FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(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 March 2007
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 20 April 2007 |
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Common Stock, $1 par value
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216,611,366 |
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
INDEX
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 32-33 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 36.
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 March 2007 |
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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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$ |
37.3 |
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$ |
35.2 |
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Trade receivables, less allowances for doubtful accounts |
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1,658.0 |
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1,564.7 |
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Inventories |
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530.7 |
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509.5 |
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Contracts in progress, less progress billings |
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186.6 |
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191.6 |
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Prepaid expenses |
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227.2 |
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55.1 |
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Other receivables and current assets |
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268.9 |
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256.5 |
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TOTAL CURRENT ASSETS |
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2,908.7 |
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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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796.2 |
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728.3 |
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PLANT AND EQUIPMENT, at cost |
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14,198.6 |
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13,590.3 |
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Less accumulated depreciation |
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7,862.9 |
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7,428.3 |
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PLANT AND EQUIPMENT, net |
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6,335.7 |
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6,162.0 |
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GOODWILL |
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1,009.9 |
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989.1 |
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INTANGIBLE ASSETS, net |
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111.2 |
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113.0 |
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OTHER NONCURRENT ASSETS |
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716.3 |
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575.7 |
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TOTAL ASSETS |
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$ |
11,878.0 |
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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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$ |
1,506.6 |
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$ |
1,655.1 |
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Accrued income taxes |
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146.3 |
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98.7 |
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Short-term borrowings |
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390.7 |
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417.5 |
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Current portion of long-term debt |
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218.7 |
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152.1 |
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TOTAL CURRENT LIABILITIES |
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2,262.3 |
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2,323.4 |
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LONG-TERM DEBT |
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2,704.5 |
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2,280.2 |
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DEFERRED INCOME & OTHER NONCURRENT LIABILITIES |
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682.7 |
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642.0 |
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DEFERRED INCOME TAXES |
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773.6 |
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833.1 |
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TOTAL LIABILITIES |
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6,423.1 |
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6,078.7 |
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MINORITY INTEREST IN SUBSIDIARY COMPANIES |
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178.4 |
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178.0 |
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SHAREHOLDERS EQUITY |
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Common stock (par value $1 per share; 2007 and 2006
249,455,584 shares) |
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249.4 |
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249.4 |
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Capital in excess of par value |
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717.8 |
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682.5 |
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Retained earnings |
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6,054.4 |
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5,743.5 |
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Accumulated other comprehensive income (loss) |
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(102.7 |
) |
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(221.7 |
) |
Treasury stock, at cost (2007 32,871,218 shares; 2006
32,205,012 shares) |
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(1,642.4 |
) |
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(1,529.7 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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5,276.5 |
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4,924.0 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
11,878.0 |
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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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(Millions of dollars, except for share data) |
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Three Months Ended |
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Six Months Ended |
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31 March |
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31 March |
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2007 |
