 2002
Sales increased 21%, or $764.4. Acquisitions, including U.S. homecare companies
and Ashland Electronic Chemicals in 2003 and San Fu in July 2002, accounted for
9% of the increase. Base business revenue growth of 5% resulted from improved
volumes across most businesses, slightly offset by unfavorable pricing in
electronic specialty materials. Higher natural gas costs contractually passed
through to customers and favorable currency effects, net of the decrease from
divestitures, accounted for 7% of the sales increase.
Volumes for electronic specialty materials increased, driven primarily by
increased Asian demand. On-site and pipeline volumes in EPI were up 5%, led by
stronger oxygen, nitrogen and hydrogen volumes. Liquid bulk volumes in North
America declined 3%, and liquid bulk volumes in Europe were at a similar level
to last year. Liquid bulk volumes were strong in Asia, up 12%.
Pricing for electronic specialty materials decreased, due to the prolonged
nature of the downturn in the electronics industry, excess supply capacity, and
customer mix effects. On average, prices for liquid oxygen (LOX) and liquid
nitrogen (LIN) in North America remained flat. Underlying price increases of
about 3% were offset by the negative year-on-year impact of lower surcharges.
LOX/LIN pricing in Europe increased by 2%.
Operating income decreased 5%, or $29.2. Operating income included a net expense
of $92.0 for global cost reduction plans as compared to the prior year, which
included a net expense of $21.0 for global cost reduction plans. Operating
income was favorably impacted by the contribution of acquisitions, increased
volumes across most businesses, and favorable currency effects. Partially
offsetting these gains were higher operating costs, higher pension and SAP
implementation expenses, and lower electronics specialty material pricing.
Gases equity affiliates' income decreased by 6%, or $3.6. The decrease was due
primarily to the consolidation of San Fu and the one-time tax benefit related to
an asset revaluation at an Italian affiliate recorded in the prior year, offset
to some extent by favorable adjustments to customary post-sale liabilities
associated with two divested cogeneration plant investments and the impact of
currency effects.
29
<PAGE>
Management's Discussion and Analysis CONTINUED
2002 VS. 2001
Sales in 2002 declined $410.7, or 10%. Acquisitions, including San Fu in July
2002, accounted for a 2% increase in sales. Underlying base business sales
declined 3%, principally due to lower shipments to the electronics industry and
lower demand for liquid bulk products in North America and Europe. Electronics
was affected by a reduction in customers' global silicon wafer processing due to
soft demand for most semiconductor products. The decline in base business sales
was partially offset by higher prices for liquid bulk gases and volume growth in
EPI. On average, prices for LOX/LIN were up 2%. Excluding surcharge effects,
prices for LOX/LIN increased 3%. EPI on-site volumes grew 5%, due to higher
hydrogen demand in the refining industry. The impact of lower natural gas cost
contractually passed through to customers and divestitures, slightly offset by
favorable currency, accounted for the remaining sales decrease of 9%.
Operating income declined $40.9, or 6%, due principally to depressed conditions
in the global electronics market and North American steel industry and higher
maintenance spending in EPI. The major factors for the decline in operating
income of the Electronics business were lower worldwide demand coupled with
price declines resulting from excess industry capacity. Operating income in 2002
included a net global cost reduction plan expense of $21.0 as compared to the
prior year, which included a net expense of $66.9 for global cost reduction
plans. Other factors partially offsetting the operating income decline included
the consolidation of San Fu in the fourth quarter of 2002, higher prices and
improved Asian volumes.
Equity affiliates' income was down $9.8, or 14%, mainly due to the divestiture
of investments in two cogeneration facilities in the fourth quarter of 2001,
lower Electronics results and the consolidation of San Fu in the fourth quarter
of 2002. Equity affiliates' income in 2002 included a tax benefit related to an
asset revaluation at an Italian affiliate.
2004 OUTLOOK
Gases sales are expected to increase based upon volume growth driven by an
improved manufacturing environment, the Ashland Electronic Chemicals
acquisition, the full year impact of the 2003 U.S. homecare acquisitions, and
planned U.S. homecare acquisitions in 2004. Higher shipments are expected for
Electronics during the year based on estimates of increased wafer production and
demand from the flat-panel display market. Hydrogen volumes are expected to
continue to grow as regulatory drivers for clean fuels continue and new plants
to serve such demand are brought onstream during the year.
Based on favorable demographics and other trends in the healthcare industry, the
company's healthcare business is expected to continue to grow organically. Other
industrial end markets are expected to more closely track the general state of
the manufacturing economies of the world. The company's current outlook for U.S.
manufacturing growth is 2% to 6% in 2004, and volume growth assumptions for the
U.S. liquid bulk gases business are tied to this range. Liquid bulk volumes
outside the U.S. are also tied to manufacturing growth. The company expects that
manufacturing growth in the European region will be below the U.S., while growth
in Asia will exceed the U.S. Pricing in the liquid bulk business globally is
expected to remain firm as the company continues to attempt to both recover cost
increases and restore the business to reinvestment levels of return. Pricing in
electronics specialty materials is expected to decline in 2004 as the full year
impact of 2003 price reductions and increased volumes taken by customers should
result in lower average prices.
CHEMICALS
The Chemicals segment consists of Performance Materials and Chemical
Intermediates. Performance Materials accounted for about two-thirds of the
segment's sales. Performance polymers, the largest product line in Performance
Materials, uses vinyl acetate monomer (VAM) as its principal raw material. The
cost of VAM generally fluctuates with energy prices and industry supply and
demand. Performance polymers are sold in several markets, which are also served
by competing products that are not derived from VAM, limiting the ability to
adjust prices immediately as the cost of VAM increases. Margin fluctuation
results from the timing of and ability to adjust prices in response to changes
in VAM costs. About one-third of the segment's sales come from Chemical
Intermediates, which include polyurethane intermediates and amines.
Approximately one-half of Chemical Intermediates are supplied under long-term
contracts under which costs are passed through to customers. Methylamines are
sold in competitive markets with prices and margins fluctuating with the cost of
natural gas and competitors' actions. During 2004, the company will begin
purchasing methanol for domestic methylamines production and shut down its
methanol production facility. This will have the effect of reducing the
volatility of methylamines margins.
<TABLE>
<CAPTION>
CHEMICALS 2003 2002 2001
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 1,591.2 $ 1,451.7 $ 1,522.8
Operating income 67.1 172.5 112.3
Equity affiliates' income 10.8 11.7 7.5
====================================================================================
</TABLE>
30
<PAGE>
2003 VS. 2002
Sales increased 10%, or $139.5. Acquisitions, including Sanwa Chemical Industry
Co., Ltd. (Sanwa), accounted for a 1% increase. Underlying base business sales
increased 4%, resulting primarily from improved volumes. In Chemical
Intermediates, volumes increased 8%, led by polyurethane intermediates (PUI) and
higher amines, due to stronger PUI demand, as well as a better market for
herbicides. Performance Materials volumes were down 1%, principally due to
performance polymers. The impact of favorable currency effects and natural gas
cost increases passed through to customers, slightly offset by divestitures,
accounted for the remaining sales increase of 5%.
Operating income decreased $105.4. Operating income included a net expense of
$58.1 for global cost reduction plans compared to the prior year, which included
a net expense of $2.7. The remaining decline in operating income was driven by
higher raw material and energy costs and weaker volumes in performance polymers.
This decline was partially offset by favorable currency effects and improved
volumes in polyurethane intermediates and higher amines.
Chemicals equity affiliates' income decreased $.9. Chemicals equity affiliates'
income consists primarily of a global polymers joint venture.
2002 VS. 2001
Sales in 2002 were down $71.1, or 5%. Underlying base business sales declined
2%. The overall volume index was flat, while the aggregate price index was down
2%. In Performance Materials, volumes increased as performance polymers
experienced higher demand. In Chemical Intermediates, volumes declined due to
reduced demand in the herbicide end market for higher amines. The impact of
lower natural gas cost passed through to customers and divestitures accounted
for the remaining 3% decrease.
Operating income in 2002 increased $60.2. Operating income included a net
expense of $2.7 for global cost reduction plans as compared to the prior year,
which included a net expense of $28.6 for global cost reduction plans. The other
main factor for the improvement was lower natural gas and lower operating costs,
as productivity efforts and constrained spending more than offset inflationary
impacts. Higher volumes in Performance Materials, namely in the performance
polymers product lines, also contributed favorably to operating income. The
impact of lower selling prices was offset by lower raw material costs.
Equity affiliates' income increased $4.2, primarily due to the improved
profitability of the global polymers joint venture.
2004 OUTLOOK
In Performance Materials, the expectation is for higher volumes driven by
economic growth and the increased sale of new products across the portfolio. The
company's outlook for VAM costs assumes relative stability. In Chemical
Intermediates, volumes in continuing operations are expected to expand in 2004
in line with the assumed U.S. manufacturing growth range of 2% to 6% and a
normal agricultural cycle. The company intends to divest its European
methylamines and derivatives business during the year. The timing of this action
does not materially affect the segment's total outlook. The company's outlook
for raw material costs in Chemical Intermediates includes the shutdown of its
methanol production facility early in the year and the start-up of a long-term
purchased methanol supply arrangement in the second half of the fiscal year,
which should materially reduce chemical raw material cost volatility,
principally in the U.S. methylamines business. In the interim period between the
shutdown of the company's methanol plant and the start-up of the long-term
methanol supply agreement, the company has contracted to purchase methanol on a
short-term basis.
A long-term supplier of sulfuric acid, used in the production of dinitrotoluene
(DNT), emerged from Chapter 11 bankruptcy protection in June 2003. To facilitate
the supplier's ability to emerge from bankruptcy and to continue supplying
product to the company, the company agreed to participate in the supplier's
financing and has continued to supply additional financing. Total loans to the
supplier at 30 September 2003 totaled $39.8. If the supplier does not continue
to operate, the sales and profitability of the chemicals segment could be
materially impacted on an annual basis because of the company's inability to
supply all of its customers' base requirements. The company does not expect a
material loss related to this supplier.
EQUIPMENT
The Equipment segment designs and manufactures cryogenic and gas processing
equipment for air separation, gas processing, LNG and hydrogen purification. The
segment also builds cryogenic transportation containers for liquid helium.
Equipment is sold worldwide to companies involved in oil and gas recovery and
processing, chemical and petrochemical manufacturing, power generation, and
steel and primary metal producers. This business is cyclical, primarily impacted
by capital spending for expansion of manufacturing capacity.
31
<PAGE>
Management's Discussion and Analysis CONTINUED
<TABLE>
<CAPTION>
EQUIPMENT 2003 2002 2001
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $267.8 $275.6 $250.4
Operating income 4.2 20.7 10.0
Equity affiliates' income .2 2.6 2.0
- ---------------------------------------------------------------------------
</TABLE>
2003 VS. 2002
Sales decreased $7.8, while operating income decreased $16.5. The 2003 results
included a net expense of $2.4 for global cost reduction plans. Operating
income was lower due to lower helium container sales, lower LNG activity and
lower margins in non-LNG product lines. Sales backlog for the Equipment segment
increased to $259 at 30 September 2003, compared to $114. It is expected that
approximately $200 of the backlog will be completed during 2004.
2002 VS. 2001
Sales in 2002 grew $25.2, while operating income increased $10.7. Operating
income in 2001 included a net global cost reduction plan expense of $2.0. The
sales and operating income improvement reflected increased activity across
several product lines, particularly helium containers and LNG heat exchangers.
Additionally, operating income benefited from favorable cost performance. Sales
backlog for the Equipment segment declined to $114 at 30 September 2002,
compared to $227, due to lower new project activity.
2004 OUTLOOK
The company's outlook for the Equipment segment is for improved operating income
in 2004 based on an anticipation of receiving two to four new LNG heat exchanger
orders during the year, which should increase Equipment segment profitability in
the latter quarters.
ALL OTHER
All other principally comprises long-term research and development expense and
unallocated corporate expenses and income.
<TABLE>
<CAPTION>
2003 2002 2001
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Operating (loss) $(51.6) $(32.3) $(31)
Equity affiliates' income 15.1 -- --
- ---------------------------------------------------------------------------
</TABLE>
2003 VS. 2002
Operating loss increased $19.3. This increase reflected expenses associated with
portfolio management activities in the current year and favorable adjustments
recorded in the prior year related to a divested business and insurance
settlements.
Equity affiliates' income represents favorable adjustments to customary
post-sale liabilities associated with a divested business that is not associated
with any of the company's current segments.
2002 VS. 2001
Operating loss in 2002 was comparable to 2001. 2002 included lower foreign
exchange gains and higher corporate expenses. 2001 included a $9.5 net expense
for global cost reduction plans and a $6.0 charge for a litigation settlement.
2001 also included a higher favorable adjustment related to a divested business
and favorable insurance settlements.
PENSION BENEFITS
The company and certain of its subsidiaries sponsor defined benefit plans that
cover a substantial portion of all worldwide employees. Pension benefits earned
are generally based on years of service and compensation during active
employment. Assets under the company's defined benefit plans consist primarily
of equity and fixed-income securities. The amounts recognized in the financial
statements for pension benefits are determined on an actuarial basis utilizing
several different assumptions.
For 2003, the fair market value of pension plan assets for the company's
defined benefit plans as of their valuation date increased to $1,147.5 from
$1,012.5. The accumulated benefit obligation for these plans as of their
measurement date was $1,815.8 and $1,430.7 for 2003 and 2002, respectively. The
increase in the obligation was due principally to a decline in the weighted
average discount rate used to measure future benefit obligations to 5.8% from
6.5%.
Approximately 65% of total company defined benefit pension plan assets are held
in the U.S. plans. The targeted allocation of the investment portfolio of the
U.S. plans is 50% in domestic equities, 20% in international equities, 25% in
fixed income and 5% in real estate. The U.K. pension plans, which represent
approximately 30% of the total defined benefit plan assets, have a targeted
allocation of 50% in domestic equities, 30% in international equities and 20% in
fixed income. At 30 September 2003, the actual investment portfolios were
essentially in line with the targeted allocations.
PENSION FUNDING
Pension funding includes both contributions to funded plans and benefit
payments under unfunded plans. With respect to funded plans, the company's
funding policy is that contributions, combined with appreciation and earnings,
will be sufficient to pay benefits without creating
32
<PAGE>
unnecessary surpluses. In addition, the company ensures that contributions
satisfy all legal funding requirements. External actuarial firms analyze the
liabilities and demographics of each plan, which helps guide the level of
contributions. During 2003 and 2002, the company contributed $61.6 and $54.2,
respectively, to the pension plans.
2004 OUTLOOK
Cash contributions are estimated to be approximately $200 in 2004. The company
expects to make significant contributions, although at reduced levels from 2004,
in succeeding years. Actual future contributions will depend on future funding
legislation, discount rates, investment performance, plan design and various
other factors.
SIGNIFICANT ASSUMPTIONS
The company accounts for pension benefits using the accrual method, consistent
with the requirements of SFAS No. 87, "Employers' Accounting for Pensions."
Actuarial models are used in calculating the pension expense and liability
related to the various plans. These models have an underlying assumption that
the employees render service over their service lives on a relatively smooth
basis; therefore, the expense of benefits earned should follow a similar
pattern.
Several assumptions and statistical variables are used in the models to
calculate the expense and liability related to the plans. The company, in
consultation with its actuaries, determines assumptions about the discount rate,
the expected rate of return on plan assets and the future rate of compensation
increase. Note 17 to the consolidated financial statements includes disclosure
of these rates on a weighted average basis, encompassing both the domestic and
international plans. The actuarial models also use assumptions on demographic
factors such as retirement, mortality and turnover. The company believes the
assumptions are within accepted guidelines and ranges. However, these actuarial
assumptions could vary materially from actual results due to economic events and
different rates of retirement, mortality and turnover.
One of the critical assumptions used in the actuarial models is the discount
rate. This rate is determined at the annual measurement date for each of the
various plans and is therefore subject to change each year. The rate reflects
the prevailing market rate for high-quality fixed-income debt instruments with
maturities corresponding to the expected duration of the benefit obligations on
the measurement date. The rate is used to discount the future cash flows of
benefit obligations back to the measurement date. A higher discount rate
decreases the present value of the benefit obligations and results in lower
pension expense. A 50 basis point change in the discount rate impacts pension
expense by approximately $18 per year. The weighted average discount rate at the
2003 and 2002 measurement dates was 5.8% and 6.5%, respectively. This decline
reflected the market conditions of lower interest rates.
The expected long-term rate of return on plan assets represents the average rate
of return to be earned by plan assets over the period that the benefits included
in the benefit obligation are to be paid. Lower returns on the plan assets
result in higher pension expense. The company uses historic market return
trends combined with current market conditions for each asset category to
estimate the rate of return. The weighted average actual compound rate of return
earned on plan assets for the last ten years was 8.5%. For the last 20 years
this rate was 10.6%. A 50 basis point change in the estimated rate of return on
plan assets impacts pension expense by approximately $6 per year. The company
lowered the weighted average expected rate of return which will be used to
determine pension expense in 2004 to 8.4% from 9.1%.
