FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended 31 December 2006
OR
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o |
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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)
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Delaware
(State or Other Jurisdiction of Incorporation or Organization)
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23-1274455
(I.R.S. Employer Identification No.) |
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7201 Hamilton Boulevard, Allentown, Pennsylvania
(Address of Principal Executive Offices)
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18195-1501
(Zip Code) |
610-481-4911
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class |
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Outstanding at 22 January 2007 |
Common Stock, $1 par value
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216,448,000 |
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
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Page No. |
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Part I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Consolidated Balance Sheets
31 December 2006 and 30 September 2006 |
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3 |
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Consolidated Income Statements
Three Months Ended 31 December 2006 and 2005 |
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4 |
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Consolidated Comprehensive Income Statements
Three Months Ended 31 December 2006 and 2005 |
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5 |
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Consolidated Statements of Cash Flows
Three Months Ended 31 December 2006 and 2005 |
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6 |
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Summary by Business Segments
Three Months Ended 31 December 2006 and 2005 |
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7 |
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Summary by Geographic Regions
Three Months Ended 31 December 2006 and 2005 |
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8 |
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Notes to Consolidated Financial Statements |
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9 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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13 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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24 |
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Item 4. Controls and Procedures |
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24 |
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Part II. OTHER INFORMATION |
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Item 1A. Risk Factors |
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25 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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25 |
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Item 6. Exhibits |
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25 |
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Signatures |
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26 |
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Exhibit Index |
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27 |
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BASIS OF PRESENTATION:
The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (the
company or registrant) included herein have been prepared by the company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the company, the accompanying statements
reflect adjustments necessary to present fairly the financial position, results of operations and
cash flows for those periods indicated, and contain adequate disclosure to make the information
presented not misleading. Adjustments included herein are of a normal, recurring nature unless
otherwise disclosed in the Notes to the consolidated financial statements. However, the interim
results for the periods indicated herein do not reflect certain adjustments, such as the valuation
of inventories on the LIFO cost basis, which can only be finally determined on an annual basis.
The consolidated financial statements included herein should be read in conjunction with the
financial statements and Notes thereto included in the companys latest annual report on Form 10-K
in order to fully understand the basis of presentation.
Results of operations for interim periods are not necessarily indicative of the results of
operations for a full year. Reference the 2007 Outlook included on
pages 20-21 in Managements
Discussion and Analysis of Financial Condition and Results of Operations. Risk factors that could
impact results are discussed under Forward-Looking Statements on page
24.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(Millions of dollars, except for share data) |
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31 December 2006 |
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30 September 2006 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash items |
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$ |
64.5 |
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$ |
35.2 |
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Trade receivables, less allowances for doubtful accounts |
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1,618.1 |
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1,564.7 |
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Inventories |
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536.4 |
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509.5 |
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Contracts in progress, less progress billings |
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144.2 |
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191.6 |
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Other receivables and current assets |
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286.9 |
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311.6 |
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TOTAL CURRENT ASSETS |
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2,650.1 |
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2,612.6 |
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INVESTMENT IN NET ASSETS OF AND ADVANCES TO
EQUITY AFFILIATES |
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765.6 |
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728.3 |
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PLANT AND EQUIPMENT, at cost |
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13,929.0 |
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13,590.3 |
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Less accumulated depreciation |
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7,664.8 |
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7,428.3 |
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PLANT AND EQUIPMENT, net |
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6,264.2 |
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6,162.0 |
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GOODWILL |
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1,007.6 |
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989.1 |
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INTANGIBLE ASSETS, net |
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114.1 |
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113.0 |
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OTHER NONCURRENT ASSETS |
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698.4 |
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575.7 |
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TOTAL ASSETS |
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$ |
11,500.0 |
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$ |
11,180.7 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Payables and accrued liabilities |
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$ |
1,483.9 |
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$ |
1,655.1 |
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Accrued income taxes |
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107.9 |
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98.7 |
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Short-term borrowings |
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648.5 |
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417.5 |
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Current portion of long-term debt |
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165.7 |
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152.1 |
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TOTAL CURRENT LIABILITIES |
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2,406.0 |
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2,323.4 |
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LONG-TERM DEBT |
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2,336.0 |
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2,280.2 |
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DEFERRED INCOME & OTHER NONCURRENT LIABILITIES |
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666.5 |
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642.0 |
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DEFERRED INCOME TAXES |
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791.2 |
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833.1 |
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TOTAL LIABILITIES |
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6,199.7 |
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6,078.7 |
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MINORITY INTEREST IN SUBSIDIARY COMPANIES |
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188.8 |
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178.0 |
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SHAREHOLDERS EQUITY |
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Common stock (par value $1 per share; 2007 and 2006
249,455,584 shares) |
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249.4 |
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249.4 |
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Capital in excess of par value |
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695.4 |
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682.5 |
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Retained earnings |
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5,901.4 |
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5,743.5 |
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Accumulated other comprehensive income (loss) |
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(127.1 |
) |
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(221.7 |
) |
Treasury stock, at cost (2007 33,007,584 shares;
2006 32,205,012 shares) |
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(1,607.6 |
) |
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(1,529.7 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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5,111.5 |
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4,924.0 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
11,500.0 |
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$ |
11,180.7 |
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The accompanying notes are an integral part of these statements.
3
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
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Three Months Ended |
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31 December |
(Millions of dollars, except for share data) |
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2006 |
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2005 |
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SALES |
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$ |
2,432.5 |
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$ |
2,015.8 |
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COSTS AND EXPENSES |
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Cost of sales |
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1,788.5 |
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1,491.7 |
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Selling and administrative |
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284.4 |
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250.9 |
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Research and development |
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34.8 |
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37.6 |
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Other (income) expense, net |
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(7.5 |
) |
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(17.9 |
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OPERATING INCOME |
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332.3 |
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253.5 |
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Equity affiliates income |
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30.1 |
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27.8 |
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Interest expense |
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39.1 |
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26.3 |
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INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND
MINORITY INTEREST |
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323.3 |
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255.0 |
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Income tax provision |
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85.1 |
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67.1 |
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Minority interest in earnings of subsidiary companies |
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7.9 |
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6.1 |
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INCOME FROM CONTINUING OPERATIONS |
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230.3 |
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181.8 |
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LOSS FROM DISCONTINUED OPERATIONS, net of tax |
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(1.1 |
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NET INCOME |
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$ |
230.3 |
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$ |
180.7 |
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BASIC EARNINGS PER COMMON SHARE |
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Income from continuing operations |
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$ |
1.06 |
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$ |
.82 |
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Loss from discontinued operations |
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(.01 |
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Net Income |
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$ |
1.06 |
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$ |
.81 |
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DILUTED EARNINGS PER COMMON SHARE |
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Income from continuing operations |
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$ |
1.03 |
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$ |
.80 |
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Loss from discontinued operations |
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Net Income |
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$ |
1.03 |
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$ |
.80 |
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WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING (in
millions) |
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216.7 |
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222.0 |
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WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING
ASSUMING DILUTION (in millions) |
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223.4 |
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227.1 |
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DIVIDENDS DECLARED PER COMMON SHARE Cash |
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$ |
.34 |
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$ |
.32 |
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The accompanying notes are an integral part of these statements.