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2006 |
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2007 |
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2006 |
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SALES |
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$ |
2,473.3 |
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$ |
2,229.5 |
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$ |
4,905.8 |
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$ |
4,245.3 |
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COSTS AND EXPENSES |
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Cost of sales |
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1,824.4 |
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1,667.7 |
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3,612.9 |
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3,159.4 |
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Selling and administrative |
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293.1 |
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271.8 |
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577.5 |
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522.7 |
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Research and development |
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35.1 |
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37.5 |
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69.9 |
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75.1 |
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Gain on sale of a chemical facility |
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(70.4 |
) |
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(70.4 |
) |
Impairment of loans receivable |
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65.8 |
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65.8 |
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Other (income) expense, net |
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(4.0 |
) |
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(25.5 |
) |
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(11.5 |
) |
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(43.4 |
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OPERATING INCOME |
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324.7 |
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282.6 |
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657.0 |
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536.1 |
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Equity affiliates income |
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32.4 |
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24.3 |
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62.5 |
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52.1 |
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Interest expense |
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37.8 |
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25.3 |
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76.9 |
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51.6 |
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INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND
MINORITY INTEREST |
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319.3 |
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281.6 |
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642.6 |
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536.6 |
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Income tax provision |
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84.3 |
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74.9 |
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169.4 |
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142.0 |
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Minority interest in earnings of subsidiary companies |
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7.4 |
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10.2 |
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15.3 |
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16.3 |
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INCOME FROM CONTINUING OPERATIONS |
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227.6 |
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196.5 |
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457.9 |
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378.3 |
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INCOME FROM DISCONTINUED OPERATIONS, net of tax |
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7.5 |
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6.4 |
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NET INCOME |
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$ |
227.6 |
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$ |
204.0 |
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$ |
457.9 |
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$ |
384.7 |
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BASIC EARNINGS PER COMMON SHARE |
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Income from continuing operations |
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$ |
1.05 |
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$ |
.88 |
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$ |
2.11 |
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$ |
1.70 |
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Income from discontinued operations |
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.04 |
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.03 |
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Net Income |
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$ |
1.05 |
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$ |
.92 |
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$ |
2.11 |
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$ |
1.73 |
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DILUTED EARNINGS PER COMMON SHARE |
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Income from continuing operations |
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$ |
1.02 |
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$ |
.86 |
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$ |
2.05 |
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$ |
1.66 |
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Income from discontinued operations |
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.03 |
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.03 |
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Net Income |
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$ |
1.02 |
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$ |
.89 |
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$ |
2.05 |
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$ |
1.69 |
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WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING (in
millions) |
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216.5 |
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222.8 |
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216.6 |
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222.4 |
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WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING
ASSUMING DILUTION (in millions) |
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223.4 |