The expected rate of compensation increase is another key assumption. The
company determines this rate based on historic trends and comparisons to
external rates. A 50 basis point change in the expected rate of compensation
increase impacts pension expense by approximately $11 per year. The company
lowered the expected rate of compensation increase which will be used to
determine pension expense in 2004 to 4.2% from 4.7%. This reduction reflected
the lower levels of inflation.
PENSION EXPENSE
Pension expense in 2003 was $96.4 compared to $55.7 in 2002. Expense in 2003
included a special termination charge of $12.7 under the global cost reduction
plan. Expense in 2002 included $11.4 for special termination, settlement and
curtailment charges. In 2001, pension expense was $59.7, including $22.0 for
special termination and settlement charges.
The year-to-year variances in pension expense are principally attributable to
changes in the discount rate, lower asset returns, and a reduction in the
expected rate of return on plan assets. The global weighted average discount
rates used to compute pension expense were 6.5%, 7.1% and 7.6% for 2003, 2002
and 2001, respectively. Pension expense includes the expected return on plan
assets, as opposed to the actual returns. The expected return on plan assets is
determined by applying the expected long-term rate of return to the
market-related value of plan assets. The market-related value is a calculated
value that amortizes the difference between the actual and expected returns
33
<PAGE>
Management's Discussion and Analysis CONTINUED
on equity securities ratably over a five-year period. The amortization of these
differences reduced the market-related value of assets for 2003 and resulted in
higher pension expense. Also contributing to higher expense in 2003 was a
decline in the weighted average expected return on plan assets. The return, used
in the determination of expense, was 9.1% for 2003 compared to 9.4% for 2002.
2004 OUTLOOK
Pension expense is estimated to be $133 for 2004, which includes anticipated
settlement charges of $9. This represents an increase of $37 from 2003, which
included a charge of $12.7 for special termination benefits. The increase in
estimated pension expense in 2004 is principally the result of a lower discount
rate, lower asset returns in prior years and a decrease in the expected
long-term rate of return on plan assets. The global weighted average discount
rate and the long-term rate of return on plan assets used to compute pension
expense for 2004 is 5.8% and 8.4%, respectively.
ADDITIONAL MINIMUM LIABILITY
A $147.1 after-tax charge was recorded to comprehensive income within
shareholders' equity due to the recognition of an additional minimum liability
in 2003. The additional minimum liability is equal to the accumulated benefit
obligation less the fair value of pension plan assets in excess of the accrued
pension cost. The increase in the additional minimum liability resulted
principally from the decline in the discount rate.
In 2002, a $158.2 after-tax charge was recorded to comprehensive income within
shareholders' equity due to the recognition of an additional minimum liability
and the reversal of prepaid pension plan assets. The increase in the additional
minimum liability resulted principally from the decline in the discount rate
and the loss in value of plan assets.
RECOGNITION OF ACTUARIAL GAINS AND LOSSES
At the end of 2003 and 2002, unrecognized actuarial losses for the defined
benefit plans were $866.6 and $599.6, respectively. These losses principally
reflect a decline in the discount rate and differences between the expected and
actual return on plan assets. SFAS No. 87 requires the amortization of
unrecognized actuarial gains/losses in excess of certain thresholds into pension
expense over the average remaining service lives of the employees to the extent
they are not offset by future gains/losses. Amortization of the total
unrecognized actuarial loss at the end of 2003 will increase pension expense by
approximately $24 in 2004. Future increases in the discount rate and higher than
expected returns on plan assets would reduce the unrecognized actuarial losses
and resulting amortization in years beyond 2004.
STOCK-BASED COMPENSATION
The company applies Accounting Principles Board (APB) Opinion No. 25 in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized. If the company recognized compensation expense in accordance
with SFAS No. 123, net income would have been reduced by $37.9, $40.9 and $30.1
in years 2003, 2002 and 2001, respectively. The company intends to continue
applying its current accounting methodology until a new uniform accounting
standard for stock options is issued. This is consistent with the company's goal
of providing understandable information on a basis comparable with what other
companies disclose. See Note 1 and Note 14 to the consolidated financial
statements for further information.
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
matters totaled $29.6, $24.4 and $21.6 for 2003, 2002 and 2001, 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 $30 and $31 in 2004
and 2005, respectively.
Although precise amounts are difficult to define, the company estimates that in
2003, it spent approximately $16 on capital projects to control pollution versus
$14 in 2002. Capital expenditures to control pollution in future years are
estimated at $17 in 2004 and $14 in 2005.
34
<PAGE>
It is the company's policy to accrue environmental investigatory, external
legal costs and noncapital remediation costs for identified sites when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. The potential exposure for such costs is estimated to
range from $9 to a reasonably possible upper exposure of $21. The balance sheet
at 30 September 2003 and 2002 included an accrual of $15.3.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. Subject to the imprecision in estimating future environmental costs,
the company does not expect that any sum it may have to pay in connection with
environmental matters in excess of the amounts recorded or disclosed above would
have a materially adverse effect on its financial condition or results of
operations in any one year.
LIQUIDITY AND CAPITAL RESOURCES
The company maintained a solid financial position throughout 2003. Cash from
operations, supplemented with proceeds from asset sales and the beginning of the
year cash balance, provided funding for the company's capital spending program,
debt repayment and dividend payout. The company is currently rated A/A2
(long-term) and A-1/P-1 (commercial paper), respectively, by Standard & Poor's
and Moody's.
CASH FLOWS
The company's cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:
<TABLE>
<CAPTION>
2003 2002 2001
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used for):
Operating activities $ 1,036.0 $1,063.9 $1,084.0
Investing activities (1,046.6) (493.6) (277.7)
Financing activities (182.7) (385.0) (832.9)
Effect of exchange rate changes
on cash 15.8 2.2 (1.3)
- ---------------------------------------------------------------------------
(Decrease) increase in cash
cash items $ (177.5) $ 187.5 $ (27.9)
===========================================================================
</TABLE>
OPERATING ACTIVITIES
2003 VS. 2002
Net cash provided by operating activities decreased $27.9, or 3%. Before working
capital changes, the contribution of net income adjusted for noncash items to
cash provided by operating activities was up $38.8. Net income decreased by
$128.1. Noncash adjustments favorably contributing to the change in cash
provided by operating activities included increased depreciation expense, the
larger impairment of long-lived assets in 2003 and a reduced gain on the sale
of assets and investments. The increase in depreciation expense of $59.2 was due
principally to currency effects from a weaker U.S. dollar and acquisitions. The
expenses for the impairment of long-lived assets increased $88.0, principally
due to the 2003 global cost reduction plan. The gain on the sale of assets and
investments was higher in 2002 by $58.1, principally due to the gain on sale of
the U.S. packaged gas business in 2002. Additionally, cash provided by
operating activities in 2003 benefited from higher dividend payments from equity
affiliates. These favorable impacts were more than offset by deferred income
taxes and an increased usage of cash for working capital in 2003. The $38.4
unfavorable impact from deferred income taxes resulted primarily from higher
foreign tax benefits. The increase in accounts receivable was primarily due to
the impact of natural gas cost contractually passed through to customers.
Inventories increased as a result of higher energy and raw material costs.
Payables and accrued liabilities increased primarily due to expenses for the
2003 global cost reduction plan.
2002 VS. 2001
Cash provided by operating activities in 2002 declined $20.1, or 2%. Before
working capital changes, the contribution of net income adjusted for noncash
items to cash provided by operating activities was up $69.5. Net income
increased $59.8. Noncash adjustments favorably contributing to the change in
cash provided by operating activities included deferred income taxes and a
reduced gain on the sale of assets and investments. The favorable impact from
deferred income taxes of $26.2 resulted from higher temporary differences
associated with foreign subsidiaries. The gain on the sale of assets and
investments was higher in 2001 by $38.2 due to the gain on the divestiture of
the interest in cogeneration facilities. These favorable impacts were offset by
the prior year loss on the early retirement of debt. The change in working
capital was due principally to the collection of a tax refund in 2001 associated
with a loss on currency hedges.
INVESTING ACTIVITIES
2003 VS. 2002
In 2003, cash used for investing activities increased by $553.0, due principally
to acquisitions and lower proceeds from the sale of assets and investments.
Acquisitions in 2003, totaling $529.6, included Ashland's Electronic Chemicals
business for $293.2 in August 2003, AHS for $165.8 in October 2002, additional
small homecare businesses and Sanwa. Acquisitions in 2002, totaling $114.8,
included the purchase of an additional 22% of the outstanding shares of San Fu,
35
<PAGE>
Management's Discussion and Analysis CONTINUED
raising the company's ownership interest to 70%. Proceeds from the sale of
assets and investments declined $190.8 from the prior year. The company sold its
Canadian packaged gas business in April 2003 for proceeds of $41.2. In 2002, the
company sold the majority of its U.S. packaged gas business for proceeds of
$254.5.
2002 VS. 2001
In 2002, cash used for investing activities increased by $215.9, due principally
to lower proceeds from the sale of assets and investments. In 2001, the company
sold its investments in two cogeneration projects and certain U.S. cryogenic
vessel equipment.
CAPITAL EXPENDITURES
As a result of higher acquisitions, capital expenditures in 2003 totaled
$1,170.9, compared to $805.6. As in 2002, additions to plant and equipment in
2003 were largely in support of the worldwide Gases business.
Capital expenditures are detailed in the following table:
<TABLE>
<CAPTION>
2003 2002 2001
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Additions to plant and equipment $ 612.9 $627.6 $708.3
Investments in and advances to
unconsolidated affiliates 6.1 39.2 38.3
Acquisitions, less cash acquired 529.6 114.8 59.2
Long-term debt assumed in
acquisitions 5.2 20.1 --
Capital leases 17.1 3.9 .5
- --------------------------------------------------------------------------------
$1,170.9 $805.6 $806.3
================================================================================
</TABLE>
2004 OUTLOOK
Capital expenditures for new plant and equipment in 2004 are expected to be
between $650 and $750. In addition, the company intends to continue to evaluate
acquisition opportunities and investments in affiliated entities. It is
anticipated that these expenditures will be funded primarily with cash from
operations.
FINANCING ACTIVITIES
2003 VS. 2002
Cash used for financing activities declined $202.3 in 2003, primarily due to a
$37.6 increase in short-term borrowings in 2003 versus a $170.9 reduction in
2002. Higher payments on long-term debt in 2003 were partially funded by
increased long-term debt proceeds.
2002 VS. 2001
Cash used for financing activities declined $447.9 in 2002. Lower payments on
long-term debt of $593.0 were partially offset by a $202.0 reduction in
commercial paper borrowings. The company repurchased $541.1 of its outstanding
long-term fixed-rate debt during 2001. The average remaining life of the
repurchased debt was 18.5 years, and the average coupon was 7.56%. In 2002, the
company did not purchase treasury stock, as the share repurchase program was
suspended in the fourth quarter of 2001. During 2001, the company purchased
2.1 million of its outstanding shares at a cost of $87.2.
FINANCING AND CAPITAL STRUCTURE
Capital needs in 2003 were satisfied with cash from operations, proceeds from
asset sales and the beginning of the year cash balance. At the end of 2003,
total debt outstanding was $2.5 billion compared to $2.4 billion, with the
increase due to the impact of the weaker U.S. dollar on the translation of
foreign currency debt. Total debt at 30 September 2003 and 2002 expressed as a
percentage of the sum of total debt, shareholders' equity and minority interest
was 38.7% and 39.6%, respectively.
Long-term debt financings in 2003 totaled $162.8. This was composed primarily
of floating-rate U.S. dollar borrowings and fixed-and floating-rate Taiwan
dollar borrowings with terms ranging from four to thirty-five years.
Commercial paper outstanding at 30 September 2003 was $92.2. Substantial credit
facilities are maintained to provide backup funding for commercial paper and to
ensure availability of adequate sources of liquidity. At 30 September 2003, the
company's committed lines of credit totaled $600, maturing in January 2005. No
borrowings were outstanding under these commitments at the end of 2003. The
company expects to replace these commitments with a new committed facility
totaling at least $600, maturing in 2009.
Additional commitments of $25.6 are maintained by the company's foreign
subsidiaries, of which $17.1 was borrowed and outstanding at 30 September 2003.
During 2004, the company expects to file a form S-3 Registration Statement with
the U.S. Securities and Exchange Commission for the incremental issuance of up
to $1 billion of a variety of securities including debt securities, preferred
stock and common stock. The primary purpose of this registration is to provide
capacity for the company to issue debt securities to replace debt maturing in
2004 and 2005.
The Board of Directors in May 2003 increased the quarterly cash dividend 10%,
from 21 cents per share to 23 cents per share. Dividends are declared by the
Board of Directors and are usually paid during the sixth week after the close of
the fiscal quarter.
36
<PAGE>
CONTRACTUAL OBLIGATIONS
The company is obligated to make future payments under various contracts such as
debt agreements, lease agreements and unconditional purchase obligations. The
following table summarizes these contractual obligations of the company as of 30
September 2003.
<TABLE>
<CAPTION>
PAYMENTS DUE BY PERIOD
- -------------------------------------------------------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt obligations:
Debt maturities $2,293 $ 164 $ 793 $ 276 $ 492 $ 116 $ 452
Contractual interest 477 120 92 59 44 18 144
Capital leases 57 13 24 5 5 1 9
Operating leases 233 50 45 36 17 11 74
Unconditional purchase obligations 592 111 58 43 41 40 299
- -------------------------------------------------------------------------------------------------------------------------
Total contractual obligations $3,652 $ 458 $1,012 $ 419 $ 599 $ 186 $ 978
=========================================================================================================================
</TABLE>
LONG-TERM DEBT OBLIGATIONS
The long-term debt obligations include the maturity payments of long-term debt,
including current portion, and the related contractual interest obligations.
Refer to Note 11 to the consolidated financial statements for additional
information on long-term debt.
Contractual interest is the interest the company is contracted to pay on the
long-term debt obligations without taking into account the interest impact of
interest rate swaps related to any of this debt, which at current interest
rates would reduce contractual interest. The company had $442.5 of long-term
debt subject to variable interest rates at 30 September 2003, excluding
fixed-rate debt that has been swapped to variable-rate debt. The rate assumed
for the variable interest component of the contractual interest obligation was
the rate in effect at 30 September 2003. Variable interest rates are primarily
determined by LIBOR interest rates in the currency in which the debt is
denominated and by U.S. short-term tax-exempt interest rates.
LEASES
Refer to Note 12 to the consolidated financial statements for additional
information on capital and operating leases.
UNCONDITIONAL PURCHASE OBLIGATIONS
Most of the company's significant long-term unconditional purchase obligations
relate to feedstock supply for numerous HyCO (hydrogen, carbon monoxide and
syngas) facilities. The price of feedstock supply is principally related to the
price of natural gas. However, long-term take-or-pay sales contracts to HyCO
customers are generally matched to the term of the feedstock supply obligations
and provide recovery of price increases in the feedstock supply. Due to the
matching of numerous feedstock supply obligations to customer sales contracts,
the company does not believe these obligations would have a material effect on
its financial condition or results of operations.
Natural gas supply obligations that are not related to HyCO long-term customer
contracts are principally short-term requirements contracts or gas
transportation agreements.
The above unconditional purchase obligations also include the fixed demand
charge for electric power under numerous supply contracts. A fixed demand charge
is generally included in electric power supply agreement pricing and is
generally reset at least annually; therefore, the fixed obligation is
principally included in 2004. A portion of the power supply requirement relates
to long-term take-or-pay sales contracts to industrial gas customers, which
provide for recovery of power costs.
The company also has contractual obligations for materials, supplies and
services as part of the ordinary conduct of business that are not unconditional
purchase obligations and therefore not included in the above table. Critical raw
material supply contracts in the Chemicals segment are principally requirements
contracts at market prices.
OFF-BALANCE SHEET ARRANGEMENTS
The company has entered into certain guarantee agreements and an arrangement
involving the sale and leaseback of U.S. cryogenic vessel equipment. The
company's guarantee agreements are discussed in Note 18 to the consolidated
financial statements. Information on the sale and leaseback of U.S. cryogenic
vessel equipment is also contained in Note 12 to the consolidated financial
statements. The company has not entered into any agreements under which the
company
37
<PAGE>
Management's Discussion and Analysis CONTINUED
has an obligation arising out of a variable interest entity. The company does
not have any derivative instruments indexed to the company's own stock. The
company's off-balance sheet arrangements are not reasonably likely to have a
material impact on financial condition, changes in financial condition, results
of operations, or liquidity.