4
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Unaudited)
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Three Months Ended |
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31 December |
(Millions of dollars) |
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2006 |
|
2005 |
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NET INCOME |
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$ |
230.3 |
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$ |
180.7 |
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OTHER COMPREHENSIVE INCOME, net of tax: |
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Net unrealized holding gain on investments,
net of income tax of $3.4 and $3.6 |
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6.0 |
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6.5 |
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Net unrecognized gain on derivatives
qualifying as hedges, net of income tax of
$1.1 |
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2.6 |
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Foreign currency translation adjustments, net
of income tax (benefit) of $(23.3) and $17.2 |
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86.0 |
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18.4 |
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TOTAL OTHER COMPREHENSIVE INCOME |
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94.6 |
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24.9 |
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COMPREHENSIVE INCOME |
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$ |
324.9 |
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$ |
205.6 |
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The accompanying notes are an integral part of these statements.
5
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended |
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31 December |
(Millions of dollars) |
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2006 |
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2005 |
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OPERATING ACTIVITIES FROM CONTINUING OPERATIONS |
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Net Income |
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$ |
230.3 |
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$ |
180.7 |
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Loss from discontinued operations, net of tax |
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1.1 |
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Income from Continuing Operations |
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230.3 |
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181.8 |
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Adjustments to reconcile income to cash provided by operating activities: |
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Depreciation and amortization |
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201.7 |
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182.5 |
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Deferred income taxes |
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14.7 |
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53.7 |
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Undistributed earnings of unconsolidated affiliates |
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(16.4 |
) |
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(10.1 |
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Gain on sale of assets and investments |
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(.3 |
) |
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(10.7 |
) |
Share-based compensation |
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16.4 |
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17.2 |
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Noncurrent capital lease receivables |
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(47.0 |
) |
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(16.1 |
) |
Other |
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(36.4 |
) |
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|
.5 |
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Subtotal |
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363.0 |
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398.8 |
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Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures: |
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Trade receivables |
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(31.0 |
) |
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(10.1 |
) |
Inventories and contracts in progress |
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32.8 |
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(64.5 |
) |
Payables and accrued liabilities |
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(215.1 |
) |
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(64.6 |
) |
Other |
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12.7 |
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(5.7 |
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Working capital changes |
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(200.6 |
) |
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(144.9 |
) |
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CASH PROVIDED BY OPERATING ACTIVITIES (a) |
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162.4 |
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|
253.9 |
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INVESTING ACTIVITIES FROM CONTINUING OPERATIONS |
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Additions to plant and equipment (b) |
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(238.3 |
) |
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(304.0 |
) |
Acquisitions, less cash acquired |
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Investment in and advances to unconsolidated affiliates |
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(1.5 |
) |
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Proceeds from sale of assets and investments |
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12.5 |
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17.6 |
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Proceeds from insurance settlements |
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14.9 |
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25.0 |
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Other |
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(.4 |
) |
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2.3 |
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CASH USED FOR INVESTING ACTIVITIES |
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(212.8 |
) |
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(259.1 |
) |
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FINANCING ACTIVITIES FROM CONTINUING OPERATIONS |
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Long-term debt proceeds |
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53.8 |
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|
230.5 |
|
Payments on long-term debt |
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(36.2 |
) |
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(66.3 |
) |
Net increase (decrease) in commercial paper and short-term borrowings |
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|
226.2 |
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|
(78.3 |
) |
Dividends paid to shareholders |
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|
(73.9 |
) |
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(71.0 |
) |
Purchase of Treasury Stock |
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(133.5 |
) |
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|
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Proceeds from stock option exercises |
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37.0 |
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|
13.0 |
|
Excess tax benefit from share-based compensation/other |
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|
6.7 |
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|
.8 |
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CASH PROVIDED BY FINANCING ACTIVITIES |
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|
80.1 |
|
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|
28.7 |
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DISCONTINUED OPERATIONS |
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Cash used for operating activities |
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(7.0 |
) |
Cash used for investing activities |
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|
(1.2 |
) |
Cash used for financing activities |
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CASH USED FOR DISCONTINUED OPERATIONS |
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|
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|
(8.2 |
) |
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Effect of Exchange Rate Changes on Cash |
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(.4 |
) |
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|
(.4 |
) |
|
Increase in Cash and Cash Items |
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|
29.3 |
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|
14.9 |
|
Cash and Cash Items Beginning of Year |
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35.2 |
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|
55.8 |
|
|
Cash and Cash Items End of Period |
|
$ |
64.5 |
|
|
$ |
70.7 |
|
|
(a) |
|
Pension plan contributions in 2007 and 2006 were $239.9 and $102.9, respectively. |
|
(b) |
|
Excludes capital lease additions of $.6 in both 2007 and 2006.
|
The accompanying notes are an integral part of these statements.
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
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|
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|
|
|
|
|
|
|
|
Three Months Ended |
|
|
31 December |
(Millions of dollars) |
|
2006 |
|
2005 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
740.0 |
|
|
$ |
622.1 |
|
Tonnage Gases |
|
|
604.5 |
|
|
|
532.6 |
|
Electronics and Performance Materials |
|
|
509.9 |
|
|
|
416.8 |
|
Equipment and Energy |
|
|
195.6 |
|
|
|
93.8 |
|
Healthcare |
|
|
155.8 |
|
|
|
135.5 |
|
Chemicals |
|
|
226.7 |
|
|
|
215.0 |
|
|
Segment and Consolidated Totals |
|
$ |
2,432.5 |
|
|
$ |
2,015.8 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
139.2 |
|
|
$ |
105.3 |
|
Tonnage Gases |
|
|
88.8 |
|
|
|
73.8 |
|
Electronics and Performance Materials |
|
|
50.9 |
|
|
|
38.5 |
|
Equipment and Energy |
|
|
26.8 |
|
|
|
14.5 |
|
Healthcare |
|
|
9.4 |
|
|
|
18.0 |
|
Chemicals |
|
|
18.9 |
|
|
|
8.9 |
|
|
Segment Totals |
|
|
334.0 |
|
|
|
259.0 |
|
Other |
|
|
(1.7 |
) |
|
|
(5.5 |
) |
|
Consolidated Totals |
|
$ |
332.3 |
|
|
$ |
253.5 |
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
21.1 |
|
|
$ |
21.7 |
|
Chemicals |
|
|
2.8 |
|
|
|
2.6 |
|
Other Segments |
|
|
6.2 |
|
|
|
3.5 |
|
|
Segment and Consolidated Totals |
|
$ |
30.1 |
|
|
$ |
27.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December |
|
30 September |
(Millions of dollars) |
|
2006 |
|
2006 |
|
Identifiable assets (a) |
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
3,429.7 |
|
|
$ |
3,283.2 |
|
Tonnage Gases |
|
|
2,784.2 |
|
|
|
2,803.0 |
|
Electronics and Performance Materials |
|
|
2,357.5 |
|
|
|
2,334.5 |
|
Equipment and Energy |
|
|
345.7 |
|
|
|
304.4 |
|
Healthcare |
|
|
878.0 |
|
|
|
856.5 |
|
Chemicals |
|
|
546.3 |
|
|
|
579.8 |
|
|
Segment Totals |
|
|
10,341.4 |
|
|
|
10,161.4 |
|
Other |
|
|
393.0 |
|
|
|
291.0 |
|
|
Consolidated Totals |
|
$ |
10,734.4 |
|
|
$ |
10,452.4 |
|
|
(a) |
|
Identifiable assets are equal to total assets less investments in and advances to equity
affiliates. |
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
31 December |
(Millions of dollars) |
|
2006 |
|
2005 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,285.0 |
|
|
$ |
1,188.5 |
|
Canada |
|
|
43.7 |
|
|
|
18.7 |
|
|
Total North America |
|
|
1,328.7 |
|
|
|
1,207.2 |
|
|
Europe |
|
|
713.5 |
|
|
|
532.7 |
|
Asia |
|
|
351.7 |
|
|
|
248.3 |
|
Latin America |
|
|
38.6 |
|
|
|
27.6 |
|
|
Total |
|
$ |
2,432.5 |
|
|
$ |
2,015.8 |
|
|
Geographic information is based on country of origin. The Europe segment operates principally in
Belgium, France, Germany, the Netherlands, the U.K., and Spain. The Asia segment operates
principally in China, Japan, Korea, and Taiwan.