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228.5 |
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223.4 |
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227.9 |
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DIVIDENDS DECLARED PER COMMON SHARE Cash |
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$ |
.38 |
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$ |
.34 |
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$ |
.72 |
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$ |
.66 |
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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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(Millions of dollars) |
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Three Months Ended |
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31 March |
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2007 |
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2006 |
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NET INCOME |
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$ |
227.6 |
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$ |
204.0 |
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OTHER COMPREHENSIVE INCOME, net of tax: |
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Net unrealized holding gain (loss) on
investments, net of income tax (benefit) of
$4.7 and $(2.4) |
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7.9 |
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(4.3 |
) |
Net unrecognized gain on derivatives
qualifying as hedges, net of income tax of $.2
and $.9 |
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.7 |
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1.1 |
|
Foreign currency translation adjustments, net
of income tax (benefit) of $(5.2) and $(16.6) |
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15.8 |
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60.1 |
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TOTAL OTHER COMPREHENSIVE INCOME |
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24.4 |
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56.9 |
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COMPREHENSIVE INCOME |
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$ |
252.0 |
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$ |
260.9 |
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(Millions of dollars) |
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Six Months Ended |
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31 March |
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2007 |
|
2006 |
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NET INCOME |
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$ |
457.9 |
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$ |
384.7 |
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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 $8.1 and $1.2 |
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13.9 |
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2.2 |
|
Net unrecognized gain on derivatives qualifying
as hedges, net of income tax of $1.3 and $1.0 |
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3.3 |
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1.1 |
|
Foreign currency translation adjustments, net of
income tax (benefit) of $(28.5) and $.5 |
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101.8 |
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|
78.5 |
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TOTAL OTHER COMPREHENSIVE INCOME |
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119.0 |
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|
81.8 |
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COMPREHENSIVE INCOME |
|
$ |
576.9 |
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$ |
466.5 |
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|
Amounts reclassified from other comprehensive income into earnings in 2007 and 2006 were not
material.
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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(Millions of dollars) |
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Six Months Ended |
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31 March |
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2007 |
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2006 |
|
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS |
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Net Income |
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$ |
457.9 |
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$ |
384.7 |
|
Income from discontinued operations, net of tax |
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(6.4 |
) |
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Income from Continuing Operations |
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|
457.9 |
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|
378.3 |
|
Adjustments to reconcile income to cash provided by operating activities: |
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Depreciation and amortization |
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|
402.2 |
|
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|
367.6 |
|
Deferred income taxes |
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6.9 |
|
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|
(13.8 |
) |
Undistributed earnings of unconsolidated affiliates |
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|
(42.2 |
) |
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(33.6 |
) |
Loss (gain) on sale of assets and investments |
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1.1 |
|
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|
(12.4 |
) |
Gain on a sale of a chemical facility |
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|
|
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(70.4 |
) |
Impairment of loans receivable |
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|
|
|
|
|
65.8 |
|
Share-based compensation |
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|
31.4 |
|
|
|
37.0 |
|
Noncurrent capital lease receivables |
|
|
(42.9 |
) |
|
|
(58.1 |
) |
Other |
|
|
12.5 |
|
|
|
61.3 |
|
Working capital changes that provided (used) cash, excluding effects of
acquisitions and divestitures: |
|
|
|
|
|
|
|
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Trade receivables |
|
|
(69.7 |
) |
|
|
3.3 |
|
Inventories |
|
|
(13.3 |
) |
|
|
(63.3 |
) |
Contracts in progress |
|
|
7.2 |
|
|
|
(31.0 |
) |
Prepaid expenses |
|
|
(164.6 |
) |
|
|
(21.6 |
) |
Payables and accrued liabilities |
|
|
(232.1 |
) |
|
|
(138.6 |
) |
Other |
|
|
27.0 |
|
|
|
75.9 |
|
|
CASH PROVIDED BY OPERATING ACTIVITIES (a) |
|
|
381.4 |
|
|
|
546.4 |
|
|
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Additions to plant and equipment (b) |
|
|
(494.8 |
) |
|
|
(807.6 |
) |
Acquisitions, less cash acquired |
|
|
(20.0 |
) |
|
|
(127.0 |
) |
Investment in and advances to unconsolidated affiliates |
|
|
(1.5 |
) |
|
|
(8.3 |
) |
Proceeds from sale of assets and investments |
|
|
15.6 |
|
|
|
191.9 |
|
Proceeds from insurance settlements |
|
|
14.9 |
|
|
|
35.8 |
|
Other |
|
|
.7 |
|
|
|
(2.2 |
) |
|
CASH USED FOR INVESTING ACTIVITIES |
|
|
(485.1 |
) |
|
|
(717.4 |
) |
|
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
Long-term debt proceeds |
|
|
461.3 |
|
|
|
280.3 |
|
Payments on long-term debt |
|
|
(48.0 |
) |
|
|
(127.0 |
) |
Net (decrease) increase in commercial paper and short-term borrowings |