RELATED PARTY TRANSACTIONS
The company's principal related parties are equity affiliates operating in
industrial gas and chemicals businesses. The company did not engage in any
material transactions involving related parties that included terms or other
aspects that differ from those which would be negotiated at arm's length with
clearly independent parties.
MARKET RISKS AND SENSITIVITY ANALYSIS
The company's earnings, cash flows and financial position are exposed to market
risks relating to fluctuations in interest rates and foreign currency exchange
rates. It is the policy of the company to minimize its cash flow exposure to
adverse changes in currency and exchange rates and to manage the financial risks
inherent in funding the company with debt capital.
The company addresses these financial exposures through a controlled program of
risk management that includes the use of derivative financial instruments.
Counterparties to all derivative contracts are major financial institutions,
thereby minimizing the risk of credit loss. All instruments are entered into for
other than trading purposes. The utilization of these instruments is described
more fully in Note 6 to the consolidated financial statements. The major
accounting policies for these instruments are described in Note 1 to the
consolidated financial statements.
The company's derivative and other financial instruments consist of long-term
debt (including current portion), interest rate swaps, cross currency interest
rate swaps, foreign exchange-forward contracts 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 $63.4 at 30 September
2003 and $50.1 at 30 September 2002 as disclosed in Note 6 to the consolidated
financial statements. These amounts primarily represent an investment in a
publicly traded foreign company accounted for by the cost method. The company
assessed the materiality of the market risk exposure on these other investments
and determined this exposure to be immaterial.
At 30 September 2003 and 2002, the net financial instrument position was a
liability of $2,542.1 and $2,363.0, respectively. The increase in the net
financial instrument position was due primarily to the impact of a weaker U.S.
dollar on the translation of foreign currency debt and the market value of
foreign exchange-forward contracts and the impact of lower global interest rates
on the market value of fixed-rate debt.
The analysis below presents the sensitivity of the market value of the company's
financial instruments to selected changes in market rates and prices. The range
of changes chosen reflects the company's view of changes which are reasonably
possible over a one-year period. Market values are the present value of
projected future cash flows based on the market rates and prices chosen. The
market values for interest rate risk and foreign currency risk are calculated by
the company using a third-party software model that utilizes standard pricing
models to determine the present value of the instruments based on market
conditions (interest rates, spot and forward exchange rates and implied
volatilities) as of the valuation date.
INTEREST RATE RISK
The company's debt portfolio, including swap agreements, as of 30 September 2003
primarily comprised debt denominated in Euros (44%) and U.S. dollars (32%). This
debt portfolio is composed of 64% fixed-rate debt and 36% variable-rate debt.
Changes in interest rates have different impacts on the fixed-and variable-rate
portions of the company's debt portfolio. A change in interest rates on the
fixed portion of the debt portfolio impacts the net financial instrument
position but has no impact on interest incurred or cash flows. A change in
interest rates on the variable portion of the debt portfolio impacts the
interest incurred and cash flows but does not impact the net financial
instrument position.
The sensitivity analysis related to the fixed portion of the company's debt
portfolio assumes an instantaneous 100 basis point move in interest rates from
the levels at 30 September 2003 and 2002, with all other variables (including
foreign exchange rates) held constant. A 100 basis point increase in market
interest rates would result in a decrease of $41 and $52 in the net liability
position of financial instruments at 30 September 2003 and 2002, respectively. A
100 basis point decrease in market interest rates would result in an increase of
$44 and $55 in the net liability position of financial instruments at 30
September 2003 and 2002, respectively.
Based on the variable-rate debt included in the company's debt portfolio,
including the interest rate swap agreements, as of 30 September
38
<PAGE>
2003 and 2002, a 100 basis point increase in interest rates would result in an
additional $9 and $8 in interest incurred per year at 30 September 2003 and
2002, respectively. A 100 basis point decline would lower interest incurred by
$9 and $8 per year at 30 September 2003 and 2002, respectively.
FOREIGN CURRENCY EXCHANGE RATE RISK
The sensitivity analysis assumes an instantaneous 10% change in the foreign
currency exchange rates from their levels at 30 September 2003 and 2002, with
all other variables (including interest rates) held constant. A 10%
strengthening of the functional currency of an entity versus all other
currencies would result in a decrease of $223 and $188 in the net liability
position of financial instruments at 30 September 2003 and 2002, respectively. A
10% weakening of the functional currency of an entity versus all other
currencies would result in an increase of $217 and $183 in the net liability
position of financial instruments at 30 September 2003 and 2002, respectively.
The primary currencies for which the company has exchange rate exposure are the
U.S. dollar versus the Euro, the U.S. dollar versus the U.K. Pound Sterling and
the Euro versus the U.K. Pound Sterling. Foreign currency debt, cross currency
interest rate swaps and foreign exchange-forward contracts are used in countries
where the company does business, thereby reducing its net asset exposure.
Foreign exchange-forward contracts also are used to hedge the company's firm and
highly anticipated foreign currency cash flows, along with foreign
exchange-option contracts. Thus, there is either an asset or cash flow exposure
related to all of the financial instruments in the above sensitivity analysis
for which the impact of a movement in exchange rates would be in the opposite
direction and materially equal (or more favorable in the case of purchased
foreign exchange-option contracts) to the impact on the instruments in the
analysis.
INFLATION
The financial statements are presented in accordance with accounting principles
generally accepted in the United States and do not fully reflect the impact of
prior years' inflation. While the U.S. inflation rate has been modest for
several years, the company operates in many countries with both inflation and
currency issues. The ability to pass on inflationary cost increases is an
uncertainty due to general economic conditions and competitive situations. It is
estimated that the cost of replacing the company's plant and equipment today is
greater than its historical cost. Accordingly, depreciation expense would be
greater if the expense were stated on a current cost basis.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of the company's financial condition and
results of operations is based on the consolidated financial statements and
accompanying notes that have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 1 to the consolidated financial statements describes the company's major
accounting policies. Judgments and estimates of uncertainties are required in
applying the company's accounting policies in many areas. The following are
areas requiring significant judgments and estimates: depreciable lives of plant
and equipment, cash flow and valuation assumptions in performing impairment
tests of long-lived assets and equity investments, and estimated costs to be
incurred for environmental liabilities and pension benefits.
Application of the critical accounting policies discussed below requires
management's significant judgments, often as the result of the need to make
estimates of matters that are inherently uncertain. If actual results were to
differ materially from the estimates made, the reported results could be
materially affected. However, the company is not currently aware of any
reasonably likely events or circumstances that would result in materially
different results.
The company's senior management has reviewed these critical accounting policies
and estimates and the Management's Discussion and Analysis regarding them with
its audit committee.
Information concerning the company's implementation and impact of new accounting
standards issued by the Financial Accounting Standards Board (FASB) is discussed
in Note 2. Otherwise, the company did not adopt an accounting policy in the
past year that had a material impact on the company's financial condition,
change in financial condition or results of operations.
DEPRECIABLE LIVES OF PLANT AND EQUIPMENT
Plant and equipment is recorded at cost and depreciated using the straight-line
method, which deducts equal amounts of cost of each asset from earnings every
year over its estimated economic useful life. Net plant and equipment at 30
September 2003 totaled $5,637.1, representing 60% of total assets. Depreciation
expense during 2003
39
<PAGE>
Management's Discussion and Analysis CONTINUED
totaled $640.2, representing 11% of total costs and expenses. Given the
significance of plant and equipment and associated depreciation to the company's
financial statements, the determination of an asset's economic useful life is
considered to be a critical accounting estimate. The estimate is critical for
the company's Gases and Chemicals segments, both capital-intensive businesses
in which the company owns and operates plant and equipment.
Economic useful life is the duration of time the asset is expected to be
productively employed by the company, which may be less than its physical life.
Management's assumptions on the following factors, among others, affect the
determination of estimated economic useful life: wear and tear, obsolescence,
technical standards, contract life, changes in market demand and raw material
availability. The company makes estimates and assumptions regarding its
competitive position in various end markets and geographic locations.
The estimated economic useful life of an asset is monitored to ensure its
appropriateness, especially in light of changed business circumstances. For
example, changes in technological advances, changes in the estimated future
demand for products, or excessive wear and tear may result in a shorter
estimated useful life than originally anticipated. In these cases, the company
would depreciate the remaining net book value over the new estimated remaining
life, thereby increasing depreciation expense per year on a prospective basis.
Likewise, if the estimated useful life is increased, the adjustment to the
useful life decreases depreciation expense per year on a prospective basis. Over
the past three years, changes in economic useful life assumptions have not had a
material impact on the company's reported results.
The company has numerous long-term customer supply contracts, particularly in
the gases on-site business. These contracts principally have initial contract
terms of 15 to 20 years. Depreciable lives of the production assets related to
long-term contracts are matched to the contract lives. Extensions to the
contract term of supply frequently occur prior to the expiration of the initial
term. As contract terms are extended, the depreciable life of the remaining net
book value of the production assets is adjusted to match the new contract term.
The depreciable lives of merchant gas production facilities are principally 15
years. Major chemical production facilities are also generally depreciated over
15 years. The terms of customer contracts associated with products produced at
these types of facilities typically have a much shorter term. Management has
determined a 15-year life to be appropriate based on historical experience
combined with its judgment on future assumptions such as technological
advances, potential for obsolescence, competitors' actions, etc. Management
monitors its assumptions and may potentially need to adjust depreciable life as
circumstances change. A change in the depreciable life for all merchant
chemical and gas facilities by one year would impact annual depreciation
expense by approximately $20.
IMPAIRMENT OF LONG-LIVED ASSETS AND EQUITY INVESTMENTS
PLANT AND EQUIPMENT
Net plant and equipment at 30 September 2003 totaled $5,637.1. Plant and
equipment held for use is grouped for impairment testing at the lowest level for
which there are identifiable cash flows. Impairment testing of the asset group
occurs whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. The company assesses recoverability
by comparing the carrying amount of the asset group to the estimated
undiscounted future cash flows expected to be generated by the assets. If an
asset group is considered impaired, the impairment loss to be recognized would
be measured as the amount by which the asset group's carrying amount exceeds
its fair value. Assets to be disposed of by sale are reported at the lower of
carrying amount or fair value less cost to sell.
The estimate of plant and equipment fair value is based on estimated discounted
future cash flows expected to be generated by the asset group. The assumptions
underlying cash flow projections represent management's best estimates at the
time of the impairment review. Factors that management must estimate include:
industry and market conditions, sales volume and prices, costs to produce,
inflation, etc. Changes in key assumptions or actual conditions which differ
from estimates could result in an impairment charge. The company uses reasonable
and supportable assumptions when performing impairment reviews and cannot
predict the occurrence of future events and circumstances that could result in
impairment charges. Over the past three years, there have been no impairments of
asset groups held for use. As part of the actions taken in the company's global
cost reduction plans, recognized impairments of assets to be sold or abandoned
were $90.1, $3.7 and $23.8 in 2003, 2002 and 2001, respectively. Refer to the
Global Cost Reduction Plans discussion above.
GOODWILL
The purchase method of accounting for business combinations requires the company
to make use of estimates and judgments to allocate the purchase price paid for
acquisitions to the fair value of the net tangible and identifiable intangible
assets. Goodwill represents the excess of the aggregate purchase price over the
fair value of net assets of an acquired entity. Goodwill, including goodwill
associated
40
<PAGE>
with equity affiliates, was $793.5 as of 30 September 2003. The majority of the
company's goodwill is assigned to reporting units within the Gases segment.
Disclosures related to goodwill are included in Note 10 to the consolidated
financial statements.
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on 1
October 2001. In accordance with SFAS No.142, goodwill is no longer amortized
on a recurring basis but rather is subject to periodic impairment testing. Prior
to adopting SFAS No. 142, the company amortized goodwill into income over
periods not exceeding 40 years.
The company performs an impairment test annually in the fourth quarter of the
fiscal year. In addition, goodwill would be tested more frequently if changes in
circumstances or the occurrence of events indicated potential impairment exists.
The impairment test requires the company to compare the fair value of business
reporting units to carrying value including assigned goodwill. The results of
the impairment tests have indicated fair value amounts exceeded carrying amounts
by a substantial margin.
The company primarily uses the present value of future cash flows to determine
fair value. The company's valuation model assumes a five-year growth period for
the business and an estimated exit trading multiple. Management judgment is
required in the estimation of future operating results and to determine the
appropriate exit multiple. The exit multiple is determined from comparable
industry transactions. Future operating results and exit multiples could
reasonably differ from the estimates. However, given the substantial margin by
which fair value exceeded carrying amounts in the latest goodwill impairment
review, the company does not anticipate a material impact on the financial
statements from differences in these assumptions.
EQUITY INVESTMENTS
Investments in and advances to equity affiliates totaled $553.5 at 30 September
2003. The majority of the company's investments are nonpublicly traded ventures
with other companies in the industrial gas or chemicals business. Summarized
financial information of equity affiliates is included in Note 8 to the
consolidated financial statements. Equity investments are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the investment may not be recoverable.
In the event that a decline in fair value of an investment occurs, and the
decline in value is considered to be other than temporary, an impairment loss
would be recognized. Management's estimate of fair value of an investment is
based on estimated discounted future cash flows expected to be generated by the
investee. Changes in key assumptions about the financial condition of an
investee or actual conditions which differ from estimates could result in an
impairment charge. Over the past three years, there have been no impairment
charges associated with an equity investment.
ENVIRONMENTAL LIABILITIES
Accruals for environmental loss contingencies are recorded when it is probable
that a liability has been incurred and the amount can reasonably be estimated.
The company estimates the exposure for environmental contingencies to range
from $9 to a reasonably possible upper exposure of $21. The balance sheet at 30
September 2003 included an accrual of $15.3, primarily as part of other
noncurrent liabilities. Management views the measurement of environmental loss
contingency accruals as a critical accounting estimate because of the
considerable uncertainty surrounding estimation and the need to forecast into
the distant future.
In the normal course of business, the company is involved in legal proceedings
under the federal Superfund law, similar state environmental laws and RCRA
relating to the designation of certain sites for investigation or remediation.
Presently, there are approximately 40 sites on which a final settlement has not
been reached where the company, along with others, has been designated a
potentially responsible party by the Environmental Protection Agency or is
otherwise engaged in investigation or remediation. In addition, the company is
also involved in cleanup activities at certain of its manufacturing sites. Sites
for which the company monitors environmental exposure are related to operations
within the Gases and Chemicals segments as well as discontinued businesses.
Measurement of environmental accruals is based on the evaluation of currently
available information with respect to each individual site and considers factors
such as existing technology, presently enacted laws and regulations, and prior
experience in remediation of contaminated sites. An environmental accrual
related to cleanup of a contaminated site might include, for example, provision
for one or more of the following types of costs: site investigation and testing
costs, cleanup costs, costs related to soil and water contamination resulting
from tank ruptures, postremediation monitoring costs and outside legal fees.
Environmental accruals include costs related to other potentially responsible
parties to the extent that the company has reason to believe such parties will
not fully pay their proportionate share. The accruals also do not take into
account any claims for recoveries from insurance and are not discounted.
41
<PAGE>
Management's Discussion and Analysis CONTINUED
As assessments and remediation progress at individual sites, the amount of the
projected cost is reviewed periodically, and the accrual is adjusted to reflect
additional technical and legal information that becomes available. Management
has a well-established process in place to identify and monitor the company's
environmental exposures. An environmental accrual analysis is prepared and
maintained that lists all environmental loss contingencies, even where an
accrual has not been established. This analysis assists in monitoring the
company's overall environmental exposure and serves as a tool to facilitate
on-going communication among the company's technical experts, environmental
managers, environmental lawyers and financial management to ensure that required
accruals are recorded and potential exposures disclosed.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given the inherent uncertainties in evaluating environmental
exposures. Using reasonably possible alternative assumptions of the exposure
level could result in an increase to the environmental accrual. Due to the
inherent uncertainties related to environmental exposures, a significant
increase to the reasonably possible upper exposure level could occur if a new
site was designated, the scope of remediation was increased or a significant
increase in the company's proportionate share occurred.
PENSION BENEFITS
The company sponsors defined benefit pension plans in various forms for
employees who meet eligibility requirements. Several assumptions and statistical
variables are used in actuarial models to calculate the pension expense and
liability related to the various plans. Assumptions about the discount rate, the
expected rate of return on plan assets and the future rate of compensation
increases are determined by the company. The actuarial models also use
assumptions on demographic factors such as retirement, mortality and turnover.
Management considers the accounting for pension benefits critical because of the
significance and number of assumptions used. Depending on the assumptions
selected, pension expense could vary significantly and have a material effect on
reported earnings. The assumptions used can also materially affect the
measurement of benefit obligations. For a detailed discussion of the company's
pension benefits, see Pension Benefits above and Note 17 to the consolidated
financial statements.