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except for share data)
1. MAJOR ACCOUNTING POLICIES
Refer to the companys 2006 annual report on Form 10-K for a description of major accounting
policies. There have been no material changes to these accounting policies during the first
quarter of 2007.
2. NEW ACCOUNTING STANDARDS
Postretirement Benefits
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132R. This Statement
requires recognition of the funded status of benefit plans in the balance sheet, with changes in
the funded status recognized in comprehensive income within shareholders equity in the year in
which the changes occur. The funded status is to be determined based on the measurement of plan
assets and obligations as of fiscal year end. The requirement to recognize the funded status of
benefit plans and the disclosure requirements under the new Statement are effective as of the end
of the fiscal year ending after 15 December 2006. Based on the funded status of benefit plans as of
30 September 2006, the company would have recognized an additional liability of $536. The
requirement to measure plan assets and benefit obligations as of fiscal year end is effective for
fiscal years ending after 15 December 2008. This will require the company to measure the plan
assets and benefit obligations of its U.K. and Belgium plans as of 30 September instead of 30 June.
The company is currently evaluating the impact of SFAS No. 158 on its consolidated financial
statements.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements that require or
permit fair value measurements and does not require any new fair value measurements. This Statement
is effective for financial statements issued for fiscal years beginning after 15 November 2007, and
interim periods within those fiscal years, with earlier application encouraged. The provisions of
SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which the
Statement is initially applied, except for a limited form of retrospective application for certain
financial instruments. The company is currently evaluating the effect of SFAS No. 157.
Uncertainty in Income Taxes
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109. This Interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. FIN No. 48 is effective for fiscal years beginning after 15 December 2006. The
company is currently evaluating the effect this Interpretation will have on its consolidated
financial statements.
3. DISCONTINUED OPERATIONS
In March 2006, the company announced it was exploring the sale of its Amines and Polymers
businesses as part of the companys ongoing portfolio management activities. The company sold its
Amines business to Taminco N.V. on 29 September 2006. Accordingly, the Amines business is being
accounted for as discontinued operations and the consolidated financial statements for prior
periods have been adjusted to reflect this presentation.
9
4. ACQUISITION PENDING APPROVAL
On 8
January 2007, the company announced it had reached a definitive agreement with The Linde
Group to acquire the industrial gas business of BOC Gazy Sp z o. o. for 370 million Euros ($481).
The transaction is subject to regulatory approval and customary closing conditions. For regulatory
purposes, BOC Gazy was required to be sold by Linde as a result of its purchase of The BOC Group
plc in September 2006. The BOC Gazy business had fiscal year 2006 sales of approximately 126
million Euros ($164). The business has approximately 750 employees, five major industrial gas
plants, and six cylinder transfills serving customers across a diverse range of industries,
including chemicals, steel and base metals, among others.
5. GLOBAL COST REDUCTION PLAN
The following table summarizes changes to the carrying amount of the accrual for the 2006
global cost reduction plan for the three months ended 31 December 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other |
|
Asset |
|
|
|
|
|
|
Benefits |
|
Impairments |
Total |
|
Total 2006 Plan Charge |
|
$ |
60.6 |
|
|
$ |
11.5 |
|
|
$ |
72.1 |
|
Noncash Expenses |
|
|
(13.0 |
) |
|
|
(11.5 |
) |
|
|
(24.5 |
) |
Cash Expenditures |
|
|
(1.1 |
) |
|
|
|
|
|
|
(1.1 |
) |
|
Accrual Balance at 30 September 2006 |
|
|
46.5 |
|
|
|
|
|
|
|
46.5 |
|
|
Cash Expenditures |
|
|
(8.0 |
) |
|
|
|
|
|
|
(8.0 |
) |
|
Accrual
Balance at 31 December 2006 |
|
$ |
38.5 |
|
|
$ |
|
|
|
$ |
38.5 |
|
|
6. SHARE-BASED COMPENSATION
The company has various share-based compensation programs, which include stock options, deferred
stock units, and restricted stock. During the three months ended 31
December 2006, the company granted 1.5 million stock options at a
weighted-average exercise price of $67.23 and an estimated fair value
of $22.42 per option. The fair value of these options was estimated
using a lattice-based option valuation model that used the following
assumptions: expected volatility of 30.6%; expected dividend yield of
2.1%; expected life in years of 7.0-9.0; and a risk-free interest
rate of 4.6%-4.7%. In addition, the company granted 366,865 deferred
stock units at a weighted-average grant-date fair value of $68.12 and
50,500 restricted stock units at a weighted-average grant-date fair
value of $66.69. Refer to Note 15 in the companys 2006 annual
report on Form 10K for information on the valuation and accounting
for these programs.
Share-based compensation cost charged against income in the first quarter of 2007 was $16.4, before
taxes of $6.4. Of the share-based compensation cost recognized, $13.1 was a component of selling and
administrative expense, $2.3 a component of cost of sales, and $1.0 a component of research and
development. Share-based compensation cost charged against income for the first quarter of 2006
was $17.2, before taxes of $6.7. Of the share-based compensation cost recognized, $13.8 was a component of
selling and administrative expense, $2.2 a component of cost of sales, and $1.2 a component of
research and development. The amount of share-based compensation cost capitalized in 2007 and 2006 was not
material.
