Founded on the On-site Concept
Air Products was founded by the late Leonard P. Pool in 1940 in Detroit, Michigan, on the strength of a simple, but then revolutionary, idea: the “on-site” concept of producing and selling industrial gases, primarily oxygen. At the time, most oxygen was sold as a highly compressed gas in cylinders that weighed five times more than the gas product. Pool proposed building oxygen gas generating facilities adjacent to large-volume gas users, thereby reducing distribution costs. The concept of piping the gas directly from the generator to the point of use proved sound and technically solvable.

Today: A Global Supplier of Gases and Chemicals
In the intervening years, the company expanded its business through internal development and acquisitions. Today, Air Products (NYSE:APD) serves customers in technology, energy, healthcare, and industrial markets worldwide. It offers a unique portfolio of products, services, and solutions, providing atmospheric gases, process and specialty gases, process and cryogenic equipment, and performance materials. Air Products is recognized for its innovative culture, operational excellence, and commitment to safety and the environment. With annual revenues of $10 billion and operations in over 40 countries, Air Products’ 22,000 employees build lasting relationships with their customers and communities based on understanding, integrity, and passion. The company ranks 275st in sales and 280th in total assets among FORTUNE magazine’s April 2007 list of the 500 largest corporations in the U.S. Corporate headquarters are located on a 600-acre campus in eastern Pennsylvania’s Lehigh Valley, near Allentown; European headquarters are at Hersham, near London; and Asian headquarters are in Singapore, with offices in Tokyo and Hong Kong.

Beginnings
Air Products leased its first oxygen gas generator to a small Detroit steel company in 1941. Shortly thereafter, a second order for a gaseous oxygen generator was received from the Norfolk Navy Yard. World War II diverted the company’s attention to the design and manufacture of mobile generators to produce oxygen for use by the military in high-altitude flights. Air Products moved to Chattanooga, Tennessee to take advantage of the manufacturing space and manpower available there and produced 240 oxygen generators for the armed forces and for “lend-lease” to foreign allies. During this period the company built a strong technical organization and established a tradition of response to customer needs that continues today.

Postwar Years
At the end of the war, Air Products’ military contracts were terminated. The company then refocused its sights on commercial markets by setting up operations near Allentown in Pennsylvania’s Lehigh Valley, close to the industrial markets of the Northeast.

In 1945, Air Products secured a contract with Weirton Steel Company in West Virginia to lease three generators that produced six tons per day of oxygen. The contract confirmed the value of the company’s “on-site” marketing and financing strategy. By building and operating its own air separation plants and supplying gas “over the fence” to customers on a take-or-pay basis, Air Products became the first company to put into practice what would later become the marketing norm for the industrial gas industry. The contract was the first of many with the steel industry.

The 1950s brought more civilian business and new government and military contracts. In support of America’s emerging missile and space program, Air Products began to design and manufacture plants capable of producing tonnage quantities of liquid oxygen and nitrogen. The experience gained in building these plants—and later liquid hydrogen plants—for the federal government catapulted Air Products into a major position in the commercial industrial gas business in the United States and Europe.

The company’s marketing and production strategies were further refined during the 1950s. Several independent regional gas distributors were acquired and the marketing concept known as "piggy-backing" was introduced. This concept involved adding extra gas liquefaction capacity to the on-site plants. It enabled Air Products to serve its tonnage base-load gas customers, such as steelmakers, and produce and deliver additional higher-margin liquefied gases economically to other so-called "merchant" gas customers, i.e., users of smaller tanker-load quantities in the surrounding area.

Expansion and Diversification
In 1957, Air Products entered the overseas market for industrial gases through a joint venture with the Butterley Company, a British firm to which Air Products licensed its processes and designs for manufacturing cryogenic equipment used in industrial gas production. The new venture was called Air Products (Great Britain), Ltd. Air Products later acquired a 100 percent interest in this business and expanded its operation into the supply of industrial gases as well as cryogenic equipment.

The decade of the ‘60s brought further diversification. In 1961, Air Products began manufacturing chemicals via a joint venture with a petroleum refining company to convert refinery by-products into oxo-alcohols for use in producing plasticizers. A year later, the company acquired the Houdry Process Company and its subsidiary, the Catalytic Construction Company. Houdry had an international reputation in process licensing and in the production and sale of certain organic chemicals and catalysts. Catalytic was well known in the engineering and construction field and had pioneered the contract maintenance concept for the maintenance and repair of chemical and petroleum plants.

The company’s position in chemicals expanded with the 1969 acquisition of Escambia Chemical Corporation, a large chemical complex at Pensacola, Florida. Escambia manufactured industrial chemicals, such as amines and polyurethane intermediates, polyvinyl chloride resins, and fertilizers.