|
|
(33.6 |
) |
|
|
103.6 |
|
Dividends paid to shareholders |
|
|
(147.5 |
) |
|
|
(142.2 |
) |
Purchase of Treasury Stock |
|
|
(255.2 |
) |
|
|
|
|
Proceeds from stock option exercises |
|
|
103.9 |
|
|
|
60.8 |
|
Excess tax benefit from share-based compensation/other |
|
|
22.6 |
|
|
|
9.2 |
|
|
CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
103.5 |
|
|
|
184.7 |
|
|
6
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
|
|
|
|
|
|
|
|
|
(Millions of dollars) |
|
|
|
|
Six Months Ended |
|
|
31 March |
|
|
2007 |
|
2006 |
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
|
|
|
|
6.5 |
|
Cash used for investing activities |
|
|
|
|
|
|
(2.4 |
) |
Cash used for financing activities |
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY DISCONTINUED
OPERATIONS |
|
|
|
|
|
|
4.1 |
|
|
Effect of Exchange Rate Changes on Cash |
|
|
2.3 |
|
|
|
.3 |
|
|
Increase in Cash and Cash Items |
|
|
2.1 |
|
|
|
18.1 |
|
Cash and Cash Items Beginning of Year |
|
|
35.2 |
|
|
|
55.8 |
|
|
Cash and Cash Items End of Period |
|
$ |
37.3 |
|
|
$ |
73.9 |
|
|
|
|
|
(a) |
|
Pension plan contributions in 2007 and 2006 were $255.9 and $112.8, respectively.
|
|
(b) |
|
Excludes capital lease additions of $.8 and $1.1 in 2007 and 2006, respectively. Includes
$297.2 for the repurchase of cryogenic vessel equipment in 2006. |
The accompanying notes are an integral part of these statements.
7
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY BUSINESS SEGMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars) |
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
31 March |
|
31 March |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
784.5 |
|
|
$ |
669.2 |
|
|
$ |
1,524.5 |
|
|
$ |
1,291.3 |
|
Tonnage Gases |
|
|
606.5 |
|
|
|
531.1 |
|
|
|
1,211.0 |
|
|
|
1,063.7 |
|
Electronics and Performance Materials |
|
|
550.9 |
|
|
|
469.7 |
|
|
|
1,060.8 |
|
|
|
886.5 |
|
Equipment and Energy |
|
|
131.8 |
|
|
|
174.8 |
|
|
|
327.4 |
|
|
|
268.6 |
|
Healthcare |
|
|
157.1 |
|
|
|
136.3 |
|
|
|
312.9 |
|
|
|
271.8 |
|
Chemicals |
|
|
242.5 |
|
|
|
248.4 |
|
|
|
469.2 |
|
|
|
463.4 |
|
|
Segment and Consolidated Totals |
|
$ |
2,473.3 |
|
|
$ |
2,229.5 |
|
|
$ |
4,905.8 |
|
|
$ |
4,245.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
141.2 |
|
|
$ |
115.1 |
|
|
$ |
280.4 |
|
|
$ |
220.4 |
|
Tonnage Gases |
|
|
81.0 |
|
|
|
78.2 |
|
|
|
169.8 |
|
|
|
152.0 |
|
Electronics and Performance Materials |
|
|
57.7 |
|
|
|
46.8 |
|
|
|
108.6 |
|
|
|
85.3 |
|
Equipment and Energy |
|
|
16.4 |
|
|
|
20.0 |
|
|
|
43.2 |
|
|
|
34.5 |
|
Healthcare |
|
|
7.0 |
|
|
|
(1.8 |
) |
|
|
16.4 |
|
|
|
16.2 |
|
Chemicals |
|
|
23.3 |
|
|
|
25.3 |
|
|
|
42.2 |
|
|
|
34.2 |
|
|
Segment Totals |
|
|
326.6 |
|
|
|
283.6 |
|
|
|
660.6 |
|
|
|
542.6 |
|
Other |
|
|
(1.9 |
) |
|
|
(1.0 |
) |
|
|
(3.6 |
) |
|
|
(6.5 |
) |
|
Consolidated Totals |
|
$ |
324.7 |
|
|
$ |
282.6 |
|
|
$ |
657.0 |
|
|
$ |
536.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
23.3 |
|
|
$ |
21.1 |
|
|
$ |
44.4 |
|
|
$ |
42.8 |
|
Chemicals |
|
|
4.9 |
|
|
|
2.2 |
|
|
|
7.7 |
|
|
|
4.8 |
|
Other Segments |
|
|
4.2 |
|
|
|
1.0 |
|
|
|
10.4 |
|
|
|
4.5 |
|
|
Segment and Consolidated Totals |
|
$ |
32.4 |
|
|
$ |
24.3 |
|
|
$ |
62.5 |
|
|
$ |
52.1 |
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars) |
|
|
|
|
|
|
31 March |
|
30 September |
|
|
2007 |
|
2006 |
|
Identifiable assets (a) |
|
|
|
|
|
|
|
|
Merchant Gases |
|
$ |
3,477.7 |
|
|
$ |
3,283.2 |
|
Tonnage Gases |
|
|
2,822.0 |
|
|
|
2,803.0 |
|
Electronics and Performance Materials |
|
|
2,425.0 |
|
|
|
2,334.5 |
|
Equipment and Energy |
|
|
316.9 |
|
|
|
304.4 |
|
Healthcare |
|
|
895.0 |
|
|
|
856.5 |
|
Chemicals |
|
|
556.7 |
|
|
|
579.8 |
|
|
Segment Totals |
|
|
10,493.3 |
|
|
|
10,161.4 |
|
Other |
|
|
588.5 |
|
|
|
291.0 |
|
|
Consolidated Totals |
|
$ |
11,081.8 |
|
|
$ |
10,452.4 |
|
|
|
|
|
(a) |
|
Identifiable assets are equal to total assets less investments in and advances to equity
affiliates. |
8
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
SUMMARY BY GEOGRAPHIC REGIONS
(Unaudited)
(Millions of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
31 March |
|
31 March |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Revenues from external customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,293.9 |
|
|
$ |
1,263.3 |
|
|
$ |
2,578.9 |
|
|
$ |
2,451.8 |
|
Canada |
|
|
46.5 |
|
|
|
18.3 |
|
|
|
90.2 |
|
|
|
37.0 |
|
|
Total North America |
|
|
1,340.4 |
|
|
|
1,281.6 |
|
|
|
2,669.1 |
|
|
|
2,488.8 |
|
|
Europe |
|
|
739.6 |
|
|
|
635.7 |
|
|
|
1,453.1 |
|
|
|
1,168.4 |
|
Asia |
|
|
354.5 |
|
|
|
281.8 |
|
|
|
706.2 |
|
|
|
530.1 |
|
Latin America |
|
|
38.8 |
|
|
|
30.4 |
|
|
|
77.4 |
|
|
|
58.0 |
|
|
Total |
|
$ |
2,473.3 |
|
|
$ |
2,229.5 |
|
|
$ |
4,905.8 |
|
|
$ |
4,245.3 |
|
|
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.
9
AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except for share data)
1. MAJOR ACCOUNTING POLICIES
Refer to the 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 six
months of 2007.
2. NEW ACCOUNTING STANDARDS
Fair Value Option
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115. This Statement permits companies
to elect to measure certain financial instruments at fair value on an instrument-by-instrument
basis, with changes in fair value recognized in earnings each reporting period. In addition, SFAS
No. 159 establishes financial statement presentation and disclosure requirements for assets and
liabilities reported at fair value under the election. SFAS No. 159 is effective as of the
beginning of the first fiscal year beginning after 15 November 2007. Retrospective application is
not allowed. Early adoption is permitted under certain circumstances. The Company is currently evaluating this Statement.
Postretirement Benefits
In September 2006, the FASB issued 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 Taxes an 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.
10
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.
4. ACQUISITION PENDING
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. The
transaction has received all necessary regulatory approvals as of 18 April 2007 and is now subject
to customary contractual closing conditions. Linde was required to sell BOC Gazy as a condition of
regulatory approval 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. 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 six months ended 31 March 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
(22.0 |
) |
|
|
|
|
|
|
(22.0 |
) |
|
Accrual Balance at 31 March 2007 |
|
$ |
24.5 |
|
|
$ |
|
|
|
$ |
24.5 |
|
|
6. SHARE-BASED COMPENSATION
The Company has various share-based compensation programs, which include stock options, deferred
stock units, and restricted stock. During the six months ended 31 March 2007, 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 387,915 deferred stock units at a weighted-average
grant-date fair value of $68.41 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 three and six months ended 31 March
2007 was $15.0 (before taxes of $5.8) and $31.4 (before taxes of $12.1), respectively. Of the
share-based compensation cost recognized, 80% was a component of selling and administrative
expense, 14% a component of cost of sales, and 6% a component of research and development.
Share-based compensation cost charged against income in the three and six months ended 31 March
2006 was $19.8 (before taxes of $7.7) and $37.0 (before taxes of $14.5), respectively. The
amount of share-based compensation cost capitalized in 2007 and 2006 was not material.