10
7. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the quarter ended 31
December 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
Currency |
|
|
|
|
30 September |
|
and |
|
Translation |
|
31 December |
|
|
2006 |
|
Adjustments |
|
and Other |
|
2006 |
|
Merchant Gases |
|
$ |
262.4 |
|
|
$ |
|
|
|
$ |
9.9 |
|
|
$ |
272.3 |
|
Tonnage Gases |
|
|
10.3 |
|
|
|
|
|
|
|
.3 |
|
|
|
10.6 |
|
Electronics and Performance Materials |
|
|
305.4 |
|
|
|
.2 |
|
|
|
4.0 |
|
|
|
309.6 |
|
Healthcare |
|
|
379.1 |
|
|
|
.3 |
|
|
|
3.4 |
|
|
|
382.8 |
|
Chemicals |
|
|
31.9 |
|
|
|
|
|
|
|
.4 |
|
|
|
32.3 |
|
|
|
|
$ |
989.1 |
|
|
$ |
.5 |
|
|
$ |
18.0 |
|
|
$ |
1,007.6 |
|
|
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
31 December |
|
|
2006 |
|
2005 |
|
NUMERATOR |
|
|
|
|
|
|
|
|
Used in basic and diluted EPS |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
230.3 |
|
|
$ |
181.8 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(1.1 |
) |
|
Net Income |
|
$ |
230.3 |
|
|
$ |
180.7 |
|
|
DENOMINATOR (in millions) |
|
|
|
|
|
|
|
|
Weighted average number of common shares used in
basic EPS |
|
|
216.7 |
|
|
|
222.0 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
5.6 |
|
|
|
4.4 |
|
Other award plans |
|
|
1.1 |
|
|
|
.7 |
|
|
|
|
|
6.7 |
|
|
|
5.1 |
|
|
Weighted average number of common shares and
dilutive potential common shares used in diluted
EPS |
|
|
223.4 |
|
|
|
227.1 |
|
|
BASIC EPS |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.06 |
|
|
$ |
.82 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(.01 |
) |
|
Net Income |
|
$ |
1.06 |
|
|
$ |
.81 |
|
|
DILUTED EPS |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.03 |
|
|
$ |
.80 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1.03 |
|
|
$ |
.80 |
|
|
11
9. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net pension cost for the defined benefit plans and other postretirement
benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 31 December |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
Pension Benefits |
|
Other Benefits |
|
Service cost |
|
$ |
20.0 |
|
|
$ |
19.4 |
|
|
$ |
1.5 |
|
|
$ |
1.6 |
|
Interest cost |
|
|
41.5 |
|
|
|
36.5 |
|
|
|
1.3 |
|
|
|
1.3 |
|
Expected return on plan assets |
|
|
(46.5 |
) |
|
|
(38.9 |
) |
|
|
|
|
|
|
|
|
Prior service cost amortization |
|
|
1.1 |
|
|
|
.8 |
|
|
|
(.5 |
) |
|
|
(.6 |
) |
Actuarial loss amortization |
|
|
14.3 |
|
|
|
16.2 |
|
|
|
.6 |
|
|
|
.9 |
|
Settlement and curtailment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
Other |
|
|
.4 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
30.8 |
|
|
$ |
35.3 |
|
|
$ |
2.9 |
|
|
$ |
3.2 |
|
|
During the three months ended 31 December 2006, contributions of $239.9 were made. The company
expects to contribute approximately $40 to the pension plans during the remainder of 2007. For the
three months ended 31 December 2005, contributions of $102.9 were made. During 2006, total
contributions were $130.1.
10. COMMITMENTS AND CONTINGENCIES
The company is involved in various legal proceedings, including competition, environmental,
health, safety, product liability, and insurance matters. While 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 or net cash flows, a future charge for any damage award
could have a significant impact on the companys net income in the period in which it is recorded.
11. SUPPLEMENTAL INFORMATION
Share Repurchase Program
In March 2006, the Board of Directors approved a $1,500 share repurchase program. The company
began the share repurchase program in the third quarter of 2006 and purchased 7.7 million of its
outstanding shares at a cost of $496.1 during 2006. The company expects to complete an additional
$500 of the program during fiscal year 2007 and during the first quarter purchased 1.8 million of
its outstanding shares at a cost of $125.7.
Hurricanes
In the fourth quarter of 2005, the companys New Orleans industrial gas complex sustained extensive
damage from Hurricane Katrina. Other industrial gases and chemicals facilities in the Gulf Coast
region also sustained damages from Hurricanes Katrina and Rita in fiscal 2005.
Insurance recoveries for property damages and business interruption were recognized as claims were
settled. Operating income for the three months ended 31 December 2005 included a net gain of
$7.3 related to insurance recoveries net of property damage and other expenses incurred. Operating
income for the three months ended 31 December 2006 was not impacted except for higher depreciation
expense of approximately $1. During the three months ended 31 December 2006 and 2005, the company
collected insurance proceeds of $19.1 and $25.0, respectively. The company estimated the impact of
business interruption at $(26.0) for the three months ended 31 December 2005.
12
A table summarizing the estimated impact of the Hurricanes for the three months ended 31 December
2005 is provided below:
|
|
|
|
|
|
|
Three Months Ended |
|
|
31 December 2005 |
|
Insurance Recoveries Recognized |
|
$ |
12.2 |
|
Property Damage/Other Expenses |
|
|
(4.9 |
) |
|
|
|
$ |
7.3 |
|
Estimated Business Interruption |
|
|
(26.0 |
) |
|
Total Estimated Impact |
|
$ |
(18.7 |
) |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Millions of dollars, except for share data)
The disclosures in this quarterly report are complementary to those made in the companys 2006
annual report on Form 10-K. An analysis of results for the first quarter of 2007, including an
update to the companys 2007 Outlook, is provided in the Managements Discussion and Analysis to
follow.
All
comparisons in the discussion are to the corresponding period in the prior year unless otherwise stated. All
amounts presented are in accordance with U.S. generally accepted accounting principles. All
amounts are presented in millions of dollars, except for share data, unless otherwise indicated.
FIRST QUARTER 2007 VS. FIRST QUARTER 2006
FIRST QUARTER 2007 IN SUMMARY
|
|
|
Sales of $2,433 were up 21% from the prior year, driven by strong volume growth,
higher equipment sales, and improved pricing. |
|
|
|
|
Operating income of $332 increased 31% from strong volume growth and improved cost
performance. |
|
|
|
|
Net income of $230 increased 27% and diluted earnings per share of $1.03 increased 29%.