During the 1960s, the company also expanded its overseas operations. In 1964, a 60 percent-owned subsidiary for the production of industrial gases was formed in the Benelux countries with Société Generale de Belgique S.A., a major European financial and industrial holding company. The subsidiary would ultimately become 100 percent owned by Air Products.

A short time later, Air Products established a wholly-owned subsidiary in the Federal Republic of Germany. In 1969 a joint venture was established in South Africa, and the company acquired an interest in what is now its wholly-owned subsidiary in France.

Business was further expanded in the ‘70s with acquisition of the chemicals and plastics business of Airco, Inc. This added several chemical products to the company’s portfolio, such as polyvinyl acetate emulsions, polyvinyl alcohol, acetylenic chemicals, and fabricated plastics. During this period, the company also significantly increased production of DNT and TDA, chemical intermediates used to manufacture polyurethane foams, and amines, important ingredients in agricultural chemicals.

In industrial gases, major investments were made in Western Europe, Brazil, and the United States. Many new applications were developed for industrial gases, including oxygen in cupolas, oxygen for copper smelting, inert atmospheres for heat treating metals, liquid nitrogen for the quick freezing of meats and other food products and in grinding various materials, and recovering scrap metals from them.

Meanwhile in the late ‘60s and ‘70s, the company expanded its business devoted to the design of cryogenic equipment and other process and related engineering services. Processes for liquefying helium gas and natural gas, and techniques for manufacturing giant heat exchangers for such applications, were notable technical achievements. Most of the process designs and heat exchangers for natural gas liquefaction projects around the world have been furnished by the company.

The 1980s
The 1980s continued to reflect Air Products’ strategy of strengthening its base businesses. In Asia, the company took minority positions in industrial gas companies in Korea, Japan, Malaysia, Hong Kong, the People’s Republic of China, Thailand, and Taiwan. Further geographic expansion occurred with joint ventures in Spain and Mexico and the acquisition of Inter-City Gas Co. in western Canada. In the United States, the company expanded by acquiring the Separex Corporation—a manufacturer of membrane gas separation systems—and the J. C. Schumacher Company, a leading supplier of high purity chemicals for the semiconductor industry.

In chemicals, plant expansions in both polymer emulsions and polyvinyl alcohol helped the company keep up with growth in these key product lines. In addition, the acquisition of the industrial chemicals division of Abbott Laboratories in 1985 gave the company increased manufacturing capability for new specialty amines developed in Air Products’ research laboratories. During this period, the company also completed several acquisitions that extended its polyurethane additives business. A significant expansion of the company’s emerging epoxy curing agents business was undertaken in 1988 with the acquisition of Anchor Chemical, Plc. of England.

In 1982 Air Products acquired Stearns-Roger Corporation, a leading engineering and construction services company based in Denver, Colorado. Following several years of profitable operations and a merger of Stearns-Roger with Catalytic, Inc. to form Stearns Catalytic World Corporation, business prospects dimmed, in large part due to significant declines in energy prices. In November 1986, Air Products divested the majority of its engineering services business by selling the domestic operations of Stearns Catalytic to United Engineers & Constructors, a subsidiary of Raytheon Company.

From the mid-1980s on, Air Products began to explore new businesses to take advantage of the company’s proven skills in engineering, owning, and operating large-scale process plants. The company formed an environmental and energy systems business to focus its efforts in the expanding markets for power generation, air pollution control, and energy recovery from solid waste. In partnership with Browning-Ferris Industries, it formed American Ref-Fuel, a joint marketing effort to build, own, and operate waste-to-energy facilities. The company also formed a general partnership with Mitsubishi Heavy Industries America, Inc. to participate in markets for air pollution control systems and services. Air Products also acquired GSF Energy Inc., a leader in capturing, purifying, and selling the natural gas produced in landfills.

During the 1980s, noncryogenic technologies for producing industrial gases were developed and commercialized, and the company embarked on a comprehensive effort aimed at achieving quality throughout its operations.

The 1990s
In the 1990s, the company continued to invest globally. In Europe, it expanded into Italy by acquiring a 49 percent interest in Sapio, a leading Italian industrial gas supplier, and completing the acquisition of Carburos Metalicos, Spain’s leading industrial gas supplier. The company also acquired polyurethane additives and polyurethane release agent businesses in Germany.

In Asia, the company formed a joint venture with Daido Hoxan Inc. to provide gases and related chemicals, environmental systems, equipment, and services to the electronics industry in Japan. Another joint venture was formed with Showa Denko to manufacture specialty gases for semiconductor manufacturers worldwide. Air Products also established a new company in Singapore; formed a joint venture in Indonesia which is now wholly owned by Air Products; began producing polymer emulsions in Korea; and opened new facilities at Tsukuba, Japan, to supply a variety of gas and chemical products to semiconductor manufacturers throughout Asia.