11
7. GOODWILL
Changes to the carrying amount of consolidated goodwill by segment for the six months ended 31
March 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
Currency |
|
|
|
|
30 September |
|
and |
|
Translation |
|
31 March |
|
|
2006 |
|
Adjustments |
|
and Other |
|
2007 |
|
Merchant Gases |
|
$ |
265.2 |
|
|
$ |
|
|
|
$ |
10.7 |
|
|
$ |
275.9 |
|
Tonnage Gases |
|
|
10.3 |
|
|
|
|
|
|
|
.1 |
|
|
|
10.4 |
|
Electronics and Performance Materials |
|
|
305.4 |
|
|
|
.3 |
|
|
|
2.2 |
|
|
|
307.9 |
|
Healthcare |
|
|
381.4 |
|
|
|
.3 |
|
|
|
5.5 |
|
|
|
387.2 |
|
Chemicals |
|
|
26.8 |
|
|
|
|
|
|
|
1.7 |
|
|
|
28.5 |
|
|
|
|
$ |
989.1 |
|
|
$ |
.6 |
|
|
$ |
20.2 |
|
|
$ |
1,009.9 |
|
|
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
31 March |
|
31 March |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
NUMERATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used in basic and diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
227.6 |
|
|
$ |
196.5 |
|
|
$ |
457.9 |
|
|
$ |
378.3 |
|
Income from discontinued operations |
|
|
|
|
|
|
7.5 |
|
|
|
|
|
|
|
6.4 |
|
|
Net Income |
|
$ |
227.6 |
|
|
$ |
204.0 |
|
|
$ |
457.9 |
|
|
$ |
384.7 |
|
|
DENOMINATOR (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares used in basic EPS |
|
|
216.5 |
|
|
|
222.8 |
|
|
|
216.6 |
|
|
|
222.4 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
5.7 |
|
|
|
5.0 |
|
|
|
5.7 |
|
|
|
4.7 |
|
Other award plans |
|
|
1.2 |
|
|
|
.7 |
|
|
|
1.1 |
|
|
|
.8 |
|
|
|
|
|
6.9 |
|
|
|
5.7 |
|
|
|
6.8 |
|
|
|
5.5 |
|
|
Weighted average number of common
shares and dilutive potential common
shares used in diluted EPS |
|
|
223.4 |
|
|
|
228.5 |
|
|
|
223.4 |
|
|
|
227.9 |
|
|
BASIC EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.05 |
|
|
$ |
.88 |
|
|
$ |
2.11 |
|
|
$ |
1.70 |
|
Income from discontinued operations |
|
|
|
|
|
|
.04 |
|
|
|
|
|
|
|
.03 |
|
|
Net Income |
|
$ |
1.05 |
|
|
$ |
.92 |
|
|
$ |
2.11 |
|
|
$ |
1.73 |
|
|
DILUTED EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.02 |
|
|
$ |
.86 |
|
|
$ |
2.05 |
|
|
$ |
1.66 |
|
Income from discontinued operations |
|
|
|
|
|
|
.03 |
|
|
|
|
|
|
|
.03 |
|
|
Net Income |
|
$ |
1.02 |
|
|
$ |
.89 |
|
|
$ |
2.05 |
|
|
$ |
1.69 |
|
|
12
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 March |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
Pension Benefits |
|
Other Benefits |
|
Service cost |
|
$ |
20.3 |
|
|
$ |
19.4 |
|
|
$ |
1.4 |
|
|
$ |
1.5 |
|
Interest cost |
|
|
41.9 |
|
|
|
36.7 |
|
|
|
1.4 |
|
|
|
1.2 |
|
Expected return on plan assets |
|
|
(46.9 |
) |
|
|
(39.0 |
) |
|
|
|
|
|
|
|
|
Prior service cost amortization |
|
|
1.0 |
|
|
|
.8 |
|
|
|
(.4 |
) |
|
|
(.5 |
) |
Actuarial loss amortization |
|
|
14.3 |
|
|
|
16.2 |
|
|
|
.5 |
|
|
|
.9 |
|
Special termination benefits |
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
Other |
|
|
.5 |
|
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
31.1 |
|
|
$ |
35.8 |
|
|
$ |
2.9 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended 31 March |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
Pension Benefits |
|
Other Benefits |
|
Service cost |
|
$ |
40.3 |
|
|
$ |
38.8 |
|
|
$ |
2.9 |
|
|
$ |
3.1 |
|
Interest cost |
|
|
83.4 |
|
|
|
73.2 |
|
|
|
2.7 |
|
|
|
2.5 |
|
Expected return on plan assets |
|
|
(93.4 |
) |
|
|
(77.9 |
) |
|
|
|
|
|
|
|
|
Prior service cost amortization |
|
|
2.1 |
|
|
|
1.6 |
|
|
|
(.9 |
) |
|
|
(1.1 |
) |
Actuarial loss amortization |
|
|
28.6 |
|
|
|
32.4 |
|
|
|
1.1 |
|
|
|
1.8 |
|
Special termination benefits |
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
Other |
|
|
.9 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
61.9 |
|
|
$ |
71.1 |
|
|
$ |
5.8 |
|
|
$ |
6.3 |
|
|
During the six months ended 31 March 2007, pension contributions of $255.9 were made. The Company
expects to contribute approximately $30 to the pension plans during the remainder of 2007. For the
six months ended 31 March 2006, pension contributions of $112.8 were made. During 2006, total
contributions were $130.1.