NEW ACCOUNTING STANDARDS
In November 2002, the FASB published Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," and the Emerging Issues Task Force (EITF)
reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure." In
January 2003, the FASB published Interpretation No. 46, "Consolidation of
Variable Interest Entities." In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." In May 2003,
the FASB ratified the EITF consensus on Issue No. 01-08, "Determining Whether an
Arrangement Contains a Lease." See Note 2 to the consolidated financial
statements for information concerning the company's implementation and impact of
new accounting standards.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current
expectations at the time the document was originally prepared regarding
important risk factors. Management does not anticipate publicly updating any of
its expectations except as part of the quarterly earnings announcement process.
Actual results may differ materially from those forward-looking statements
expressed. In addition to important risk factors and uncertainties referred to
in the Management's Discussion and Analysis, factors that might cause
forward-looking statements to differ materially from actual results include
those specifically referenced as future events or outcomes that the company
anticipates as well as, among other things, overall economic and business
conditions different than those currently anticipated and demand for the
company's goods and services during that time; competitive factors in the
industries in which it competes; interruption in ordinary sources of supply;
the ability to recover increased energy and raw material costs from customers;
spikes in the pricing of natural gas; changes in government regulations;
consequences of acts of war or terrorism impacting the United States and other
markets; the success of implementing cost reduction programs; the timing,
impact, and other uncertainties of future acquisitions or divestitures;
significant fluctuations in interest rates and foreign currencies; the impact
of tax and other legislation and regulations in jurisdictions in which the
company and its affiliates operate; and the timing and rate at which tax credits
can be utilized.
42
<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 that is responsible for evaluating
the adequacy and application of financial and operating controls and for testing
compliance with company policies and procedures.
The independent auditors 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 entirely comprises individuals who
are not employees of the company. This Committee meets periodically with the
independent auditors, 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 auditors who are then appointed by the Board of Directors, subject
to ratification by the shareholders.
- -s- John P. Jones III -s- John R. Owings
- ----------------------- -----------------------
John P. Jones III John R. Owings
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
24 October 2003 24 October 2003
43
<PAGE>
REPORTS OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Air Products and Chemicals, Inc.:
We have audited the accompanying consolidated balance sheets of Air Products and
Chemicals, Inc. (a Delaware corporation) and subsidiaries as of 30 September
2003 and 2002, and the related consolidated statements of income, cash flows and
shareholders' equity for the years then ended. 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. The financial
statements of Air Products and Chemicals, Inc. for the year ended 30 September
2001 were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements, before the
revisions as described in Note 1 and Note 10 to the financial statements, in
their report dated 26 October 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 2003 and 2002 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 2003 and 2002, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed above, the financial statements of Air Products and Chemicals, Inc.
for the year ended 30 September 2001 were audited by other auditors who have
ceased operations. As described in Note 1, those financial statements have been
revised. We audited the adjustments described in Note 1 that were applied to
revise the 2001 financial statements. In our opinion, such adjustments are
appropriate and have been properly applied. In addition, as described in Note
10, the financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which was adopted as of 1 October 2001.
In our opinion, the disclosures for 2001 in Note 10 are appropriate. However, we
were not engaged to audit, review, or apply any procedures to the 2001 financial
statements of Air Products and Chemicals, Inc. other than with respect to such
adjustments and disclosures, and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.
KPMG LLP
KPMG LLP
Philadelphia, Pennsylvania
24 October 2003
44
<PAGE>
The following report is a copy of a previously issued Arthur Andersen LLP
("Andersen") report, and the report has not been reissued by Andersen. The
Andersen report refers to the consolidated balance sheets as of 30 September
2001 and 2000 and the consolidated statements of income, cash flows and
shareholders' equity for the years ended 30 September 2000 and 1999, which are
no longer included in the accompanying financial statements.
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
2001 and 2000, and the related consolidated statements of income, cash flows and
shareholders' equity for each of the three years in the period ended 30
September 2001. 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 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
30 September 2001, in conformity with accounting principles generally accepted
in the United States.
- -s- Arthur Andersen LLP
Arthur Andersen LLP
Philadelphia, Pennsylvania
26 October 2001
45
<PAGE>
THE FINANCIAL STATEMENTS
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER (millions of dollars, except per share) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $ 6,297.3 $ 5,401.2 $ 5,857.8
- -------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 4,613.1 3,815.7 4,216.4
Selling and administrative 832.6 704.3 698.7
Research and development 121.1 120.3 121.8
Other (income) expense, net (26.5) (37.1) (31.5)
Global cost reduction plans, net 152.5 23.1 107.0
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 604.5 774.9 745.4
Income from equity affiliates, net of related expenses 84.4 76.2 81.2
Gain on sale of U.S. packaged gas business -- 55.7 --
Gain on divestiture of interest in cogeneration facilities -- -- 101.6
Loss on early retirement of debt -- -- (75.8)
Interest expense 123.5 122.3 191.2
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES AND MINORITY INTEREST 565.4 784.5 661.2
Income tax provision 147.2 240.8 190.5
Minority interest in earnings of subsidiary companies 18.0 18.3 5.1
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 400.2 525.4 465.6
Cumulative effect of accounting change (2.9) -- --
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 397.3 $ 525.4 $ 465.6
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING (in millions) 219.7 217.2 214.8
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING ASSUMING DILUTION (in millions) 223.6 222.7 219.3
- -------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE
Income before cumulative effect of accounting change $ 1.82 $ 2.42 $ 2.17
Cumulative effect of accounting change (.01) -- --
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1.81 $ 2.42 $ 2.17
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of accounting change $ 1.79 $ 2.36 $ 2.12
Cumulative effect of accounting change (.01) -- --
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1.78 $ 2.36 $ 2.12
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
30 SEPTEMBER (millions of dollars, except per share) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash items $ 76.2 $ 253.7
Trade receivables, less allowances for doubtful accounts of $21.8 in 2003 and $12.0 in 2002 1,188.5 980.9
Inventories 483.1 392.6
Contracts in progress, less progress billings 82.8 68.1
Other current assets 237.3 214.0
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,067.9 1,909.3
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN NET ASSETS OF AND ADVANCES TO EQUITY AFFILIATES 553.5 484.2
PLANT AND EQUIPMENT, at cost 11,723.2 10,879.8
Less accumulated depreciation 6,086.1 5,502.0
- -------------------------------------------------------------------------------------------------------------------------------
PLANT AND EQUIPMENT, net 5,637.1 5,377.8
- -------------------------------------------------------------------------------------------------------------------------------
GOODWILL 725.8 431.1
INTANGIBLE ASSETS, net 104.1 70.9
OTHER NONCURRENT ASSETS 343.5 221.7
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,431.9 $ 8,495.0
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Payables and accrued liabilities $ 1,123.5 $ 839.3
Accrued income taxes 115.6 72.9
Short-term borrowings 165.7 116.9
Current portion of long-term debt 176.4 227.1
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,581.2 1,256.2
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,168.6 2,041.0
DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES 1,005.9 827.4
DEFERRED INCOME TAXES 705.6 725.6
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,461.3 4,850.2
- -------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 188.1 184.4
- -------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock (par value $1 per share; issued 2003 and 2002--249,455,584 shares) 249.4 249.4
Capital in excess of par value 493.9 437.1
Retained earnings 4,516.6 4,312.8
Accumulated other comprehensive income (loss) (567.2) (566.9)
Treasury stock, at cost (2003--22,189,714 shares; 2002--22,236,196 shares) (766.1) (767.8)
Shares in trust (2003--5,842,391 shares; 2002--8,684,265 shares) (144.1) (204.2)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,782.5 3,460.4
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,431.9 $ 8,495.0
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
47
<PAGE>
The Financial Statements CONTINUED
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER (millions of dollars) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 397.3 $ 525.4 $ 465.6
Adjustments to reconcile income to cash provided by operating activities:
Depreciation 640.2 581.0 573.0
Impairment of long-lived assets 91.7 3.7 23.8
Deferred income taxes 26.8 65.2 39.0
Loss on early retirement of debt -- -- 75.8
Undistributed earnings of unconsolidated affiliates (6.8) (44.4) (46.2)
Gain on sale of assets and investments (8.4) (66.5) (104.7)
Other 6.5 44.1 12.7
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,147.3 1,108.5 1,039.0
- -------------------------------------------------------------------------------------------------------------------------------
Working capital changes, excluding effects of acquisitions and
divestitures:
Trade receivables (88.0) (13.1) 63.9
Inventories and contracts in progress (53.2) 55.1 2.6
Payables and accrued liabilities 13.3 (133.7) (99.4)
Other 16.6 47.1 77.9
- -------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 1,036.0 1,063.9 1,084.0
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to plant and equipment (612.9) (627.6) (708.3)
Acquisitions, less cash acquired (529.6) (114.8) (59.2)
Investment in and advances to unconsolidated affiliates (6.1) (39.2) (38.3)
Proceeds from sale of assets and investments 102.1 292.9 497.0
Other (.1) (4.9) 31.1
- -------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,046.6) (493.6) (277.7)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Long-term debt proceeds 162.8 61.3 121.0
Payments on long-term debt (271.0) (203.6) (796.6)
Net increase (decrease) in commercial paper and short-term borrowings 37.6 (170.9) 8.0
Dividends paid to shareholders (188.6) (175.6) (165.2)
Purchase of treasury stock -- -- (87.2)
Issuance of stock for options and award plans 76.5 103.8 87.1
- -------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (182.7) (385.0) (832.9)
- -------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 15.8 2.2 (1.3)
- -------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH ITEMS (177.5) 187.5 (27.9)
CASH AND CASH ITEMS--BEGINNING OF YEAR 253.7 66.2 94.1
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH ITEMS--END OF YEAR $ 76.2 $ 253.7 $ 66.2
===============================================================================================================================
Cash paid during the year for:
Interest (net of amounts capitalized) $ 123.6 $ 124.1 $ 226.7
Taxes (net of refunds) 79.1 136.5 62.6
</TABLE>
The accompanying notes are an integral part of these statements.
48
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Accumulated
Common Capital in Other
(millions of dollars, Shares Common Excess of Retained Comprehensive Treasury Shares in
except per share) Outstanding Stock Par Value Earnings Income (Loss) Stock Trust Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE 30 SEPTEMBER 2000 214,218,709 $249.4 $342.2 $3,667.9 $(407.8) $(681.6) $(348.8) $ 2,821.3
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 465.6 465.6
Net gain on derivatives,
net of income tax of $1.1 1.8 1.8
Translation adjustments,
net of income tax of $14.1 (43.3) (43.3)
Net change in unrealized
holding gains, net of
income tax of $3.8 6.3 6.3
Change in minimum pension
liability, net of income tax
of $5.8 (9.5) (9.5)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 420.9
Issuance of shares in trust for
stock options and award plans 3,362,762 25.0 75.7 100.7
Tax benefit of stock option and
award plans 17.7 17.7
Cash dividends ($.78 per share) (167.6) (167.6)
Purchase of treasury shares (2,118,851) (87.2) (87.2)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE 30 SEPTEMBER 2001 215,462,620 $249.4 $384.9 $3,965.9 $(452.5) $(768.8) $(273.1) $ 3,105.8
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 525.4 525.4
Net gain on derivatives,
net of income tax of $.3 1.1 1.1
Translation adjustments,
net of income tax of $29.8 50.1 50.1
Net change in unrealized
holding gains, net of income
tax of $1.6 (7.4) (7.4)
Change in minimum pension
liability, net of income tax
of $81.4 (158.2) (158.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 411.0
Issuance of treasury shares
and shares in trust for stock
options and award plans 3,072,503 30.3 1.0 68.9 100.2
Tax benefit of stock option and
award plans 21.9 21.9
Cash dividends ($.82 per share) (178.5) (178.5)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE 30 SEPTEMBER 2002 218,535,123 $249.4 $437.1 $4,312.8 $(566.9) $(767.8) $(204.2) $3,460.4
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 397.3 397.3
Net loss on derivatives,
net of income tax of $2.5 (5.1) (5.1)
Translation adjustments, net
of income tax of $60.3 146.8 146.8
Net change in unrealized
holding gains, net of
income tax of $3.1 5.1 5.1
Change in minimum pension
liability, net of income
tax of $71.4 (147.1) (147.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 397.0
Issuance of treasury shares
and shares in trust for stock
options and award plans 2,888,356 34.6 1.7 60.1 96.4
Tax benefit of stock option and
award plans 22.2 22.2
Cash dividends ($.88 per share) (193.5) (193.5)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE 30 SEPTEMBER 2003 221,423,479 $249.4 $493.9 $4,516.6 $(567.2) $(766.1) $(144.1) $3,782.5
==================================================================================================================================
</Table>
The accompanying notes are an integral part of these statements.
49
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
(millions of dollars, except per share)
1. MAJOR ACCOUNTING POLICIES
CONSOLIDATION PRINCIPLES
The consolidated financial statements include the accounts of Air Products and
Chemicals, Inc. and its majority-owned subsidiary companies (the company). The
company consolidates all entities that it controls. The equity method of
accounting is used when the company has a 20% to 50% interest in other
companies and exercises significant influence. Under the equity method, original
investments are recorded at cost and adjusted by the company's share of
undistributed earnings or losses of these companies.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from gases and chemicals sales is recognized as risk and title to the
product transfers to the customer which occurs at the time shipment is made.
Sales returns and allowances are not a business practice in the industry.
Revenues from equipment sale contracts are recorded primarily using the
percentage-of-completion method. Under this method, revenues from the sale of
major equipment, such as natural gas liquefaction (LNG) heat exchangers and air
separation units, are recognized primarily based on labor hours incurred to date
compared with total estimated labor hours. Changes to total estimated labor
hours and anticipated losses, if any, are recognized in the period determined.
Amounts billed for shipping and handling fees are classified as sales in the
consolidated income statements. Costs incurred for shipping and handling are
classified as cost of sales.
PLANT AND EQUIPMENT
Plant and equipment is stated at cost less accumulated depreciation.
Construction costs, labor and applicable overhead related to installations are
capitalized. Expenditures for additions and improvements that extend the lives
or increase the capacity of plant assets are capitalized. The costs of
maintenance and repairs of plant and equipment are charged to expense as
incurred.
Depreciation is recorded using the straight-line method, which deducts equal
amounts of the cost of each asset from earnings every year over its expected
useful life. The estimated useful lives primarily range from 15 to 30 years
(principally 30 years) for buildings and principally from 15 to 20 years for gas
generating and chemical facilities, machinery and equipment.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The company assesses recoverability by comparing the carrying
amount of the asset to estimated undiscounted future cash flows expected to be
generated by the asset. If an asset is considered impaired, the impairment loss
to be recognized is measured as the amount by which the asset's carrying amount
exceeds its fair value. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less cost to sell.
CAPITALIZED INTEREST
As the company builds new plant and equipment, it includes in the cost of these
assets a portion of the interest payments it makes during the year. The amount
of capitalized interest was $4.2, $9.4 and $6.0 in 2003, 2002 and 2001,
respectively.
FINANCIAL INSTRUMENTS
The company addresses certain financial exposures through a controlled program
of risk management that includes the use of derivative financial instruments.
The types of derivative financial instruments permitted for such risk management
programs are specified in policies set by management. The company currently
enters into foreign exchange contracts, including forward, option combination
and purchased option contracts, to reduce the effects of fluctuating foreign
currency exchange rates. The company currently enters into interest rate swap
contracts to reduce interest rate risks and to modify the interest rate
characteristics of its outstanding debt. The company is also currently party to
cross currency interest rate swap agreements. Major financial institutions are
counterparties to these contracts. The company has established counterparty
credit guidelines and only enters into transactions with financial institutions
of investment grade or better. Management believes the risk of incurring losses
related to credit risk
50
<PAGE>
is remote, and any losses would be immaterial to consolidated financial results.
The company recognizes derivatives on the balance sheet at fair value. On the
date the derivative instrument is entered into, the company generally designates
the derivative as either (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), (2) a hedge
of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability (cash flow hedge), or (3) a
hedge of a net investment in a foreign operation. Changes in the fair value of a
derivative that is designated as and meets all the required criteria for a fair
value hedge, along with the gain or loss on the hedged asset or liability that
is attributable to the hedged risk, are recorded in current period earnings.
Changes in the fair value of a derivative that is designated as and meets all
the required criteria for a cash flow hedge are recorded in accumulated other
comprehensive income and reclassified into earnings as the underlying hedged
item affects earnings. Changes in the fair value of a derivative or foreign
currency debt that is designated as and meets all the required criteria for a
hedge of a net investment are recorded as translation adjustments in accumulated
other comprehensive income. Changes in the fair value of a derivative that is
not designated as a hedge are recorded immediately in earnings.