A summary table of changes in earnings per share is presented below. |
|
|
|
|
The company purchased 1.8 million of its outstanding shares at a cost of $126 under the
$1,500 share repurchase program announced in the second quarter of 2006. |
|
|
|
|
The company announced it had reached a definitive agreement with The Linde Group to
acquire the industrial gas business of BOC Gazy Sp z o.o. for 370
million Euros (approximately
$481). |
|
|
|
|
For a discussion of the challenges, risks, and opportunities on which management is
focused, refer to the update to the companys 2007 Outlook
provided on pages 20-21. |
13
Changes in Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
31 December |
|
|
|
|
2006 |
|
2005 |
|
Increase (Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
1.03 |
|
|
$ |
.80 |
|
|
$ |
.23 |
|
|
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying business |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.28 |
|
Price/raw materials/mix |
|
|
|
|
|
|
|
|
|
|
.05 |
|
Costs |
|
|
|
|
|
|
|
|
|
|
(.15 |
) |
Acquisitions |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Divestitures |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
Currency |
|
|
|
|
|
|
|
|
|
|
.04 |
|
Prior year European land sale |
|
|
|
|
|
|
|
|
|
|
(.03 |
) |
Hurricanes (A) |
|
|
|
|
|
|
|
|
|
|
.06 |
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(.04 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
.02 |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
$ |
.23 |
|
|
|
|
|
(A) |
Includes insurance recoveries, estimated business interruption, asset
write-offs, and other expenses during 2006. |
RESULTS OF OPERATIONS
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
2,432.5 |
|
|
$ |
2,015.8 |
|
|
|
21 |
% |
Cost of sales |
|
|
1,788.5 |
|
|
|
1,491.7 |
|
|
|
20 |
% |
Selling and administrative |
|
|
284.4 |
|
|
|
250.9 |
|
|
|
13 |
% |
Research and development |
|
|
34.8 |
|
|
|
37.6 |
|
|
|
(7 |
%) |
Other (income) expense, net |
|
|
(7.5 |
) |
|
|
(17.9 |
) |
|
|
(58 |
%) |
Operating Income |
|
|
332.3 |
|
|
|
253.5 |
|
|
|
31 |
% |
Equity affiliates income |
|
|
30.1 |
|
|
|
27.8 |
|
|
|
8 |
% |
Interest expense |
|
|
39.1 |
|
|
|
26.3 |
|
|
|
49 |
% |
Effective tax rate |
|
|
27.0 |
% |
|
|
27.0 |
% |
|
|
|
|
Income from continuing operations |
|
|
230.3 |
|
|
|
181.8 |
|
|
|
27 |
% |
Loss from discontinued operations |
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
Net Income |
|
|
230.3 |
|
|
|
180.7 |
|
|
|
27 |
% |
Basic Earnings per Share |
|
$ |
1.06 |
|
|
$ |
.81 |
|
|
|
31 |
% |
Diluted Earnings per Share |
|
$ |
1.03 |
|
|
$ |
.80 |
|
|
|
29 |
% |
|
14
Discussion of Consolidated Results
Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business
|
|
|
|
|
Volume |
|
|
22 |
% |
Price/mix |
|
|
1 |
% |
Acquisitions |
|
|
1 |
% |
Currency |
|
|
3 |
% |
Natural gas/raw material cost pass-through |
|
|
(6 |
%) |
|
Total Consolidated Change |
|
|
21 |
% |
|
Sales of $2,432.5 increased 21%, or $416.7. Underlying base business growth accounted for 23% of
the increase. Sales increased 22% from higher volumes, including prior year hurricane impacts,
across all segments, as discussed in the Segment Analysis which follows. Improved pricing in the
Merchant Gases segment, partially offset by lower pricing in Electronics and Performance
Materials, increased sales by 1%. The acquisition of Tomah3 Products increased sales
by 1%. Sales improved 3% from favorable currency effects, driven primarily by the weakening of
the U.S. dollar against the Euro. Lower natural gas/raw material contractual cost pass-through
to customers decreased sales by 6% mainly due to lower natural gas prices.
Operating Income
|
|
|
|
|
|
|
Change from |
|
|
Prior Year |
|
Prior Year Operating Income |
|
$ |
254 |
|
Underlying business |
|
|
|
|
Volume |
|
|
89 |
|
Price/raw materials/mix |
|
|
14 |
|
Costs |
|
|
(47 |
) |
Acquisitions |
|
|
3 |
|
Divestitures |
|
|
(3 |
) |
Currency |
|
|
13 |
|
Prior year European land sale |
|
|
(10 |
) |
Hurricanes (A) |
|
|
19 |
|
|
Operating Income |
|
$ |
332 |
|
|
|
|
|
(A) |
Includes insurance recoveries, estimated business interruption, asset
write-offs, and other expenses during 2006. |
Operating income of $332.3 increased 31%, or $78.8.
|
|
|
Operating income increased $89 from volume growth in the Merchant Gases, Tonnage Gases,
Electronics and Performance Materials, and Equipment and Energy segments, as discussed in
the Segment Analysis which follows. |
|
|
|
|
Operating income improved $14 as higher pricing in Merchant Gases was partially offset
by price declines in Electronics and Performance Materials. |
|
|
|
|
Operating income decreased $47 from higher costs to support
growth and due to inflation. |
|
|
|
|
Favorable currency effects, primarily from the weakening of the U.S. dollar against the
Euro, increased operating income by $13. |
|
|
|
|
Operating income decreased $10 from the sale of land in Europe in the prior year. |
|
|
|
|
Operating income increased $19 from the impacts of Hurricanes Katrina and Rita,
primarily from estimated business interruption in the prior year. |
Equity Affiliates Income
Income from equity affiliates of $30.1 increased $2.3, or 8%, primarily due to higher income from
affiliates in the Equipment and Energy segment.
15
Selling and Administrative Expense (S&A)
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Currency |
|
|
3 |
% |
Other costs |
|
|
10 |
% |
|
Total S&A Change |
|
|
13 |
% |
|
S&A expense of $284.4 increased 13%, or $33.5. S&A as a percent of sales declined to 11.7% from
12.4% in 2006. Currency effects, driven by the weakening of the U.S. dollar against the Euro,
increased S&A by 3%. Underlying costs increased S&A by 10%, as productivity gains were more than
offset by inflation and higher costs to support growth.
Research and Development (R&D)
R&D decreased 7%, or $2.8, as a result of the companys organization simplification efforts. R&D
decreased as a percent of sales to 1.4% from 1.9% in 2006.
Other (Income) Expense, Net
Other income of $7.5 decreased $10.4. Items recorded to other income arise from transactions and
events not directly related to the principal income earning activities of the company. Results in
2006 included a gain of $9.5 related to the sale of land in Europe and a gain of $7.3 related to
insurance recoveries, net of property damage and other expenses incurred due to Hurricanes Katrina
and Rita. Otherwise, no individual items were material in comparison to the prior year.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended 31 December |
|
|
2006 |
|
2005 |
|
Interest incurred |
|
$ |
41.1 |
|
|
$ |
31.3 |
|
Less: interest capitalized |
|
|
2.0 |
|
|
|
5.0 |
|
|
Interest expense |
|
$ |
39.1 |
|
|
$ |
26.3 |
|
|
Interest incurred increased $9.8. The increase resulted from a higher average debt balance
excluding currency effects, higher average interest rates, and the impact of a weaker U.S. dollar
on the translation of foreign currency interest. Capitalized interest decreased by $3.0 due to
lower levels of construction in progress for plant and equipment built by the company.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income before taxes less minority
interest. The effective tax rate was 27.0% in the first quarter of 2007 and 2006.
Discontinued Operations
On 29 September 2006, the company completed the sale of its Amines business to Taminco N.V., a
producer of methylamines based in Belgium. As a result of the sale, the operating results of the
Amines business have been classified as discontinued operations in the companys consolidated
financial statements for 2006. The discontinued operations generated sales of $82.8 and a loss,
net of tax, of $1.1 in the first quarter of 2006.
Net Income
Net income was $230.3 compared to $180.7 in 2006.
Diluted earnings per share was $1.03 compared
to $.80 in 2006. A summary table of changes in earnings per share is
presented on page 14.