In Latin America, the company increased its equity position in the industrial gases businesses of the INFRA Group in Mexico and established a new chemical subsidiary and purchased a polymer emulsion business in the country. In Brazil, Air Products opened a polyurethane technical service laboratory and new warehouse facilities; acquired the amines business of Quimica da Bahia, formerly Brazil’s largest amines manufacturer; and invested over $100 million in industrial gas production facilities to serve petrochemical, paper, and other industries.

Additionally in the 1990s, the company acquired Permea, Inc., a leading supplier of membrane and adsorption gas separation systems that complement Air Products’ internally developed membrane and adsorption technologies. As a result of the acquisition, the product mix that Air Products offers in noncryogenic gas supply systems is one of the broadest available today in terms of capacity, purity, and cost-effectiveness.

Other important developments in the 1990s included Air Products’ sale of its polyvinyl chloride business and its exit of the merchant ammonia business. Both actions were consistent with the company’s strategy of focusing on product lines where Air Products has leading market positions and high prospects for profitable growth.

After a decade of success in building an environmental and energy systems business, fundamental changes in the U.S. solid waste and power markets altered the company’s strategy. In 1996, Air Products sold its landfill gas recovery business, divested its share of its American Ref-Fuel waste-to-energy business, and "bundled" power generation with industrial gases. These moves reflected Air Products’ focus on delivering shareholder value.

The New Millennium
The 1990s were a period of unprecedented change and growth. Air Products entered the new millennium challenged to find new paths to success and eager to take on new, exciting opportunities. After an attempt to acquire half the assets of competitor BOC Group failed to gain regulatory approval, Air Products' senior leadership team developed "Deliver the Difference"—an aggressive, long-term business strategy focused on portfolio management, work process improvement, change, and growth.

The company undertook several initiatives consistent with this strategy and aimed at delivering profitable growth. They included:

• evaluating all businesses to determine their growth potential and assigning them appropriate resources;
• planning and executing acquisitions of businesses that advance the company’s performance and divesting businesses where Air Products cannot be the high-value provider;
• implementing an enterprise resource planning tool to streamline and unify the operations of the company;
• organizing globally to strengthen international operations and performance;
• improving return on capital by loading plants, increasing productivity, and maintaining capital discipline.

Implementing this strategy, Air Products over the past several years has taken a number of major actions that have strengthened the company’s business positions and focused its resources on growth, profitability, and a greater return on capital.

Recent major divestitures have included:

• the company’s polyvinyl alcohol business
• most of its U.S. and Canadian packaged gas businesses
• its intermediate chemicals business for the U.S. graphics arts industry
• Air Products’ European methylamines and derivatives operations in the U.K.
• its amines business
• its dinitrotoluene plant in Geismar, Louisiana

The company is also actively looking to divest its polymers business.

During that time the company also brought in new assets that fit with its growth strategy. Major acquisitions have included:

• American Homecare Supply (AHS), a privately-held corporation providing respiratory therapy and home medical equipment to more than a half-million patients across 30 countries.
• the $200 million Electronic Chemicals business of Ashland Specialty Chemical Company.
• Sanwa Chemical of Japan; San Fu Gas Company Ltd. in Taiwan; and Messer Griesheim’s Mexican gases operations.
• the specialty surfactants producer Tomah3 Products to capitalize on its surface science expertise and high growth market opportunities.
• the industrial gas business in Poland of BOC Group, following Linde’s acquisition of BOC and regulatory divestiture of certain assets.

Air Products has also recently entered the personal care specialty ingredients industry through a licensing agreement with Landec Corporation.

These actions have been recognized by investors as prudent and beneficial. The response by the financial markets testifies to their success.

The fundamental change in the company’s strategic direction and make-up brought about by these major moves made a reorganization appropriate. In 2006, Air Products organized its operations into four global businesses: Merchant Gases, Electronics and Performance Materials; Tonnage Gases, Equipment and Energy; and Healthcare.

Going Forward: The Top Priority
Air Products’ top priority is improving its return on capital, and the company has set a goal of 12.5% Operating Return on Net Assets by fiscal 2007. Every employee is focused on loading existing assets with profitable business, delivering a step change in productivity through continuous improvement, and maintaining capital discipline. Meanwhile, the vast majority of the Air Products’ capital and R&D dollars are being directed to growth markets and geographies where the company has leadership positions and the best opportunities going forward. These actions will help the company become a more focused, less cyclical, and higher-growth company.

May 2007