The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes relating all
derivatives that are designated as fair value or cash flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. The company also formally assesses, both at the
inception of the hedge and on an ongoing basis, whether each derivative is
highly effective in offsetting changes in fair values or cash flows of the
hedged item. If it is determined that a derivative is not highly effective as a
hedge, or if a derivative ceases to be a highly effective hedge, the company
will discontinue hedge accounting with respect to that derivative prospectively.
FOREIGN CURRENCY
The value of the U.S. dollar rises and falls day to day on foreign currency
exchanges. Since the company does business in many foreign countries, these
fluctuations affect the company's financial position and results of operations.
For most foreign operations, local currencies are considered the functional
currency. Generally, foreign subsidiaries translate their assets and liabilities
into U.S. dollars at current exchange rates -- that is, the rates in effect at
the end of the fiscal period. The gains or losses that result from this process
are shown in accumulated other comprehensive income in the shareholders' equity
section of the balance sheet.
The revenue and expense accounts of foreign subsidiaries are translated into
U.S. dollars at the average exchange rates that prevailed during the period.
Therefore, the U.S. dollar value of these items on the income statement
fluctuates from period to period, depending on the value of the dollar against
foreign currencies. Some transactions are made in currencies different from an
entity's functional currency. Gains and losses from these foreign currency
transactions are generally included in income as they occur.
ENVIRONMENTAL EXPENDITURES
Accruals for investigatory, external legal costs and noncapital remediation
costs are recorded when it is probable that a liability has been incurred and
the amount of loss can be reasonably estimated. Remediation costs are
capitalized if the costs improve the company's property as compared with the
condition of the property when originally constructed or acquired, or if the
costs prevent environmental contamination from future operations. Costs to
operate and maintain the capitalized facilities are expensed as incurred.
The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and considers
factors such as existing technology, presently enacted laws and regulations and
prior experience in remediation of contaminated sites. These liabilities include
costs related to other potentially responsible parties to the extent that the
company has reason to believe such parties will not fully pay their
proportionate share. They also do not take into account any claims for
recoveries from insurance and are not discounted. As assessments and remediation
progress at individual sites, these liabilities are reviewed periodically and
adjusted to reflect additional technical and legal information that becomes
available. Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The accruals for environmental liabilities are
reflected in the balance sheet, primarily as part of other noncurrent
liabilities.
STOCK-BASED COMPENSATION
The company has various stock-based compensation plans as described in Note 14.
The company accounts for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
compensation expense has been recognized in net income for stock options. The
following table
51
<PAGE>
Notes to the Financial Statements CONTINUED
illustrates the effect on net income and earnings per share as if the company
had applied the fair value recognition provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
to its stock option plans.
<TABLE>
<CAPTION>
2003 2002 2001
- -----------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME, AS REPORTED $ 397.3 $ 525.4 $ 465.6
Deduct total stock option employee
compensation expense determined
under fair value-based method,
net of related tax effects (37.9) (40.9) (30.1)
- -----------------------------------------------------------------------
PRO FORMA NET INCOME $ 359.4 $ 484.5 $ 435.5
- -----------------------------------------------------------------------
BASIC EARNINGS PER SHARE
As reported $ 1.81 $ 2.42 $ 2.17
Pro forma 1.64 2.23 2.03
- -----------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
As reported $ 1.78 $ 2.36 $ 2.12
Pro forma 1.61 2.18 2.00
=======================================================================
</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 assumptions:
<TABLE>
<CAPTION>
2003 2002 2001
- ----------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 2.0% 2.0% 2.1%
Expected volatility 30.6% 30.1% 29.2%
Risk-free interest rate 3.6% 4.7% 5.9%
Expected life (years) 7.9 7.8 7.6
==========================================================
</TABLE>
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.
The weighted average fair value of options granted as calculated by the
Black-Scholes option-pricing model was $13.71 per share in 2003, $12.90 per
share in 2002 and $12.82 per share in 2001.
INCOME TAXES
The company accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the tax effects
of temporary differences between the financial reporting and tax bases of assets
and liabilities using enacted tax rates. A principal temporary difference
results from the excess of tax depreciation over book depreciation because
accelerated methods of depreciation and shorter useful lives are used for income
tax purposes. The cumulative impact of a change in tax rates or regulations is
included in income tax expense in the period that includes the enactment date.
CASH AND CASH ITEMS
Cash and cash items include cash, time deposits and certificates of deposit
acquired with an original maturity of three months or less.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The allowances for doubtful accounts represent estimated uncollectible
receivables associated with potential customer defaults on contractual
obligations, usually due to customers' potential insolvency. The allowances
include amounts for certain customers where a risk of default has been
specifically identified. In addition, the allowances include a provision for
customer defaults on a general formula basis when it is determined the risk of
some default is probable and estimable but cannot yet be associated with
specific customers. The assessment of the likelihood of customer defaults is
based on various factors, including the length of time the receivables are past
due, historical experience and existing economic conditions.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of chemical
inventories and some gas and equipment inventories in the United States is
determined using the last-in, first-out (LIFO) method. The cost of other
inventories is principally determined using the first-in, first-out (FIFO)
method.
As of 30 September 2003, the company changed its method of accounting for LIFO
inventory by reducing the number of LIFO inventory pools from ten pools to three
pools. This newly adopted accounting principle is preferable as each pool will
include items with similar economic activity. The adoption of this new
accounting principle did not have a material effect on the company's financial
statements.
GOODWILL AND INTANGIBLE ASSETS
When a company is acquired, the difference between the fair value of its net
assets, including identified intangibles, and the purchase price is goodwill.
Goodwill is recorded as a noncurrent asset on the balance sheet.
52
<PAGE>
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and intangible assets. The
Statement provides that goodwill and intangible assets with indefinite lives are
no longer amortized on a recurring basis but instead are subject to impairment
testing at least annually. The company adopted SFAS No. 142 on 1 October 2001.
Accordingly, the company no longer amortizes goodwill, including goodwill
associated with investments in equity affiliates. In accordance with the
provisions of SFAS No. 142, the company performed impairment tests on goodwill
which indicated no impairment of goodwill. Disclosures required by SFAS No. 142
are presented in Note 10.
Prior to 1 October 2001, the company amortized goodwill into income over periods
not exceeding 40 years.
Intangible assets with determinable lives primarily consist of customer
relationships, noncompete covenants and purchased patents and technology. There
were no acquired intangible assets with indefinite lives. The cost of intangible
assets with determinable lives is amortized on a straight-line basis over the
estimated period of economic benefit. Customer relationships are generally
amortized over periods of three to ten years. Noncompete covenants are generally
amortized over periods of three to five years based on contractual terms.
Purchased patents and technology and other intangibles are amortized based on
contractual terms, ranging from eight to twenty years. Amortizable lives are
adjusted whenever there is a change in the estimated period of economic benefit.
The company reviews long-lived assets, including intangible assets with
determinable lives, for impairment whenever events and circumstances indicate
the carrying amount of the assets may not be recoverable.
RETIREMENT-RELATED BENEFITS
The cost of retiree benefits is recognized over the employees' service period.
The company's defined benefit pension plans are accounted for in accordance with
SFAS No. 87, "Employers' Accounting for Pensions." Nonpension postretirement
benefits are accounted for in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." These Statements
require the use of actuarial methods and assumptions in the valuation of benefit
obligations and the performance of plan assets. Differences between actual and
expected results or changes in the value of obligations and plan assets are not
recognized as they occur but rather, systematically and gradually over
subsequent periods. Refer to Note 17 for disclosures related to the company's
pension and other postretirement benefits.
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.
RECLASSIFICATIONS
The company changed its reporting for the global cost reduction plans to present
the costs on a separate income statement line item within operating income. In
2003, the company recorded a net global cost reduction plan expense of $152.5,
which was previously reflected in the income statement as follows: cost of sales
$20.6, selling and administrative $34.1, research and development $2.1 and other
expense $95.7. In 2002, the company recorded a net global cost reduction plan
expense of $23.1, which was previously reflected in the income statement as
follows: cost of sales $12.0, selling and administrative $10.8, research and
development $.3. In 2001, the company recorded a net global cost reduction plan
expense of $107.0, which was previously reflected in the income statement as
follows: cost of sales $26.9, selling and administrative $53.4, research and
development $.7 and other expense of $26.0.
As of 1 October 2001, the company changed its reporting of demurrage/cylinder
income to include it in revenues. Previously, it was included as an offset to
cost of sales. The consolidated income statements of the prior periods were
adjusted to reflect this reclassification.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." The Statement requires gains and losses from
debt extinguishments that are used as part of the company's risk management
strategy to be classified as income from operations rather than as extraordinary
items, net of tax. The company adopted this Statement as of 1 July 2002. The
impact on the company was to reclassify the extraordinary item recorded in the
fourth quarter of 2001 to income from continuing operations.
53
<PAGE>
Notes to the Financial Statements CONTINUED
2. NEW ACCOUNTING STANDARDS
STANDARDS ADOPTED 2003
The company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
on 1 October 2002. The Statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred. The liability is measured at discounted fair value and is adjusted to
its present value in subsequent periods as accretion expense is recorded. The
corresponding asset retirement costs are capitalized as part of the carrying
amount of the related long-lived asset and depreciated over the asset's useful
life. The company's asset retirement obligations are primarily associated with
Gases on-site long-term supply contracts under which the company has built a
facility on land leased from the customer and is obligated to remove the
facility at the end of the contract term. At 1 October 2002, the company
recognized transition amounts for existing asset retirement obligation
liabilities, associated capitalizable costs and accumulated depreciation. An
after-tax transition charge of $2.9 was recorded as the cumulative effect of an
accounting change. The ongoing expense on an annual basis resulting from the
initial adoption of SFAS No. 143 is approximately $1.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Statement also supersedes APB Opinion No. 30 provisions
related to the accounting and reporting for the disposal of a segment of a
business. This Statement establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale. The Statement retains most of the requirements in SFAS No. 121 related
to the recognition of impairment of long-lived assets to be held and used.
Additionally, SFAS No. 144 broadens the definition of businesses that qualify
for reporting as discontinued operations and changes the timing of recognizing
losses on such operations. The company adopted this Statement as of 1 October
2002, with no material effect on the company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses the accounting for
costs associated with disposal activities covered by SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," and with exit
(restructuring) activities previously covered by Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." This Statement nullifies EITF
Issue No. 94-3 in its entirety and requires that a liability for all costs be
recognized when the liability is incurred. Generally, the ability to accrue for
termination benefits at the communication date of a plan in the form of a
one-time benefit arrangement is limited. The cost of the termination benefits
would be recognized over the future service period of the employees. This
Statement does not change the accounting for termination benefits under ongoing
benefit arrangements such as those included in the company's global cost
reduction plans discussed in Note 3. The company adopted SFAS No. 146 as of 1
October 2002. The adoption of this Statement did not have an impact on the
company's financial statements.
In November 2002, the FASB published Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation expands on the
disclosure requirements to be made in interim and annual financial statements.
The company has included the required disclosures in Note 18. The Interpretation
also requires that a liability measured at fair value be recognized for
guarantees even if the probability of payment on the guarantee is remote. The
recognition provisions applied on a prospective basis for guarantees issued or
modified after 31 December 2002. The company has not issued or modified any
guarantees subsequent to 31 December 2002.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This Issue addresses the
appropriate accounting by vendors for arrangements that will result in the
delivery of multiple products, services and/or rights to assets that could occur
over a period of time. The application of EITF Issue No. 00-21 did not have a
material effect on the company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and frequent disclosures
in financial statements. Also, SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. The company has included the disclosures
prescribed by SFAS No. 148 in Note 1. The company does not intend to change its
accounting method for stock-based compensation until a new uniform accounting
standard is issued.
54
<PAGE>
In January 2003, the FASB published Interpretation No. 46, "Consolidation of
Variable Interest Entities." This Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The Interpretation establishes standards under which
a Variable Interest Entity should be consolidated by the primary beneficiary.
The company does not have an interest in a Variable Interest Entity.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." In May 2003, the FASB issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." The adoption of these Statements did not have a
material effect on the company's financial statements.
In May 2003, the FASB ratified the EITF consensus on Issue No. 01-08,
"Determining Whether an Arrangement Contains a Lease." The EITF consensus
applied prospectively to new or modified arrangements beginning after 30 June
2003. The Issue addresses how to determine whether an arrangement contains a
lease that is within the scope of SFAS No. 13, "Accounting for Leases." Under
the EITF consensus, certain contracts within the company's Gases segment
associated with on-site tonnage facilities servicing one customer may
potentially be considered leases. In cases where operating-lease treatment is
necessary, there would be no change to the company's financial results. In cases
where capital-lease treatment is necessary, the timing of revenue and expense
recognition would be impacted. Revenue would be recognized immediately for the
sale of equipment component of a contract (as compared to the current method of
revenue recognition over the life of the arrangement). A portion of revenues
formerly reported as sales would be reflected as interest income resulting from
the lease receivable. The application of this EITF consensus did not have a
material effect on the financial statements in 2003. The impact of the EITF
consensus on the company's financial statements beyond 2003 is dependent upon
the contracts executed and potential changes in business practices and
contractual arrangements.
STANDARDS ADOPTED 2002
As discussed in Note 1, the company adopted SFAS No. 142 and SFAS No. 145 during
2002.
3. GLOBAL COST REDUCTION PLANS
2003 PLAN
In 2003, the company recorded an expense of $152.7 for a global cost reduction
plan (2003 Plan). This expense included $56.8 for severance and pension-related
benefits and $95.9 for asset disposals and facility closures in the Gases and
Chemicals segments.
During the third quarter of 2003, the company completed a capacity utilization
analysis in several businesses in the Gases segment. To reduce capacity and
costs, several facilities ceased operation as of 30 June 2003. An expense of
$37.6 was recognized for the closure of these facilities, net of expected
recovery from disposal. A decision was made to terminate several incomplete
capacity expansion projects. An expense of $13.0 was recognized for the cost of
terminating these projects, net of expected recovery from disposal and
redeployment. An expense of $3.6 was also recognized for the planned sale of two
real estate properties and the termination of several leases for small
facilities. These expenses were principally in the North American merchant and
tonnage businesses with a modest amount in the Electronics business.
The rationalization of excess capacity in certain products resulted in a
decision to exit certain Chemical Intermediates operations. Late in the quarter
ended 30 June 2003, the company decided to pursue the sale of its European
methylamines and derivatives business. The company expects to complete the sale
by 30 June 2004. Expected proceeds from the sale were determined and a loss was
recognized for the difference between the carrying value of the assets and the
expected net proceeds from the sale. Additional expenses for the closure of the
methanol and ammonia plants in Pensacola, Florida, which made products for
internal consumption, were also recognized. The total expense for these actions
was $41.7.
In addition to the capacity reduction initiatives, the company continues to
implement cost reduction and productivity-related efforts. The divestitures, the
capacity reductions and the cost control initiatives will result in the
elimination of 461 positions from the company. The company will complete the
2003 Plan by 30 June 2004. Approximately 30% of the position reductions relates
to capacity rationalization and divestitures. An additional 40% relates to
ongoing productivity efforts and balancing engineering resources with project
activity and the remaining 30% relates to a reduction in the number of
management positions.
55
<PAGE>
Notes to the Financial Statements CONTINUED
The following table presents the detail of expenses by segment for the global
cost reduction plan recorded in 2003:
<TABLE>
<CAPTION>
Severance Pension Other(A) Total
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gases $ 27.1 $ 10.9 $ 54.2 $ 92.2
Chemicals 14.4 2.0 41.7 58.1
Equipment 2.2 .2 -- 2.4
- -------------------------------------------------------------------
PROVISION FOR 2003 PLAN $ 43.7 $ 13.1 $ 95.9 $ 152.7
Reversal of 2002 Plan (.2) -- -- (.2)
- -------------------------------------------------------------------
NET EXPENSE IN 2003 $ 43.5 $ 13.1 $ 95.9 $ 152.5
===================================================================
</TABLE>
(A) Asset impairments and related expenses are included in the other
category.
2002 PLAN
In 2002, the company recorded an expense of $30.8 for a global cost reduction
plan (2002 Plan), including U.S. packaged gas divestiture-related reductions.
This expense included $27.1 for severance and pension-related benefits and $3.7
for asset impairments related to the planned sale or closure of two small
chemical facilities. The 2002 Plan included 333 position eliminations in the
areas of manufacturing, engineering, distribution and overheads. The 2002 Plan
was completed as expected in March 2003.
The following table presents the detail of expenses by segment for the global
cost reduction plan recorded in 2002:
<TABLE>
<CAPTION>
Severance Pension Other(A) Total
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gases $ 15.6 $ 10.6 $ -- $ 26.2
Chemicals .8 .1 3.7 4.6
- ------------------------------------------------------------------
PROVISION FOR 2002 PLAN $ 16.4 $ 10.7 $ 3.7 $ 30.8
Reversal of 2001 Plan (7.1) -- (.6) (7.7)
- ------------------------------------------------------------------
NET EXPENSE IN 2002 $ 9.3 $ 10.7 $ 3.1 $ 23.1
==================================================================
</TABLE>
(A) Asset impairments and related expenses are included in the other category.