16
Segment Analysis
Merchant Gases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
740.0 |
|
|
$ |
622.1 |
|
|
|
19 |
% |
Operating income |
|
|
139.2 |
|
|
|
105.3 |
|
|
|
32 |
% |
Equity affiliates income |
|
|
21.1 |
|
|
|
21.7 |
|
|
|
(3 |
%) |
|
Merchant Gases Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
10 |
% |
Price/mix |
|
|
4 |
% |
Currency |
|
|
5 |
% |
|
Total Merchant Gases Change |
|
|
19 |
% |
|
Sales of $740.0 increased 19%, or $117.9. Underlying base business growth improved sales
by 14%. Sales increased 10% from stronger volumes, reflecting the companys continued
success in utilizing applications technology to drive growth.
|
|
|
Liquid bulk volumes in North America increased 11%. Liquid oxygen (LOX) and
liquid nitrogen (LIN) volumes were flat. Liquid hydrogen and liquid argon volumes
increased as Hurricanes Katrina and Rita negatively impacted prior year results. |
|
|
|
|
Liquid bulk volumes in Europe increased 4% due to higher demand across most end
markets. |
|
|
|
|
Packaged gas volumes in Europe increased 3% due to higher demand for industrial
cylinders and new offerings in the business. |
|
|
|
|
LOX/LIN volumes in Asia were up a strong 21%, driven by solid demand growth
across the region. |
Pricing increased sales by 4%. Prices for LOX/LIN improved 9% in North America and 5% in
Europe from pricing actions to recover higher power and distribution costs. Prices for
liquid hydrogen decreased as the prior year included the surcharge pricing impacts of
Hurricane Katrina. In Asia, pricing was flat versus the prior year.
Sales increased 5% from favorable currency effects, driven primarily by the weakening of
the U.S. dollar against the Euro and the Pound Sterling.
Merchant Gases Operating Income
Operating income of $139.2 increased 32%, or $33.9. Favorable operating income variances resulted
from higher volumes of $23, improved pricing and customer mix of $18, and currency effects of $7.
Operating income declined $16 from higher costs to support growth and inflation partially offset by
productivity improvements.
Merchant Gases Equity Affiliates Income
Gases equity affiliates income of $21.1 decreased $.6, as lower income in the European
affiliates was mostly offset by higher income from the Asian affiliates.
17
Tonnage Gases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
604.5 |
|
|
$ |
532.6 |
|
|
|
13 |
% |
Operating income |
|
|
88.8 |
|
|
|
73.8 |
|
|
|
20 |
% |
|
Tonnage Gases Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
31 |
% |
Currency |
|
|
2 |
% |
Natural gas/raw material cost
pass-through |
|
|
(20 |
%) |
|
Total Tonnage Gases Change |
|
|
13 |
% |
|
Sales of $604.5 increased 13%, or $71.9. Underlying base business volume growth increased
sales by 31%. Volumes were higher due to the start-up of new hydrogen plants supporting the
refinery industry in 2006. Prior year volumes were negatively impacted by the effects of
Hurricanes Katrina and Rita.
Sales increased 2% from favorable currency effects, driven primarily by the weakening of
the U.S. dollar against the Euro. Lower natural gas cost contractually passed-through to
customers decreased sales by 20%.
Tonnage Gases Operating Income
Operating income of $88.8 increased 20%, or $15.0. Operating income increased by $28 from higher
volumes and the prior year impacts of Hurricanes Katrina and Rita. Higher maintenance and operating
costs, costs to support growth, and inflation decreased operating income by $10.
Electronics and Performance Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
509.9 |
|
|
$ |
416.8 |
|
|
|
22 |
% |
Operating income |
|
|
50.9 |
|
|
|
38.5 |
|
|
|
32 |
% |
|
Electronics and Performance Materials Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
19 |
% |
Price/mix |
|
|
(2 |
%) |
Acquisitions |
|
|
4 |
% |
Currency |
|
|
1 |
% |
|
Total Electronics and Performance
Materials Change |
|
|
22 |
% |
|
18
Sales of $509.9 increased 22%, or $93.1. Underlying base business growth increased sales by
17%. Higher volumes across all Electronics product lines and from Performance Materials in
Europe and Asia improved sales by 19%. Pricing decreased sales by 2%, as electronic
specialty materials continued to experience pricing pressure. Sales increased 4% from the
acquisition of Tomah3 Products. Favorable currency effects, driven primarily by
the weakening of the U.S. dollar against key European and Asian currencies, improved sales
by 1%.
Electronics and Performance Materials Operating Income
Operating income of $50.9 increased 32%, or $12.4. Operating income increased $33 from higher
volumes, $3 from the acquisition of Tomah3 Products, and $2 from favorable currency
effects. Operating income declined by $15 from inflation and higher costs to support growth and $13
from lower pricing, net of variable costs, primarily due to lower electronics specialty materials
pricing.
Equipment and Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
195.6 |
|
|
$ |
93.8 |
|
|
|
109 |
% |
Operating income |
|
|
26.8 |
|
|
|
14.5 |
|
|
|
85 |
% |
|
Equipment and Energy Sales and Operating Income
Sales of $195.6 increased by $101.8, primarily from higher natural gas liquefaction (LNG) and large
air separation unit activity and a one-time energy related equipment sale. Operating income of
$26.8 increased by $12.3, primarily from higher LNG heat exchanger activity, favorable cost
performance, and the cancellation of an exchanger order due to a project termination by a customer.
The sales backlog for the Equipment business at 31 December 2006 was $403, compared to $446 at 30
September 2006.
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
155.8 |
|
|
$ |
135.5 |
|
|
|
15 |
% |
Operating income |
|
|
9.4 |
|
|
|
18.0 |
|
|
|
(48 |
%) |
|
Healthcare Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
10 |
% |
Acquisitions |
|
|
1 |
% |
Currency |
|
|
4 |
% |
|
Total Healthcare Change |
|
|
15 |
% |
|
Sales of $155.8 increased 15%, or $20.3. Sales increased 10% due to higher volumes,
primarily from recent contract wins in Europe, partially offset by lower volumes in the
U.S. The acquisition of a small healthcare business in Europe in 2006 improved sales by 1%.
Favorable currency effects, driven primarily by the weakening of the U.S. dollar against the Euro,
increased sales by 4%.
19
Healthcare Operating Income
Operating income of $9.4 decreased 48%, or $8.6 primarily due to lower volumes in the U.S. and
prior year results that included a gain on the sale of land in Europe.
Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 December |
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
Sales |
|
$ |
226.7 |
|
|
$ |
215.0 |
|
|
|
5 |
% |
Operating income |
|
|
18.9 |
|
|
|
8.9 |
|
|
|
112 |
% |
|
Chemicals Sales
Sales of $226.7 increased 5%, or $11.7. Sales increased primarily from higher volumes in both
Polymer Emulsions and Polyurethane Intermediates and favorable currency impacts as the U.S. dollar weakened against the
Euro. Sales decreased from divestitures, as the company sold its dinitrotoluene (DNT) production
facility in Geismar, Louisiana, in the second quarter of 2006.
Chemicals Operating Income
Operating income of $18.9 increased $10.0. Operating income in 2007 increased primarily from
higher volumes, partially offset by an environmental charge.
The
companys efforts to restructure its Chemicals businesses
continue. The Polymer Emulsions business is being marketed for sale
and to this end the company is in discussions with potential buyers
and Wacker Chemie, its partner in the business. This sale has not
progressed as quickly as the company had anticipated due to the
complexity the partnership introduces to the divestiture efforts. In
the companys Polyurethane Intermediates business, the company
is also in discussions with its customers and other parties to
maximize the value from this business. The company is optimistic that
it will be able to conclude these efforts in calendar year 2007.