13
10. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various legal proceedings, including competition, environmental, health,
safety, product liability and insurance matters. In particular, during the second quarter of 2007 a
unit of the Brazilian Ministry of Justice issued a report on its investigation of the Companys
Brazilian subsidiary, Air Products Brazil, and several other Brazilian industrial gas companies.
The report recommends that the Brazilian Administrative Council for Economic Defense impose
sanctions on Air Products Brazil and the other industrial gas companies for alleged
anti-competitive activities. The Company intends to defend this action and cannot, at this time,
reasonably predict the ultimate outcome of the proceedings or sanctions, if any, that will be
imposed. While the Company does not expect that any sums it may have to pay in connection with this
or any other legal proceeding would have a materially adverse effect on its consolidated financial
position or net cash flows, a future charge for regulatory fines or damage awards could have a
significant impact on the Companys net income in the period in which it is recorded.
Environmental
Accruals for environmental loss contingencies are recorded when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The consolidated balance sheet
at 31 March 2007 and 30 September 2006 included an accrual of $59.5 and $52.4, respectively,
primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over
a period of up to 30 years. The Company estimates the exposure for
environmental loss contingencies to range from $59.0 to a reasonably
possible upper exposure of $73.8 as of
31 March 2007, with the upper exposure exceeding the amount
accrued by $14.3.
At 30 September 2006, $42.0 of the environmental accrual was related to the Pace, Florida,
facility. In the fourth quarter of 2006, the Company sold its Amines business, which included
operations at Pace, and recognized a liability for retained environmental obligations associated
with remediation activities at Pace. The Company is required by the Florida Department of
Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to
continue its remediation efforts. As of 30 September 2006, the Company estimated that it would take
an additional 20 years to complete the groundwater remediation and the costs through completion
were estimated to range from $42 to $50 . As no amount within the range was a better
estimate than another, the Company recognized a pretax expense in the fourth quarter of 2006 of
$42.0 as a component of income from discontinued operations and recorded an environmental
accrual of $42.0 in continuing operations on the consolidated balance sheet. During fiscal year
2007, there has been no change to the estimated exposure range related to the Pace facility and the
accrual balance, reduced for spending during 2007, totaled $40.7 at 31 March 2007.
The Company has implemented many of the remedial corrective measures at the Pace, Florida, facility
required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been
bioremediated and the treated soils have been secured in a lined onsite disposal cell. Several
groundwater recovery systems have been installed to contain and remove contamination from
groundwater. In 2006, the Company conducted an extensive assessment of the site to determine how
well existing measures are working, what additional corrective measures may be needed, and whether
newer remediation technologies that were not available in the 1990s might be suitable to more
quickly and effectively remove groundwater contaminants. Based on our assessment results, we have
identified potential new approaches to accelerate the removal of contaminants and will assess their
feasibility and potential effectiveness.
11. SUPPLEMENTAL INFORMATION
Gain on Sale of a Chemical Facility
On 31 March 2006, as part of its announced restructuring of its Polyurethane Intermediates
business, the Company sold its dinitrotoluene (DNT) production facility in Geismar, Louisiana, to
BASF Corporation for $155.0. The Company wrote off the remaining net book value of assets sold,
resulting in the recognition of a gain of $70.4 ($42.9 after-tax, or $.19 per share) on the
transaction. The Air Products industrial gas facilities at this same location were not included in
this transaction and continue to produce and supply hydrogen, carbon monoxide, and syngas to
customers.
14
Impairment of Loans Receivable
In the second quarter of 2006, the Company recognized a loss of $65.8 ($42.4 after-tax, or $.19 per
share) for the impairment of loans receivable from a long-term supplier of sulfuric acid, used in
the production of DNT for the Companys Polyurethane Intermediates business. To facilitate the
suppliers ability to emerge from bankruptcy in June 2003 and continue to supply product to the
Company, the Company and other third parties agreed to participate in the suppliers financing.
Subsequent to the initial financing, the Company and the suppliers other principal lender executed
standstill agreements which temporarily amended the terms of the loan agreements, primarily to
allow the deferral of principal and interest payments. Based on events occurring within the second
quarter of 2006, management concluded that the Company would not be able to collect any amounts
due. These events included the Companys announcement of its plan to restructure its Polyurethane
Intermediates business and notification to the supplier of the Companys intent not to enter into
further standstill agreements.
Purchase of Cryogenic Vessel Equipment
On 31 March 2006, the Company exercised its option to purchase certain cryogenic vessel equipment
for $297.2, thereby terminating an operating lease originally scheduled to end 30 September 2006.
The Company originally sold and leased back this equipment in 2001, resulting in proceeds of $301.9
and recognition of a deferred gain of $134.7, which was included in other noncurrent liabilities.
In March 2006, the Company recorded the purchase of the equipment for $297.2 and reduced the
carrying value of the equipment by the $134.7 deferred gain derived from the original
sale-leaseback transaction.