2001 PLAN
In 2001, the company recorded an expense of $109.2 for a global cost reduction
plan (2001 Plan). This expense included $79.6 for severance benefits and pension
plan settlements and $29.6 for asset impairments and related restructuring
charges. The 2001 Plan included 670 position eliminations in the areas of
manufacturing, engineering, distribution and overheads. The company decided to
divest several small facilities, which required a write-down of the net carrying
value to the estimated net realizable value. The 2001 Plan was completed in
2002, with 644 positions eliminated and total expenses of $101.5 incurred. The
balance of the accrual of $7.7 was reversed into income during 2002.
The following table presents the detail of expenses by segment for the global
cost reduction plan recorded in 2001:
<TABLE>
<CAPTION>
Severance Pension Other(A) Total
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gases $ 47.0 $ 10.3 $ 11.8 $ 69.1
Chemicals 9.4 1.4 17.8 28.6
Equipment 1.2 .8 -- 2.0
Corporate -- 9.5 -- 9.5
- --------------------------------------------------------------------
PROVISION FOR 2001 PLAN $ 57.6 $ 22.0 $ 29.6 $ 109.2
Reversal of 2000 Plan (2.2) -- -- (2.2)
- --------------------------------------------------------------------
NET EXPENSE IN 2001 $ 55.4 $ 22.0 $ 29.6 $ 107.0
====================================================================
</TABLE>
(A) Asset impairments and related expenses are included in the other category.
PLAN ACCRUAL
The following table summarizes changes to the carrying amount of the accrual for
global cost reduction plans:
<TABLE>
<CAPTION>
BALANCE AS OF Severance Pension Other(A) Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30 SEPTEMBER 2000 $ 23.5 $ -- $ -- $ 23.5
Provision 57.6 22.0 29.6 109.2
Noncash expenses -- (22.0) (23.8) (45.8)
Cash expenditures (29.8) -- (4.3) (34.1)
Reverse 2000 Plan balance (2.2) -- -- (2.2)
- -----------------------------------------------------------------------------
30 SEPTEMBER 2001 $ 49.1 $ -- $ 1.5 $ 50.6
Provision 16.4 10.7 3.7 30.8
Noncash expenses -- (10.7) (3.7) (14.4)
Cash expenditures (51.6) -- (.9) (52.5)
Reverse 2001 Plan balance (7.1) -- (.6) (7.7)
- -----------------------------------------------------------------------------
30 SEPTEMBER 2002 $ 6.8 $ -- $ -- $ 6.8
Provision 43.7 13.1 95.9 152.7
Noncash expenses -- (13.1) (90.1) (103.2)
Cash expenditures (11.7) -- (1.7) (13.4)
Reverse 2002 Plan balance (.2) -- -- (.2)
- -----------------------------------------------------------------------------
30 SEPTEMBER 2003 $ 38.6 $ -- $ 4.1 $ 42.7
=============================================================================
</TABLE>
(A) Asset impairments and related expenses are included in the other category.
4. ACQUISITIONS
Acquisitions in 2003, totaling $529.6, included Ashland's Electronic Chemicals
business, American Homecare Supply, LLC (AHS), additional small homecare
businesses, and Sanwa Chemical Industry Co., Ltd. Acquisitions in 2002, totaling
$114.8, principally included the purchase of an additional 22% of the
outstanding shares of San Fu Gas Company, Ltd. (San Fu). The acquisitions in
2003 and the San Fu acquisition in 2002 contributed $411.9 and $64.9 to sales
and operating income, respectively, for the twelve months ended 30 September
2003.
56
<PAGE>
ASHLAND'S ELECTRONIC CHEMICALS BUSINESS
On 29 August 2003, the company acquired the Electronic Chemicals business of
Ashland Specialty Chemical Company, a division of Ashland Inc., in a cash
transaction valued at $293.2. Goodwill recognized in this transaction amounted
to $89.6, of which $21.3 is deductible for tax purposes. Identified intangibles
included in this transaction amounted to $27.1. Ashland's Electronic Chemicals
business is a leading global supplier of ultrapure specialty chemicals and
services used by the electronics industry to make semiconductor devices. With
annual revenues of approximately $200, the Electronic Chemicals business of
Ashland has a global network of sales and marketing offices in North America,
Europe and Asia.
AMERICAN HOMECARE SUPPLY, LLC (AHS)
In October 2002, the company acquired AHS, a homecare market leader throughout
the northeastern United States, for $165.8. Subsequently, AHS has acquired
additional small homecare businesses for $52.3 and has been renamed Air Products
Healthcare. Goodwill recognized in these transactions amounted to $152.4, of
which $102.1 is deductible for tax purposes. Identified intangibles included in
these transactions amounted to $20.7. These acquisitions contributed $155.9 to
sales in 2003. Prior to these acquisitions, the company and its affiliates had a
homecare position serving approximately 180,000 patients. With these
acquisitions, the company and its affiliates will provide home medical services
to more than 320,000 patients in 14 countries, a significant step in the
company's strategy to be a global healthcare provider.
SAN FU GAS COMPANY, LTD. (SAN FU)
In July 2002, the company purchased an additional 22% of the outstanding shares
of San Fu, increasing the company's ownership interest from 48% to 70%. Since
1987, the company has had a joint venture ownership of San Fu, the largest
industrial gas company in Taiwan. San Fu is a full-service industrial gas and
chemical company with a broad product portfolio, supplying specialty gases,
electronic piping and equipment, liquid bulk gases, on-site/pipeline gases and
chemicals to the Taiwan marketplace. This investment is consistent with the
company's strategy of investing in growth markets (Asia) and industries
(electronics) and will provide a stronger foundation for growth in both Taiwan
and China.
As of 30 June 2002, the company accounted for its investment in San Fu using the
equity method. In July 2002, the company obtained control through the
acquisition of an additional 22% of the outstanding shares and began to
consolidate this investment. San Fu had revenues of approximately $215 for the
twelve months ended 30 September 2002. Goodwill recognized in this transaction
amounted to $51.4, which was not deductible for tax purposes. Identified
intangibles included in this transaction amounted to $19.5. As part of this
transaction, put options have been issued which give other shareholders the
right to sell San Fu stock to the company at market price when exercised. The
options are effective from January 2005 through January 2015 and allow for the
sale of all stock owned by other shareholders to the company.
5. DIVESTITURES
SALE OF CANADIAN PACKAGED GAS BUSINESS
On 1 April 2003, the company completed the sale of the majority of its Canadian
packaged gas business to the BOC Group for cash proceeds of $41.2.
SALE OF U.S. PACKAGED GAS BUSINESS
On 28 February 2002, the company completed the sale of the majority of its U.S.
packaged gas business, excluding the electronic gases and magnetic resonance
imaging-related helium operations, to Airgas, Inc. This sale included
approximately 100 facilities in 30 states associated with the filling and
distribution of cylinders, liquid dewars, tube trailers and other containers of
industrial gases and nonelectronic specialty gases and the retail selling of
welding hard goods, including customer service centers, warehouses and other
related assets. The company also sold its packaged gas operations in the
Carolinas and in Southern Virginia to National Welders Supply Company, Inc., a
joint venture between Airgas and the Turner family of Charlotte, N.C. The assets
sold generated approximately $240 in revenues in 2001, with a modest
contribution to operating income. For the five months ended 28 February 2002,
the revenues were approximately $100, also with a modest contribution to
operating income. These facilities employed 1,200 people. The cash proceeds from
these transactions were $254.5. The results for 2002 included a gain of $55.7.
SALE OF INTEREST IN COGENERATION FACILITIES
In the fourth quarter of 2001, the company sold its 50% interest in two
cogeneration facilities located in Cambria County, Pennsylvania and Orlando,
Florida. The Cambria facility uses a coal by-product to generate electricity,
with power generation capability of 88 megawatts.
57
<PAGE>
Notes to the Financial Statements CONTINUED
The Orlando facility is a natural gas-fired power plant with power generation
capability of 115 megawatts. These investments contributed approximately $11 to
net income in 2001. The results for 2001 included a gain of $101.6.
6. FINANCIAL INSTRUMENTS
CURRENCY RISK MANAGEMENT
The company does business in many foreign countries. Therefore, its earnings,
cash flows and financial position are exposed to foreign currency risk from
foreign currency denominated transactions and net investments in foreign
operations.
It is the policy of the company to minimize its cash flow exposure to adverse
changes in currency and exchange rates. This is accomplished by identifying and
evaluating the risk that the company's cash flows will decline in value due to
changes in exchange rates, and by determining the appropriate strategies
necessary to manage such exposures. The company's objective is to maintain
economically balanced currency risk management strategies that provide adequate
downside protection.
The company enters into a variety of foreign exchange contracts, including
forward, option combination and purchased option contracts, to hedge its
exposure to fluctuations in foreign currency exchange rates. These agreements
generally involve the exchange of one currency for a second currency at some
future date.
The company enters into foreign exchange contracts, including forward, option
combination and purchased option contracts, to reduce the cash flow exposure to
foreign currency fluctuations associated with certain monetary assets and
liabilities, as well as highly anticipated cash flows and certain firm
commitments. Examples of such exposures are the purchase of plant and equipment
and export sales transactions. Forward exchange contracts are also used to hedge
the value of investments in certain foreign subsidiaries and affiliates by
creating a liability in a currency in which the company has a net equity
position. The company also uses foreign currency denominated debt to hedge
certain net investments in foreign operations.
Certain forward exchange contracts entered into by the company are not
designated as hedging instruments. Contracts used to hedge the exposure to
foreign currency fluctuations associated with certain monetary assets and
liabilities are not designated as hedging instruments, and changes in the fair
value of these items are recorded in earnings to offset the foreign exchange
gains and losses of the monetary assets and liabilities. Other forward exchange
contracts may be used to economically hedge foreign currency exposures that are
not designated as hedging instruments due to the immaterial amount of the
underlying hedged exposures. Changes in the fair value of these contracts are
also recorded in earnings.
DEBT PORTFOLIO MANAGEMENT
It is the policy of the company to identify on a continuing basis the need for
debt capital and evaluate the financial risks inherent in funding the company
with debt capital. Reflecting the result of this ongoing review, the debt
portfolio and hedging program of the company is managed with the objectives and
intent to (1) reduce funding risk with respect to borrowings made or to be made
by the company to preserve the company's access to debt capital and provide debt
capital as required for funding and liquidity purposes, and (2) reduce the
aggregate interest rate risk of the debt portfolio in accordance with certain
debt management parameters.
The company enters into interest rate swap agreements to change the
fixed/variable interest rate mix of its debt portfolio in order to maintain the
percentage of fixed- and variable-rate debt within the parameters set by
management. In accordance with these parameters, the agreements are used to
reduce interest rate risks and costs inherent in the company's debt portfolio.
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. It is the company's
policy not to enter into any interest rate swap contracts which lever a move in
interest rates on a greater than one-to-one basis.
The company is also party to cross currency interest rate swap contracts. These
contracts entail both the exchange of fixed- and floating-rate interest payments
periodically over the life of the agreement and the exchange of one currency for
another currency at inception and at a specified future date. These contracts
effectively convert the currency denomination of a debt instrument into another
currency in which the company has a net equity position while changing the
interest rate characteristics of the instrument. The contracts are used to hedge
intercompany and third-party borrowing transactions and certain net investments
in foreign operations.
FAIR VALUE HEDGES
For the years ended 30 September 2003 and 2002, there was no material gain or
loss recognized in earnings resulting from hedge ineffectiveness or from
excluding a portion of derivative instruments' gain or loss from the assessment
of hedge effectiveness related to
58
<PAGE>
derivatives designated as fair value hedges. Also, the amount recognized in
earnings in 2003 and 2002 as a result of a hedged firm commitment no longer
qualifying as a fair value hedge was not material.
CASH FLOW HEDGES
For the years ended 30 September 2003 and 2002, there was no material gain or
loss recognized in earnings resulting from hedge ineffectiveness or from
excluding a portion of derivative instruments' gain or loss from the assessment
of hedge effectiveness related to derivatives designated as cash flow hedges.
The amount reclassified from accumulated other comprehensive income into
earnings as a result of the discontinuance of foreign currency cash flow hedges
due to the probability of the original forecasted transactions not occurring by
the original specified time period was not material in 2003 and 2002. The amount
in other comprehensive income expected to be reclassified into earnings in 2004
is also not material.
As of 30 September 2003, the maximum length of time over which the company is
hedging its exposure to the variability in future cash flows for forecasted
transactions is three years.
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
For the years ended 30 September 2003 and 2002, $178.2 and $68.2, respectively,
of net losses related to hedges of net investments in foreign operations were
included in accumulated other comprehensive income within shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Summarized below are the carrying values and fair values of the company's
financial instruments as of 30 September 2003 and 2002.
<TABLE>
<CAPTION>
2003 2003 2002 2002
CARRYING FAIR Carrying Fair
30 SEPTEMBER VALUE VALUE Value Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS (LIABILITIES)
Other investments $ 63.4 $ 63.4 $ 50.1 $ 50.1
Currency option contracts .1 .1 1.1 1.1
Interest rate swap agreements 21.3 21.3 20.6 20.6
Cross currency interest rate swap contracts (9.5) (9.5) 6.2 6.2
Forward exchange contracts (66.1) (66.1) (3.5) (3.5)
Long-term debt, including current portion (2,345.0) (2,487.9) (2,268.1) (2,387.4)
===============================================================================================
</TABLE>
The fair values of the company's debt, interest rate swap agreements, cross
currency interest rate swap contracts, forward exchange contracts, option
combination contracts and purchased foreign currency options are based on
estimates using standard pricing models that take into account the present value
of future cash flows as of the balance sheet date. The computation of the fair
values of these instruments is generally performed by the company.
The fair value of other investments is based principally on quoted market
prices. The carrying amounts reported in the balance sheet for cash and cash
items, accounts receivable, payables and accrued liabilities, accrued income
taxes and short-term borrowings approximate fair value due to the short-term
nature of these instruments. Accordingly, these items have been excluded from
the above table.
7. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- --------------------------------------------------------------
<S> <C> <C>
INVENTORIES AT FIFO COST
Finished goods $ 327.2 $ 276.8
Work in process 26.8 35.7
Raw materials and supplies 165.8 107.9
- --------------------------------------------------------------
519.8 420.4
Less excess of FIFO cost over LIFO cost (36.7) (27.8)
- --------------------------------------------------------------
$ 483.1 $ 392.6
==============================================================
</TABLE>
Inventories valued using the LIFO method comprised 49.3% and 46.1% of
consolidated inventories before LIFO adjustment at 30 September 2003 and 2002,
respectively. Liquidation of prior years' LIFO inventory layers in 2003, 2002
and 2001 did not materially affect results of operations in any of these years.
FIFO cost approximates replacement cost. The company's inventories have a high
turnover, and as a result there is little difference between the original cost
of an item and its current replacement cost.
As discussed in Note 1, the company changed its method of accounting for LIFO
inventory by reducing the number of LIFO inventory pools. The adoption of this
new accounting principle did not have a material effect on the company's
financial statements.
59
<PAGE>
Notes to the Financial Statements CONTINUED
8. SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
The following table presents summarized financial information on a combined 100%
basis of the principal companies accounted for by the equity method. Amounts
presented include the accounts of the following equity affiliates: Air Products
South Africa (50%); Bangkok Cogeneration Company Limited (48.8%); Bangkok
Industrial Gases Company Ltd. (50.6%); Daido Air Products Electronics, Inc.
(49%); DuPont Air Products Nanomaterials, LLC (50%); Europoort Utility Partners
V.O.F. (50%); Helap S.A. (50%); INFRA Group (40%); INOX Air Products Limited
(INOX) (49.4%); Island Pipeline Gas (33%); Pure Air on the Lake, L.P. (50%);
Sapio Produzione Idrogeno Ossigeno S.r.L. (49%); SembCorp Air Products (HyCo)
Pte. Ltd. (40%); Stockton CoGen Company (50%); Tyczka Industrie-Gases GmbH
(50%); Wacker Polymer Systems GmbH & CoKG (20%); and principally other
industrial gas producers. In the fourth quarter of 2002, the company obtained
control of San Fu after increasing its ownership interest from 48% to 70%.
Amounts presented include the accounts of San Fu for the periods during which
the equity method was applied.