Other
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended 31 December |
|
|
2006 |
|
2005 |
|
Operating loss |
|
|
($1.7 |
) |
|
|
($5.5 |
) |
|
Other
operating loss includes other expense and income which cannot be directly associated with
the business segments, including foreign exchange gains and losses, interest income, and costs
previously allocated to the Amines business. Also included are LIFO inventory adjustments, as the
business segments use FIFO and the LIFO pool is kept at corporate. Corporate research and
development costs are fully allocated to the business segments.
The operating loss of $1.7 decreased by $3.8. No individual items were material in comparison to
the prior year.
2007 OUTLOOK
The companys priority is to improve return on capital by loading existing assets, driving
productivity, and maintaining capital discipline by focusing capital investment in its growth
businesses. The discussion below outlines the areas of challenge, risk, and opportunity on which
management is focused.
Economic Environment
Domestic manufacturing activity in the first three months of 2007 improved 3.7% from the prior
year. The company still anticipates domestic manufacturing growth between 2% and 3% and growth in
silicon processed by the semiconductor industry of approximately 5% for the year.
20
Segments
|
|
|
Merchant Gases results should be lower in the second quarter, on a sequential basis, due
to slightly lower volumes and higher costs. Results for 2007 should benefit from operating
leverage on existing assets, increased productivity, improved pricing, and new investments,
particularly in Asia. |
|
|
|
|
Tonnage Gases should continue to benefit from the new hydrogen facilities brought
onstream in 2006. However, results in the second quarter are expected to be lower than the
first quarter due to customer outages and increased maintenance costs. |
|
|
|
|
Second quarter results in Electronics and Performance Materials should approximate the
first quarter as seasonally higher volumes in Performance Materials are expected to be
offset by a seasonal slowdown in Electronics. Results in 2007 are expected to benefit from
the cost savings generated by the 2006 global cost reduction plan. |
|
|
|
|
Equipment and Energy results were higher in the first quarter due to the cancelled LNG
order and reduced project costs. While LNG activity should continue to be high in 2007,
overall segment results should be lower from higher energy development spending. |
|
|
|
|
The Healthcare segment should continue to improve in the second quarter from increased
volumes and management actions taken in 2006. |
Global Cost Reduction Plan
In the fourth quarter of 2006, the company announced a global cost reduction plan. Based on actions
taken in the first quarter, the company does not expect a material change to the original estimated
cost savings of $23 for 2007 and $39 annually for 2008 and beyond.
Capital Expenditures
Capital expenditures for new plant and equipment are expected to be approximately $1,000 for 2007.
The acquisition of the industrial gas business from The Linde Group should be completed late in the
second quarter or early in the third quarter for approximately $500. The company intends to
continue to evaluate acquisition opportunities and investments in affiliated entities.
SHARE-BASED COMPENSATION
Refer to
Note 6 to the consolidated financial statements for information on
the companys share-based compensation arrangements and the valuation and accounting for the
various programs.
PENSION BENEFITS
Refer to Note 9 to the consolidated financial statements for details on pension cost and cash
contributions. For additional information on the companys pension benefits and associated
accounting policies, refer to the Pension Benefits section of Managements Discussion and Analysis
and Note 18 to the consolidated financial statements in the companys 2006 annual report on Form
10-K.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The narrative below refers to the Consolidated Statements of Cash Flows included on page 6.
Operating Activities from Continuing Operations
For the first three months, net cash provided by operating activities decreased $91.5, or 36%, as
compared to 2006. Cash provided by operating activities reflects higher earnings of $48.5 which
were more than offset by increased pension plan contributions. In the first three months, the company
contributed $239.9 to the pension plans as compared to $102.9. An
increase of $30.9 in noncurrent
capital lease receivables and lower deferred income taxes of $39.0 unfavorably impacted cash
provided by operating activities. Cash used for working capital increased by $55.7.
The working capital changes occurred principally in three areas: inventories, contracts in
progress, and accounts payable and accrued liabilities. Cash used for inventories decreased by
$40.2, as a result of prior year increased business activity and rebuilding of inventories from
unusually low levels of inventories as of 30 September 2005 due to the impact of the hurricanes.
Additionally, cash used for contracts in progress decreased by $57.1, principally attributable to a
one-time sale of energy related equipment to a refinery customer on a cost reimbursable basis in
November 2006. These changes were more than offset by an increase in cash used for payables and
accrued liabilities of $150.5, due mainly to pension contributions in 2007 and the timing of
payments.
21
Investing Activities from Continuing Operations
Cash used for investing activities decreased $46.3, or 18%. Capital expenditures totaled $240.4
for the three months ended 31 December 2006, compared to $304.6. Additions to plant and equipment
totaled $238.3 for the three months ended 31 December 2006, compared to $304.0. This decrease is
due primarily to prior year additions for the rebuilding of facilities damaged by Hurricane
Katrina. Additionally, insurance proceeds received for hurricane property damage were lower by
$10.1 in 2007.
Capital expenditures for continuing operations are detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
31 December |
|
|
2006 |
|
2005 |
|
Additions to plant and equipment |
|
$ |
238.3 |
|
|
$ |
304.0 |
|
Investment in and advances to unconsolidated
affiliates |
|
|
1.5 |
|
|
|
|
|
Acquisitions, less cash acquired |
|
|
|
|
|
|
|
|
Capital leases |
|
|
.6 |
|
|
|
.6 |
|
|
Total Capital Expenditures |
|
$ |
240.4 |
|
|
$ |
304.6 |
|
|
Financing Activities from Continuing Operations
Cash provided by financing activities increased $51.4. This increase is primarily attributable to
a net increase in cash provided by debt (short- and long-term debt proceeds net of repayments) of
$157.9 and higher proceeds from stock option exercises of $24.0, partially offset by the 2007 use
of cash of $133.5 for the purchase of Treasury Stock.
Total debt at 31 December 2006 and 30 September 2006, expressed as a percentage of the sum of total
debt, shareholders equity, and minority interest, was 37.3% and 35.8%, respectively. Total debt
increased from $2,849.8 at 30 September 2006 to $3,150.2 at 31 December 2006. This increase was
due primarily to long- and short-term debt proceeds exceeding repayments by $243.8 and the impact of
a weaker U.S. dollar on the translation of foreign currency debt.
The companys total multicurrency revolving facility, maturing in May 2011, amounted to $1,200.0 at
31 December 2006. No borrowings were outstanding under these commitments. Additional commitments
totaling $199.2 are maintained by the companys foreign subsidiaries, of which $149.0 was utilized
at 31 December 2006.
The estimated fair value of the companys long-term debt, including current portion, as of 31
December 2006 was $2,565.8 compared to a book value of $2,501.7.
In March 2006, the Board of Directors approved a $1,500 share repurchase program. The company
began the share repurchase program in the third quarter of 2006 and purchased 7.7 million of its
outstanding shares at a cost of $496.1 during 2006. The company expects to complete an additional
$500 of the program during fiscal year 2007 and during the first quarter purchased 1.8 million of
its outstanding shares at a cost of $125.7.
On 8
January 2007, the company announced it had reached a definitive agreement with The Linde Group
to acquire the industrial gas business of BOC Gazy Sp z o.o. for 370 million Euros ($481). The
transaction is subject to regulatory approval and customary closing conditions. The company
expects that the acquisition will be financed as part of the normal finance plan using a
combination of operating cash flows and new debt, as required, with the majority of debt expected
to be Euro-denominated.