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 six months ended 31 March 2007 purchased
3.5 million of its outstanding shares at a cost of $247.4.
Eurobond Issuance
On 12 March 2007, the Company issued Euro 300.0 ($395.1) of 4.625% Eurobonds maturing 15 March
2017, the proceeds of which will be used to fund a portion of the pending acquisition of the Polish
industrial gas business of BOC Gazy Sp z o. o. as discussed in Note 4.
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.
Operating income for the three and six months ended 31 March 2006 included a net gain of $19.9 and
$27.2, respectively, related to insurance recoveries net of property damage and other expenses
incurred. During the three and six months ended 31 March 2006, the Company collected insurance
proceeds of $10.8 and $35.8, respectively. The Company estimated the impact of business
interruption at $(5.2) and $(31.2) for the three and six months ended 31 March 2006, respectively.
The table below summarizes the estimated impact of the Hurricanes for the three and six months
ended 31 March 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
31 March 2006 |
|
31 March 2006 |
|
Insurance Recoveries Recognized |
|
$ |
24.0 |
|
|
$ |
36.2 |
|
Property Damage/Other Expenses |
|
|
(4.1 |
) |
|
|
(9.0 |
) |
|
|
|
$ |
19.9 |
|
|
$ |
27.2 |
|
Estimated Business Interruption |
|
|
(5.2 |
) |
|
|
(31.2 |
) |
|
Total Estimated Impact |
|
$ |
14.7 |
|
|
$ |
(4.0 |
) |
|
The Company closed-out its insurance claim related to the Hurricanes by the end of fiscal 2006. In
the first quarter of 2007, the Company collected $19.1 of insurance proceeds. Operating income for
the three and six months ended 31 March 2007 was not impacted except for higher depreciation
expense of $1.4 and $2.8, respectively.
15
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 second quarter and first six months 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.
SECOND QUARTER 2007 VS. SECOND QUARTER 2006
SECOND QUARTER 2007 IN SUMMARY
|
|
|
Sales of $2,473 were up 11% from the prior year, primarily due to strong volume
growth in Merchant Gases, Tonnage Gases, and Electronics and Performance Materials. |
|
|
|
|
Operating income of $325 increased 15% also due to strong volume growth. |
|
|
|
|
Net income of $228 increased 12% and diluted earnings per share of $1.02 increased 15%.
A summary table of changes in earnings per share is presented below. |
|
|
|
|
The Company purchased 1.6 million of its outstanding shares at a cost of $122 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. The
acquisition received regulatory approval in April 2007. |
|
|
|
|
The Company issued Euro 300 ($395.1) of 4.625% Eurobonds maturing 15 March 2017, the
proceeds of which will be used to fund a portion of the BOC Gazy
Sp z o.o. acquisition. |
|
|
|
|
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 32-33. |
16
Changes in Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Increase |
|
|
31 March |
|
(Decrease) |
|
|
2007 |
|
2006 |
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
1.02 |
|
|
$ |
.89 |
|
|
$ |
.13 |
|
|
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying business
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.22 |
|
Price/raw materials/mix |
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
|
|
|
|
|
|
|
|
(.07 |
) |
Acquisitions |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Divestitures |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
Currency |
|
|
|
|
|
|
|
|
|
|
.03 |
|
Prior year gain on sale of a chemical facility |
|
|
|
|
|
|
|
|
|
|
(.19 |
) |
Prior year impairment of loans receivable |
|
|
|
|
|
|
|
|
|
|
.19 |
|
Prior year impact of Hurricanes (A) |
|
|
|
|
|
|
|
|
|
|
(.04 |
) |
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
.03 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(.04 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
.01 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(.03 |
) |
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
.02 |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
$ |
.13 |
|
|
|
|
|
|
(A) |
|
Includes insurance recoveries, estimated business interruption, asset
write-offs, and other expenses during 2006. |
RESULTS OF OPERATIONS
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
2,473.3 |
|
|
$ |
2,229.5 |
|
|
|
11 |
% |
Cost of sales |
|
|
1,824.4 |
|
|
|
1,667.7 |
|
|
|
9 |
% |
Selling and administrative |
|
|
293.1 |
|
|
|
271.8 |
|
|
|
8 |
% |
Research and development |
|
|
35.1 |
|
|
|
37.5 |
|
|
|
(6 |
%) |
(Gain) on sale of a chemical facility |
|
|
|
|
|
|
(70.4 |
) |
|
|
|
|
Impairment of loans receivable |
|
|
|
|
|
|
65.8 |
|
|
|
|
|
Other (income) expense, net |