<TABLE>
<CAPTION>
2003 2002
- ----------------------------------------------------
<S> <C> <C>
Current assets $ 732.7 $ 732.6
Noncurrent assets 1,449.3 1,148.7
Current liabilities 537.5 572.5
Noncurrent liabilities 526.3 452.2
Net sales 1,617.8 1,608.8
Sales less cost of sales 601.9 543.0
Net income 171.7 196.3
====================================================
</TABLE>
The company's share of income of all equity affiliates for 2003, 2002 and 2001
was $70.9, $86.4 and $91.1, respectively. These amounts exclude $9.2, $12.5 and
$9.9 of related net expenses incurred by the company. Additionally, in 2003, the
company recorded favorable adjustments of $22.7 related to prior period
divestitures. Dividends received from equity affiliates were $64.1, $42.0 and
$44.9 in 2003, 2002 and 2001, respectively.
The investment in net assets of and advances to equity affiliates as of 30
September 2003 and 2002 included investment in foreign affiliates of $518.3 and
$449.5, respectively.
As of 30 September 2003 and 2002, the amount of investment in companies
accounted for by the equity method included goodwill in the amount of $67.7 and
$69.6, respectively. Goodwill is no longer amortized, as discussed in Note 1.
9. PLANT AND EQUIPMENT
The major classes of plant and equipment, at cost, are as follows:
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 164.8 $ 163.3
Buildings 800.8 698.6
Gas generating and chemical facilities, machinery and equipment 10,386.8 9,616.3
Construction in progress 370.8 401.6
- --------------------------------------------------------------------------------------------
$ 11,723.2 $ 10,879.8
============================================================================================
</TABLE>
10. GOODWILL AND INTANGIBLE ASSETS
Changes to the carrying amount of consolidated goodwill by segment are as
follows:
<TABLE>
<CAPTION>
BALANCE AS OF Gases Chemicals Equipment Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30 SEPTEMBER 2001 $ 289.2 $ 87.1 $ 8.4 $ 384.7
Acquisitions and adjustments 64.1 -- -- 64.1
Goodwill related to the sale of U.S. packaged gas business (36.3) -- -- (36.3)
Currency translation and other 15.1 2.5 1.0 18.6
==============================================================================================================
30 SEPTEMBER 2002 $ 332.1 $ 89.6 $ 9.4 $ 431.1
Acquisitions and adjustments 251.3 2.7 -- 254.0
Goodwill related to the sale of Canadian packaged gas business (9.7) -- -- (9.7)
Currency translation and other 45.5 4.6 .3 50.4
- --------------------------------------------------------------------------------------------------------------
30 SEPTEMBER 2003 $ 619.2 $ 96.9 $ 9.7 $ 725.8
==============================================================================================================
</TABLE>
In 2003, the increase in goodwill was principally due to the acquisitions of AHS
and other U.S. homecare businesses, and Ashland Electronic Chemicals. The 2002
increase in goodwill was principally due to the acquisition of an additional
interest in San Fu.
The following table presents the adjusted net income and adjusted per share
amounts for the year ended 30 September 2001, as if goodwill had not been
amortized. Total goodwill amortization, which is shown after-tax, includes both
consolidated companies and equity affiliates.
60
<PAGE>
<TABLE>
<CAPTION>
2003 2002 2001
- -------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
As reported $397.3 $525.4 $465.6
Effect of goodwill amortization -- -- 14.8
- -------------------------------------------------------------
As adjusted $397.3 $525.4 $480.4
- -------------------------------------------------------------
BASIC EARNINGS PER SHARE
As reported $ 1.81 $ 2.42 $ 2.17
Effect of goodwill amortization -- -- .07
- -------------------------------------------------------------
As adjusted $ 1.81 $ 2.42 $ 2.24
- -------------------------------------------------------------
DILUTED EARNINGS PER SHARE
As reported $ 1.78 $ 2.36 $ 2.12
Effect of goodwill amortization -- -- .07
- -------------------------------------------------------------
As adjusted $ 1.78 $ 2.36 $ 2.19
=============================================================
</TABLE>
All acquired intangible assets are subject to amortization. Acquired intangible
assets are as follows:
<TABLE>
<CAPTION>
Accumulated
Gross Amortization Net
- --------------------------------------------------------------------
<S> <C> <C> <C>
Customer relationships $ 28.4 $ 4.0 $ 24.4
Patents and technology 70.0 43.5 26.5
Noncompete covenants 10.8 10.5 .3
Other 49.3 29.6 19.7
- --------------------------------------------------------------------
30 SEPTEMBER 2002 $158.5 $ 87.6 $ 70.9
====================================================================
Customer relationships $ 71.4 $ 12.2 $ 59.2
Patents and technology 70.0 46.9 23.1
Noncompete covenants 15.7 12.1 3.6
Other 49.2 31.0 18.2
- --------------------------------------------------------------------
30 SEPTEMBER 2003 $206.3 $102.2 $104.1
====================================================================
</TABLE>
In 2003, the increase in intangible assets was due to the acquisitions of AHS
and other U.S. homecare business, and Ashland Electronic Chemicals.
Amortization expense for intangible assets was $14.6, $10.1 and $10.9 in 2003,
2002 and 2001, respectively. Projected annual amortization expense for
intangible assets as of 30 September 2003 is as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------
2004 $ 15.8
2005 15.5
2006 13.8
2007 8.7
2008 7.9
Thereafter 42.4
- -----------------------------------------------------------------
Total $104.1
=================================================================
</TABLE>
11. LONG-TERM DEBT
The following table shows the company's outstanding debt at the end of 2003 and
2002:
<TABLE>
<CAPTION>
30 SEPTEMBER Maturities 2003 2002
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PAYABLE IN U.S. DOLLARS:
DEBENTURES: (effective rate)
8.50% (8.55%) 2006 $ 100.0 $ 100.0
8.75% (8.95%) 2021 18.4 18.4
NOTES: (effective rate)
7.375% (7.54%) 2005 150.0 150.0
6.25% (6.30%) -- 100.0
Medium-term notes:
Weighted average rate
Series B 6.7% -- 16.0
Series D 6.8% 2004 to 2016 223.0 223.0
Series E 7.6% 2008 to 2026 17.4 17.4
Series F 6.5% 2007 to 2010 133.0 133.0
OTHER: 1.1% 2004 to 2037 348.0 289.2
LESS: Unamortized discount (1.8) (2.6)
PAYABLE IN OTHER CURRENCIES:
Euro bonds 6.0% 2005 571.7 493.5
Euro bonds 6.5% 2007 350.1 296.1
Other 4.9% 2004 to 2009 383.4 393.1
CAPITAL LEASE OBLIGATIONS:
United States 5.9% 2004 to 2018 17.0 5.7
Foreign 8.4% 2004 to 2007 34.8 35.3
- ------------------------------------------------------------------------------------
$2,345.0 $2,268.1
Less current portion (176.4) (227.1)
- ------------------------------------------------------------------------------------
$2,168.6 $2,041.0
====================================================================================
</TABLE>
Various debt agreements to which the company is a party include certain
financial covenants and other restrictions, including restrictions pertaining to
the ability to create property liens and enter into certain sale and leaseback
transactions. The company is in compliance with all financial debt covenants.
The company has obtained the commitment of a number of commercial banks to lend
money at market rates whenever needed. These committed lines of credit are also
used to support the issuance of commercial paper. At 30 September 2003, the
company's committed lines of credit totaled $600, maturing in January 2005. No
borrowings were outstanding under these commitments at the end of 2003.
61
<PAGE>
Notes to the Financial Statements CONTINUED
Additional commitments of $25.6 are maintained by the company's foreign
subsidiaries, of which $17.1 was borrowed and outstanding at 30 September 2003.
Maturities of long-term debt in each of the next five years are as follows:
$176.4 in 2004, $816.8 in 2005, $280.6 in 2006, $497.2 in 2007 and $116.9 in
2008.
In August 2001, the company retired $459.6 of various medium-term notes, as well
as $81.5 of an 8.75% debenture, for an aggregate principal retirement of $541.1.
A loss of $75.8 was incurred as a result of the early retirement of debt,
consisting principally of retirement premiums.
12. LEASES
Capital leases, primarily for machinery and equipment, are included with owned
plant and equipment on the balance sheet in the amount of $65.9 and $56.5 at the
end of 2003 and 2002, respectively. Related amounts of accumulated depreciation
are $37.9 and $36.1, respectively.
Operating leases, including month-to-month agreements, cost the company $101.7
in 2003, $102.7 in 2002 and $91.0 in 2001.
During 2001, the company sold and leased back certain U.S. cryogenic vessel
equipment resulting in proceeds of $301.9. This operating lease has a five-year
term with purchase and renewal options. The company recognized a deferred gain
of $134.7 on this sale-leaseback. This amount was included in other noncurrent
liabilities.
At 30 September 2003, minimum payments due under leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- ----------------------------------------------------------------
<S> <C> <C>
2004 $13.2 $ 49.9
2005 24.0 44.7
2006 5.2 35.6
2007 5.3 16.6
2008 1.1 11.6
2009 and thereafter 8.3 74.4
- --------------------------------------------------------------
$57.1 $232.8
==============================================================
</TABLE>
The present value of the above future capital lease payments is included in the
liability section of the balance sheet. At the end of 2003, $12.7 was classified
as current and $39.1 as long term.
13. 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 2003, and
300 million shares of Common Stock with a par value of $1 per share.
In 1994, the company established a trust to fund a portion of future payments to
employees under existing compensation and benefit programs. The trust, which is
administered by an independent trustee, was initially funded with 20 million
shares of Treasury Stock. It does not increase or alter the amount of benefits
or compensation that 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.
In 1998, the Board of Directors adopted a shareholder rights plan under which
common stockholders receive an associated right to purchase one one-thousandth
(1/1,000) of a share of Series A Participating Cumulative Preferred Stock, par
value $1 per share. Such rights are exercisable at a price of $345 and only in
the event of certain changes or potential changes in the beneficial ownership of
the company's Common Stock, which could result in a person or group owning more
than 15% of the outstanding Common Stock ("Acquiring Person"). If such rights
become exercisable, the rights would entitle the stockholder (other than the
Acquiring Person) to purchase for the purchase price (i) that number of one
one-thousandths of a share of Series A Participating Cumulative Preferred Stock
or (ii) that number of shares of common stock of the surviving company (in the
event of a business combination with the Acquiring Person or asset purchase of
50% or more of the company's assets by the Acquiring Person), with a value equal
to two times the purchase price of the right. The rights will expire on 19 March
2008 unless earlier redeemed by the company.
14. STOCK OPTION AND AWARD PLANS
STOCK OPTIONS
Under various plans, executives, employees and outside directors receive awards
of options to purchase common stock. Under all option awards, the terms are
fixed at the grant date. Generally, the exercise price equals the market price
of the company's stock on the date of the grant. Options under the plans
generally vest from one to three years, and the option's maximum term is 10
years. Options issued to directors are exercisable six months after the grant
date.
62
<PAGE>
The company has savings-related stock option plans in which eligible employees
in the United Kingdom may purchase stock at a price based on 90% of the stock
price on the grant date.
The following table reflects activity under all stock option plans:
<TABLE>
<CAPTION>
Number of Average
Shares Price
- --------------------------------------------------------------
<S> <C> <C>
OUTSTANDING AT 30 SEPTEMBER 2000 22,156,498 $30.18
Granted 4,592,600 35.83
Exercised (3,039,223) 24.93
Forfeited (536,668) 33.61
- --------------------------------------------------------------
OUTSTANDING AT 30 SEPTEMBER 2001 23,173,207 $31.69
Granted 5,454,587 37.82
Exercised (2,741,980) 27.51
Forfeited (422,442) 36.56
- --------------------------------------------------------------
OUTSTANDING AT 30 SEPTEMBER 2002 25,463,372 $33.44
Granted 4,648,050 42.08
Exercised (2,712,226) 27.01
Forfeited (193,390) 34.58
- --------------------------------------------------------------
OUTSTANDING AT 30 SEPTEMBER 2003 27,205,806 $35.14
Exercisable at end of year 17,042,215
Available for future grant at end
of year 11,522,747
==============================================================
</TABLE>
The following tables summarize information about options outstanding and
exercisable at 30 September 2003:
<TABLE>
<CAPTION>
Options Outstanding
- -------------------------------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life (Years) Price
- -------------------------------------------------------
<S> <C> <C> <C>
19.56-24.79 1,273,625 2.50 $23.73
26.03-29.47 7,828,628 4.42 28.37
30.01-41.69 13,377,353 6.55 38.04
41.96-52.19 4,726,200 8.97 43.31
=======================================================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- -------------------------------------------------------
Weighted
Range of Average
Exercise Number Exercise
Prices Outstanding Price
- -------------------------------------------------------
<S> <C> <C>
19.56-24.79 1,273,625 $23.73
26.03-29.47 7,828,628 28.37
30.01-41.69 7,900,296 38.58
41.96-52.19 39,666 44.18
=======================================================
</TABLE>
OTHER AWARDS
The company 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
end of the performance period. The performance period is the one- or two-year
period following the grant date. The performance shares are payable either at
the end of the performance period or after retirement. The number of shares
outstanding and earned for these awards was 500,808 and 370,446 share units as
of 30 September 2003 and 2002, respectively.
Prior to the issuance of performance shares, the company granted deferred stock
units as career share awards in 1992 through 1997 to certain executive officers
and other key employees. Career shares are deferred stock units payable in
shares of stock after retirement. Career share awards equivalent to 533,206 and
666,958 shares of stock were outstanding at the end of 2003 and 2002,
respectively.
Deferred stock units equivalent to 213,221 and 416,797 shares of stock were
outstanding at the end of 2003 and 2002, respectively.
Compensation cost is charged to expense over the periods during which employees
perform related services. Compensation expense recognized relating to the
programs granting deferred stock units was $3.8 in 2003, $3.1 in 2002 and $8.5
in 2001.
63
<PAGE>
Notes to the Financial Statements CONTINUED
15. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share (EPS) is as follows:
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002 2001
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR
Used in basic and diluted EPS
Income before cumulative effect of accounting change $400.2 $525.4 $465.6
Cumulative effect of accounting change (2.9) -- --
- -------------------------------------------------------------------------------------------
NET INCOME $397.3 $525.4 $465.6
===========================================================================================
DENOMINATOR
Weighted average number of common shares used in basic EPS (in
millions) 219.7 217.2 214.8
Effect of dilutive securities (in millions):
Employee stock options 3.4 4.8 3.6
Other award plans .5 .7 .9
- -------------------------------------------------------------------------------------------
3.9 5.5 4.5
- -------------------------------------------------------------------------------------------
Weighted average number of common shares and dilutive potential
common shares used in diluted EPS 223.6 222.7 219.3
- -------------------------------------------------------------------------------------------
BASIC EPS
Income before cumulative effect of accounting change $ 1.82 $ 2.42 $ 2.17
Cumulative effect of accounting change (.01) -- --
- -------------------------------------------------------------------------------------------
NET INCOME $ 1.81 $ 2.42 $ 2.17
===========================================================================================
DILUTED EPS
Income before cumulative effect of accounting change $ 1.79 $ 2.36 $ 2.12
Cumulative effect of accounting change (.01) -- --
- -------------------------------------------------------------------------------------------
NET INCOME $ 1.78 $ 2.36 $ 2.12
===========================================================================================
</TABLE>
Diluted EPS reflects the potential dilution that could occur if stock options or
other contracts to issue common stock were exercised or converted into common
stock. The incremental shares are included using the treasury stock method,
which assumes the proceeds from exercise are used by the company to purchase
common stock at the average market price during the period. The incremental
shares (difference between shares assumed to be issued versus purchased), to the
extent they would have been dilutive, are included in the denominator of the
diluted EPS calculation.
Options on 3.4 million shares, .1 million shares and 2.8 million shares of
common stock were excluded from the computation of diluted earnings per share
for 2003, 2002 and 2001, respectively. The exercise price of these options was
greater than the average market price of the common shares for the respective
years, and therefore the effect would have been antidilutive.