CONTRACTUAL OBLIGATIONS
The company is obligated to make future payments under various contracts such as debt
agreements, lease agreements, unconditional purchase obligations and other long-term obligations.
There have been no material changes to contractual obligations as reflected in the Managements
Discussion and Analysis in the companys 2006 annual report on Form 10-K.
22
COMMITMENTS AND CONTINGENCIES
Refer to Note 19 to the consolidated financial statements in the companys 2006 annual report
on Form 10-K and Note 10 in this quarterly filing.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to off-balance sheet arrangements as reflected in the
Managements Discussion and Analysis in the companys 2006 annual report on Form 10-K. The
companys 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 companys 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
arms length with clearly independent parties.
MARKET RISKS AND SENSITIVITY ANALYSIS
Information on the companys utilization of financial instruments and an analysis of the
sensitivity of these instruments to selected changes in market rates and prices is included in the
companys 2006 annual report on Form 10-K.
For foreign currency exchange risk, the sensitivity analysis assumes an instantaneous 10% change in
the foreign currency exchange rates 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 $274 and $216 in the net liability position of financial instruments
at 31 December 2006 and 30 September 2006, respectively. A 10% weakening of the functional
currency of an entity versus all other currencies would result in an increase of $273 and $215 in
the net liability position of financial instruments at 31 December 2006 and 30 September 2006,
respectively.
The sensitivity analysis related to the fixed portion of the companys debt portfolio assumes an
instantaneous 100 basis point move in interest rates 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 $74 and $71 in the net liability position of financial instruments at 31 December
2006 and 30 September 2006, respectively. A 100 basis point decrease in market interest rates would
result in an increase of $79 and $71 in the net liability position of financial instruments at 31
December 2006 and 30 September 2006, respectively.
There was no material change to market risk sensitivity for commodity price risk since 30 September
2006.
The net financial instrument position of the company increased from a liability of $2,533.0 at 30
September 2006 to a liability of $2,599.2 at 31 December 2006 primarily due to an increase in the
book value of long-term debt, as a result of long-term debt proceeds exceeding repayments and the
impact of a weaker U.S. dollar on the translation of foreign currency debt.
23
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of the companys financial condition and results of
operations is based on the consolidated financial statements and accompanying notes that have been
prepared in accordance with U.S. generally accepted accounting principles. The preparation of
these financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The significant accounting policies of the company are described in Note 1 to the consolidated
financial statements and the critical accounting policies and estimates are described in the
Managements Discussion and Analysis included in the 2006 annual report on Form 10-K. Information
concerning the companys implementation and impact of new accounting standards issued by the
Financial Accounting Standards Board (FASB) is included in Note 2 to the consolidated financial
statements. There have been no changes in accounting policy in the current period that had a
material impact on the companys financial condition, change in financial condition, liquidity or
results of operations.
NEW ACCOUNTING STANDARDS
See Note 2 to the consolidated financial statements for information concerning the companys
implementation and impact of new accounting standards.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on
managements reasonable expectations and assumptions as of the date of this document regarding
important risk factors. Actual performance and financial results may differ materially from those
expressed in the forward-looking statements because of many factors, including 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 companys 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
unanticipated increased energy and raw material costs from customers; uninsured litigation
judgments or settlements; changes in government regulations; consequences of acts of war or
terrorism impacting the United States and other markets; the effects of a pandemic or epidemic or
a natural disaster; charges related to portfolio management and cost reduction actions; the success
of implementing cost reduction programs and achieving anticipated acquisition synergies; the
timing, impact, and other uncertainties of future acquisitions or divestitures
or unanticipated contract terminations; significant fluctuations in interest rates and foreign
currencies from that currently anticipated; the impact of tax and other legislation and regulations
in jurisdictions in which the company and its affiliates operate; the impact of new financial
accounting standards; and the timing and rate at which tax credits can be utilized. The company
disclaims any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statements contained in this document to reflect any change in the companys
assumptions, beliefs or expectations or any change in events, conditions or circumstances upon
which any such forward-looking statements are based.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to
the Market Risks and Sensitivity Analysis on page 23 of Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
Under the supervision of the Chief Executive Officer and Chief Financial Officer, the companys
management conducted an evaluation of the effectiveness of the design and operation of the
companys disclosure controls and procedures as of 31 December 2006. 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. As previously disclosed, the company is in
the midst of an SAP implementation. As a result, certain changes have been made to the companys
internal control structure, in connection with the SAP implementation, which management believes
will strengthen their internal control structure. There have been no other significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent
to the date of such evaluation.
24
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There are no material changes from risk factors previously disclosed in the Companys Annual Report
on Form 10-K for the fiscal year ended September 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer
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(d) Maximum Number |
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(or Approximate |
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(c) Total Number of |
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Dollar Value) of |
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Shares (or Units) |
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Shares (or Units) |
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|
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Purchased as Part |
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that May Yet Be |
|
|
(a) Total Number of |
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(b) Average Price |
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of Publicly |
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Purchased Under the |
|
|
Shares (or Units) |
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Paid per Share (or |
|
Announced Plans or |
|
Plans or |
Period |
|
Purchased |
|
Unit) |
|
Programs |
|
Programs(1)(2) |
10/1/06
10/31/06 |
|
|
643,200 |
|
|
$ |
68.28 |
|
|
|
643,200 |
|
|
$ |
960,009,949 |
|
11/1/06 11/30/06 |
|
|
597,400 |
|
|
$ |
69.97 |
|
|
|
597,400 |
|
|
$ |
918,212,183 |
|
12/1/06 12/31/06 |
|
|
561,000 |
|
|
$ |
71.21 |
|
|
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561,000 |
|
|
$ |
878,263,889 |
|
Total |
|
|
1,801,600 |
|
|
$ |
69.75 |
|
|
|
1,801,600 |
|
|
$ |
878,263,889 |
|
|
|
|
(1) |
|
On 22 March 2006, the Company announced plans to purchase up to $1.5 billion of Air
Products and Chemicals, Inc. common stock under a share repurchase program approved by the
Companys Board of Directors on 16 March 2006. The program does not have a stated expiration date. |
|
(2) |
|
For the quarter ending 31 December 2006, the Company
expended $133.5 million in cash
for the repurchase of shares which was composed of $119.7 million for
shares repurchased during the quarter and $13.8 million for shares
repurchased in September 2006 and settling in October 2006. $6.0 million was reported as an accrued liability on the balance
sheet for share repurchases executed in December 2006 and settling in January 2007. |
Item 6. Exhibits.
Exhibits required by Item 601 of Regulation S-K
|
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10.1
|
|
Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY2007
awards. |
|
|
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12.
|
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Computation of Ratios of Earnings to Fixed Charges. |
|
|
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31.1.
|
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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. |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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Air Products and Chemicals, Inc.
(Registrant)
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|
Date: 26 January 2007 |
By: |
/s/ Paul E. Huck
|
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Paul E. Huck |
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Vice President and Chief Financial Officer |
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26
EXHIBIT INDEX
|
|
|
10.1.
|
|
Form of Award Agreement under the Long-Term Incentive Plan of the Company, used for FY2007
awards. |
|
|
|
12.
|
|
Computation of Ratios of Earnings to Fixed Charges. |
|
|
|
31.1.
|
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2.
|
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.
|
|
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
27