16. INCOME TAXES
The following table shows the components of the provision for income taxes:
<TABLE>
<CAPTION>
2003 2002 2001
- ---------------------------------------------
<S> <C> <C> <C>
FEDERAL
Current $ 19.2 $123.4 $ 98.2
Deferred 47.6 20.0 27.9
- -------------------------------------------
66.8 143.4 126.1
- -------------------------------------------
STATE
Current 6.8 4.6 (.6)
Deferred 4.4 14.8 14.9
- -------------------------------------------
11.2 19.4 14.3
- -------------------------------------------
FOREIGN
Current 94.4 47.6 53.9
Deferred (25.2) 30.4 (3.8)
- -------------------------------------------
69.2 78.0 50.1
- -------------------------------------------
$147.2 $240.8 $190.5
===========================================
</TABLE>
64
<PAGE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- ------------------------------------------------------------------
<S> <C> <C>
GROSS DEFERRED TAX ASSETS
Pension and other compensation
accruals $ 322.9 $ 210.9
Tax loss and investment tax
credit carryforwards 47.2 40.1
Reserves and accruals 23.9 18.6
Foreign currency translation
adjustment 113.3 83.1
Postretirement benefits 30.0 29.8
Inventory 22.2 18.5
Other 104.5 72.1
Valuation allowance (10.8) (15.4)
- ------------------------------------------------------------------
DEFERRED TAX ASSETS $ 653.2 $ 457.7
- ------------------------------------------------------------------
GROSS DEFERRED TAX LIABILITIES
Plant and equipment $ 875.8 $ 859.1
Investment in partnerships 111.8 99.6
Employee benefit plans 62.4 26.5
Currency gains 19.4 18.7
Other 125.7 119.5
- ------------------------------------------------------------------
DEFERRED TAX LIABILITIES $ 1,195.1 $ 1,123.4
- ------------------------------------------------------------------
NET DEFERRED INCOME TAX
LIABILITY $ 541.9 $ 665.7
==================================================================
</TABLE>
Net current deferred tax assets of $54.9 and net noncurrent deferred tax assets
of $108.8 were included in other current assets and other noncurrent assets at
30 September 2003, respectively. Net current deferred tax assets of $47.7 and
net noncurrent deferred tax assets of $12.2 were included in other current
assets and other noncurrent assets at 30 September 2002, respectively.
Foreign and state operating loss carryforwards as of 30 September 2003 were
$78.4 and $263.1, respectively. The foreign losses have an unlimited carryover
period. State operating loss carryforwards are available through 2023. Foreign
capital loss carryforwards were $1.3 on 30 September 2003 and have an unlimited
carryover period.
The valuation allowance as of 30 September 2003 primarily relates to the tax
loss carryforwards referenced above. If events warrant the reversal of the $10.8
valuation allowance, it would result in a reduction of tax expense.
Major differences between the United States federal statutory rate and
the effective tax rate are:
<TABLE>
<CAPTION>
(percent of income before taxes) 2003 2002 2001
- ------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 1.4 1.6 1.8
Income from equity affiliates (3.7) (3.2) (3.4)
Foreign tax credits and refunds
on dividends received from
foreign affiliates (2.9) .2 .3
Export tax benefits (1.2) (1.0) (.9)
Restructuring of operations -- -- (1.5)
Other (1.7) (1.2) (2.3)
- ------------------------------------------------------------------
EFFECTIVE TAX RATE AFTER
MINORITY INTEREST 26.9% 31.4% 29.0%
Minority interest (.9) (.7) (.2)
- ------------------------------------------------------------------
EFFECTIVE TAX RATE 26.0% 30.7% 28.8%
==================================================================
</TABLE>
The following table summarizes the income of U.S. and foreign operations, before
taxes and minority interest:
<TABLE>
<CAPTION>
2003 2002 2001
- -------------------------------------------------------------------
<S> <C> <C> <C>
Income from consolidated
operations:
United States $ 293.9 $ 463.7 $ 416.0
Foreign 177.9 232.1 154.1
Income from equity affiliates 93.6 88.7 91.1
- -------------------------------------------------------------------
$ 565.4 $ 784.5 $ 661.2
==================================================================-
</TABLE>
The company does not pay or record U.S. income taxes on the undistributed
earnings of its foreign subsidiaries 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 $1,117.1 at the end of 2003. An estimated $248.1 in U.S. income and
foreign withholding taxes would be due if these earnings were remitted as
dividends after payment of all deferred taxes.
65
<PAGE>
Notes to the Financial Statements CONTINUED
17. PENSION AND OTHER POSTRETIREMENT BENEFITS
The company and certain of its subsidiaries sponsor defined benefit pension
plans that cover a substantial portion of all worldwide employees. Pension
benefits earned are generally based on years of service and compensation during
active employment.
The company provides other postretirement benefits consisting of healthcare and
life insurance benefits to certain retirees. Healthcare benefits are
contributory, with contribution percentages adjusted periodically. The life
insurance plan is noncontributory. The plans are unfunded.
The following table presents the benefit obligation and funded status of the
domestic pension plans and other postretirement plan benefits as of 30 September
and certain foreign pension plans as of 30 June:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 1,780.1 $ 1,475.7 $ 76.8 $ 65.5
Service cost 59.3 50.1 4.2 4.4
Interest cost 117.5 104.8 5.8 4.7
Amendments 10.2 1.2 -- (3.6)
Actuarial loss 247.8 180.3 14.7 13.6
Special termination benefits, settlements and curtailments 12.5 1.8 .4 (.3)
Plan participant contributions 7.9 3.5 -- --
Benefits paid (70.9) (71.0) (8.6) (7.5)
Currency translation/other 50.7 33.7 -- --
- -----------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 2,215.1 $ 1,780.1 $ 93.3 $ 76.8
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 1,012.5 $ 1,090.8 $ -- $ --
Actual return (loss) on plan assets 104.5 (89.7) -- --
Company contributions 61.6 54.2 8.6 7.5
Plan participant contributions 7.9 3.5 -- --
Benefits paid (70.9) (72.1) (8.6) (7.5)
Currency translation/other 31.9 25.8 -- --
- -----------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,147.5 $ 1,012.5 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------
Funded status of the plans $ (1,067.6) $ (767.6) $ (93.3) $ (76.8)
Unrecognized actuarial loss (gain) 866.6 599.6 14.2 (.4)
Unrecognized prior service cost 23.0 19.0 (3.2) (4.0)
Unrecognized net transition liability (asset) .7 (2.6) -- --
- -----------------------------------------------------------------------------------------------------------------
Net amount recognized $ (177.3) $ (151.6) $ (82.3) $ (81.2)
- -----------------------------------------------------------------------------------------------------------------
TOTAL RECOGNIZED AMOUNTS IN THE BALANCE SHEET CONSIST OF:
Prepaid benefit cost $ 11.5 $ 3.6 $ -- $ --
Accrued benefit liability (689.4) (429.9) (82.3) (81.2)
Intangible asset 22.8 15.4 -- --
Accumulated other comprehensive income - pretax 477.8 259.3 -- --
- -----------------------------------------------------------------------------------------------------------------
Net amount recognized $ (177.3) $ (151.6) $ (82.3) $ (81.2)
=================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS:
Discount rate 5.8% 6.5% 6.0% 6.8%
Rate of compensation increase 4.2% 4.7% 4.5% 5.0%
=================================================================================================================
</TABLE>
66
<PAGE>
The components of net pension and other postretirement benefit cost for 2003,
2002 and 2001 are set forth in the following table:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 59.3 $ 50.1 $ 42.9 $ 4.2 $ 4.4 $ 4.1
Interest cost 117.5 104.8 96.3 5.8 4.7 4.9
Expected return on plan assets (114.9) (112.2) (102.9) -- -- --
Prior service cost amortization 3.7 2.2 2.7 (.7) (.2) (.1)
Actuarial loss (gain) amortization 16.3 3.4 2.2 -- (.7) (1.2)
Transition amount amortization (3.3) (4.0) (3.5) -- -- --
Settlement and curtailment charges -- 1.6 9.5 -- (2.1) --
Special termination benefit 12.7 9.8 12.5 .4 1.5 .9
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 91.3 $ 55.7 $ 59.7 $ 9.7 $ 7.6 $ 8.6
=================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS USED
TO DETERMINE NET COST
Discount rate 6.5% 7.1% 7.6% 6.8% 7.5% 8.0%
Expected return on plan assets 9.1% 9.4% 9.5% -- -- --
Rate of compensation increase 4.7% 4.7% 4.7% 5.0% 5.0% 5.0%
=================================================================================================================
</TABLE>
During 2003, 2002 and 2001, the company incurred charges for special termination
benefits as part of enhanced benefit programs offered under the global cost
reduction plans discussed in Note 3.
The accumulated benefit obligation for all defined benefit pension plans was
$1,815.8 and $1,430.7 at the end of 2003 and 2002.
The company's pension plans asset target allocation for 2004 and allocation at
30 September 2003 are as follows:
<TABLE>
<CAPTION>
2004 2003
Target Percentage of
Asset Category Allocation Plan Assets
- ------------------------------------------------------------------
<S> <C> <C>
Equity securities 67-73% 71%
Debt securities 20-30 23
Real estate 4-8 5
Other 0-5 1
- -----------------------------------------------------------------
Total 100%
=================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plans' assets were $2,141.0, $1,758.4 and $1,072.6, respectively, at
the end of 2003, and $1,723.1, $1,390.5 and $964.2, respectively, at the end of
2002.
A $147.1 after-tax charge was recorded to comprehensive income within
shareholders' equity due to the recognition of an additional minimum liability
in 2003. The additional minimum liability is equal to the accumulated benefit
obligation less the fair value of pension plan assets in excess of the accrued
pension cost. The increase in the additional minimum liability resulted
principally from the decline in the discount rate. In 2002, a $158.2 after-tax
charge was recorded to comprehensive income within shareholders' equity due to
the recognition of an additional minimum liability and the reversal of prepaid
pension assets. The increase in the additional minimum liability resulted
principally from the decline in the discount rate and the loss in value of plan
assets.
Certain international operations have defined benefit pension plans that are not
presented in the tables above. These international operations had accrued
pension liabilities of $16.7 as of 30 September 2003. Pension expense associated
with these plans for 2003 was $5.1.
67
<PAGE>
Notes to the Financial Statements CONTINUED
The effect of a change in the healthcare trend rate is slightly tempered by a
cap on average retiree medical cost. A one percentage point change in the
assumed healthcare cost trend rate would have the following effects:
<TABLE>
<CAPTION>
1 Percentage Point 1 Percentage Point
Increase Decrease
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost $ -- $ (.1)
Effect on the postretirement benefit obligation 1.0 (1.0)
- --------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 9.5% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for 2004. The rate was assumed to
decrease gradually to 5.0% for 2006 and thereafter.
The company maintains a nonleveraged employee stock ownership plan (ESOP) which
forms a portion of the Air Products and Chemicals, Inc. Retirement Savings and
Stock Ownership Plan (RSSOP). The ESOP was established in May of 2002. The
balance of the RSSOP is a qualified defined contribution plan including a 401(k)
elective deferral component. Substantially all U.S. employees are eligible
and participate. Dividends paid on ESOP shares are treated as ordinary dividends
by the company. Under existing tax law, the company may deduct dividends which
are paid with respect to shares held by the plan. Shares of the company's common
stock in the ESOP totaled 7,973,107 as of 30 September 2003.
The company matches a portion of the participants' contributions to the RSSOP.
Matching contributions expensed to income in 2003, 2002 and 2001 were $13.8,
$14.2 and $14.3, respectively.
18. OTHER COMMITMENTS AND CONTINGENCIES
The company in the normal course of business has commitments, lawsuits,
contingent liabilities and claims. The company is also party to certain
guarantee and warranty agreements. However, the company does not expect that any
sum it may have to pay in connection with these matters, or the matters
described below, will have a materially adverse effect on its consolidated
financial position or results of operations.
GUARANTEES AND WARRANTIES
The company is a party to certain guarantee agreements, including a residual
value guarantee, debt guarantees of equity affiliates and equity support
agreements. These guarantees are contingent commitments that are related to
activities of the company's primary businesses.
In September 2001, the company entered into an operating lease of U.S. cryogenic
vessel equipment, which included a residual value guarantee not to exceed $256.
The guarantee extends to September 2006.
The company has guaranteed repayment of some borrowings of certain foreign
equity affiliates. At 30 September 2003, these guarantees have terms primarily
in the range of one to seven years, with maximum potential payments of $18.
The company has entered into an equity support agreement related to the
financing of an air separation facility being constructed in Trinidad for a
venture in which the company, through equity affiliates, owns 50%. The maximum
potential payments, under a joint and several guarantee with the partner, are
$72 upon commencement of operations. The maximum exposure under the equity
support agreement declines overtime as an underlying loan balance is amortized.
Additionally, the company and its partner provided guarantees of certain
obligations related to the normal operations of this facility. The maximum
potential payments, under the joint and several operations guarantees, are $32.
The total combined maximum potential payments, under the joint and several
equity support agreement and the operations guarantees, are $104. The term of
these guarantees is related to the underlying twenty-year customer gas supply
contract from the facility.
An equity support agreement was entered into related to the financing of a
cogeneration project. At 30 September 2003, the remaining term of this guarantee
is 15 months, with maximum potential payments of $15. A partner in this project
has agreed to fund approximately half of any required equity contribution.
The company has not accrued any amounts related to these guarantees. To date, no
equity contributions or payments have been required since the inception of these
guarantees. The fair value of the above guarantees totals approximately $10.
The company, in the normal course of business operations, has issued product
warranties in its Equipment segment. Also, contracts often contain standard
terms and conditions which typically include a warranty and indemnification to
the buyer that the goods and services purchased do not infringe on third-party
intellectual property rights. The provision for estimated future costs relating
to warranties is not material to the consolidated results of operations.
68
<PAGE>
ENVIRONMENTAL
The company has accrued for certain environmental investigatory, external legal
costs and noncapital remediation costs consistent with the policy set forth in
Note 1. The potential exposure for such costs is estimated to range from $9 to a
reasonably possible upper exposure of $21. The balance sheet at 30 September
2003 includes an accrual of $15.3.
OTHER COMMITMENTS
The company has entered into put option agreements with certain affiliated
companies. In 1999, the company made an investment in INOX, an Indian industrial
gases company. As part of this transaction, put options were issued which give
other shareholders the right to require the company to purchase shares of INOX
(approximately 5.1 million) at a predefined exercise price. The option period
begins January 2004 and extends through January 2006. The option price during
the first year is 570 Rupees per share and during the second year 630 Rupees per
share. The U.S. dollar price of purchasing all 5.1 million shares in 2004 based
on current exchange rates would be approximately $64. In 2002, the company
entered into a put option agreement as part of the San Fu acquisition as
discussed in Note 4.
At the end of 2003, the company had purchase commitments to spend approximately
$286 for additional plant and equipment.
19. SUPPLEMENTAL INFORMATION
PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- -----------------------------------------------------------------------
<S> <C> <C>
Trade creditors, payables and accrued expenses $ 547.3 $ 480.0
Accrued payroll and employee benefits 115.4 128.1
Pension benefits 189.8 22.9
Customer advances 62.5 57.6
Accrued interest expense 40.3 40.1
Outstanding checks payable in excess
of certain cash balances 35.9 24.7
Miscellaneous 132.3 85.9
- -----------------------------------------------------------------------
$ 1,123.5 $ 839.3
=======================================================================
</TABLE>
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- -----------------------------------------------------------------------
<S> <C> <C>
Bank obligations $ 73.5 $ 116.9
Commercial paper 92.2 --
- -----------------------------------------------------------------------
$ 165.7 $ 116.9
=======================================================================
</TABLE>
The weighted average interest rate of short-term borrowings outstanding as of 30
September 2003 and 2002 was 2.1% and 3.7%, respectively.
DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred gain on sale-leaseback of U.S.
cryogenic vessel equipment $ 134.7 $ 134.7
Pension benefits 515.1 410.8
Postretirement benefits 71.6 62.2
Derivative instruments 76.3 17.1
Miscellaneous 208.2 202.6
- -----------------------------------------------------------------------
$ 1,005.9 $ 827.4
=======================================================================
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
30 SEPTEMBER 2003 2002
- -----------------------------------------------------------------------
<S> <C> <C>
(Loss) gain on derivatives $ (2.2) $ 2.9
Unrealized gain on investment 19.7 14.6
Minimum pension liability adjustment (317.5) (170.4)
Cumulative translation adjustments (267.2) (414.0)
- -----------------------------------------------------------------------
$ (567.2) $ (566.9)
=======================================================================
</TABLE>
OTHER (INCOME) EXPENSE, NET
<TABLE>
<CAPTION>
2003 2002 2001
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology and royalty income $ (15.1) $ (13.4) $ (16.9)
Interest income (3.8) (4.9) (6.2)
Foreign exchange (.8) (2.0) --
Gain on sale of assets and investments (5.0) (9.6) (.1)
Amortization of intangibles 10.3 3.8 19.4
Insurance settlements (3.6) (2.7) (9.6)
Miscellaneous (8.5) (8.3) (18.1)
- ------------------------------------------------------------------------------------
$ (26.5) $ (37.1) $ (31.5)
====================================================================================
</TABLE>
69
<PAGE>
Notes to the Financial Statements CONTINUED
SUMMARY BY QUARTER
These tables summarize the unaudited results of operations for each quarter of
2003 and 2002:
<TABLE>
<CAPTION>
First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------------------
2003
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 1,447.0 $ 1,578.1 $ 1,629.9 $ 1,642.3 $ 6,297.3
Operating income 196.5 179.0 40.0(A) 189.0 604.5
Net income 125.8 113.6 26.6(A) 131.3 397.3
Basic earnings per common share .57 .52 .12(A) .59 1.81
Diluted earnings per common share