|
|
(4.0 |
) |
|
|
(25.5 |
) |
|
|
(84 |
%) |
Operating Income |
|
|
324.7 |
|
|
|
282.6 |
|
|
|
15 |
% |
Equity affiliates income |
|
|
32.4 |
|
|
|
24.3 |
|
|
|
33 |
% |
Interest expense |
|
|
37.8 |
|
|
|
25.3 |
|
|
|
49 |
% |
Effective tax rate |
|
|
27.0 |
% |
|
|
27.6 |
% |
|
|
|
|
Income from continuing operations |
|
|
227.6 |
|
|
|
196.5 |
|
|
|
16 |
% |
Income from discontinued operations |
|
|
|
|
|
|
7.5 |
|
|
|
|
|
Net Income |
|
|
227.6 |
|
|
|
204.0 |
|
|
|
12 |
% |
Basic Earnings per Share |
|
$ |
1.05 |
|
|
$ |
.92 |
|
|
|
14 |
% |
Diluted Earnings per Share |
|
$ |
1.02 |
|
|
$ |
.89 |
|
|
|
15 |
% |
|
17
Discussion of Consolidated Results
Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business
|
|
|
|
|
Volume |
|
|
10 |
% |
Price/mix |
|
|
|
|
Acquisitions |
|
|
1 |
% |
Divestitures |
|
|
(1 |
%) |
Currency |
|
|
3 |
% |
Natural gas/raw material cost pass-through |
|
|
(2 |
%) |
|
Total Consolidated Change |
|
|
11 |
% |
|
Sales of $2,473.3 increased 11%, or $243.8. Underlying base business growth accounted for 10% of
the increase. Sales increased 10% from higher volumes across most segments, as discussed in the Segment Analysis which follows. Sales
were flat from price impacts as improved pricing in the Merchant Gases segment was offset by
lower pricing in Electronics and Performance Materials. The acquisition of Tomah3
Products increased sales by 1%. Sales decreased 1% from the divestiture of the Companys
dinitrotoluene (DNT) production facility in Geismar, Louisiana, in 2006. Sales improved 3% from
favorable currency effects, primarily the weakening of the U.S. dollar against the Euro and Pound
Sterling. Lower natural gas/raw material contractual cost pass-through to customers decreased
sales by 2% mainly due to lower natural gas prices.
Operating Income
|
|
|
|
|
|
|
Change from |
|
|
Prior Year |
|
Prior Year Operating Income |
|
$ |
283 |
|
Underlying business |
|
|
|
|
Volume |
|
|
69 |
|
Price/raw materials/mix |
|
|
(1 |
) |
Costs |
|
|
(17 |
) |
Acquisitions |
|
|
4 |
|
Divestitures |
|
|
(4 |
) |
Currency |
|
|
10 |
|
Prior year gain on sale of a chemical facility |
|
|
(70 |
) |
Prior year impairment of loans receivable |
|
|
66 |
|
Prior year impact of Hurricanes (A) |
|
|
(15 |
) |
|
Operating Income |
|
$ |
325 |
|
|
|
|
|
|
(A) |
|
Includes insurance recoveries, estimated business interruption, asset
write-offs, and other expenses during 2006. |
Operating income of $324.7 increased 15%, or $42.1.
|
|
|
Operating income increased $69 from volume growth across most segments, as discussed in
the Segment Analysis which follows. |
|
|
|
|
Operating income decreased $17 from higher costs due to increased maintenance
turnarounds in Tonnage Gases, costs to support growth, and inflation, partially offset by
productivity benefits. |
|
|
|
|
Favorable currency effects, primarily from the weakening of the U.S. dollar against the
Euro and Pound Sterling, increased operating income by $10. |
|
|
|
|
Operating income decreased $70 due to the prior year gain on the sale of the Companys
DNT production facility in Geismar, Louisiana. |
18
|
|
|
Operating income increased $66 due to the prior year impairment of loans receivable from
a long-term supplier of sulfuric acid used in the production of DNT. |
|
|
|
|
Operating income decreased $15 from the impacts of Hurricanes Katrina and Rita,
primarily from insurance recoveries exceeding estimated business interruption in the prior
year. |
Equity Affiliates Income
Income from equity affiliates of $32.4 increased $8.1, or 33%, primarily due to higher income from
affiliates in the Merchant Gases, Equipment and Energy, and Chemicals segments.
Selling and Administrative Expense (S&A)
|
|
|
|
|
|
|
% Change |
|
|
from |
|
|
Prior Year |
|
Currency |
|
|
3 |
% |
Other costs |
|
|
5 |
% |
|
Total S&A Change |
|
|
8 |
% |
|
S&A expense of $293.1 increased 8%, or $21.3. S&A as a percent of sales declined to 11.9% from
12.2% in 2006. Currency effects, primarily the weakening of the U.S. dollar against the Euro and
Pound Sterling, increased S&A by 3%. Underlying costs increased S&A by 5%, as productivity gains
were more than offset by inflation and higher costs to support growth.
Research and Development (R&D)
R&D decreased 6%, or $2.4, as a result of the Companys organization simplification efforts. R&D
decreased as a percent of sales to 1.4% from 1.7% in 2006.
Gain on Sale of a Chemical Facility
On 31 March 2006, the Company sold its DNT production facility in Geismar, Louisiana, to BASF
Corporation for $155.0. The Company wrote-off the remaining net book value of assets sold,
resulting in the recognition of a gain of $70.4 ($42.9 after-tax, or $.19 per share) on the
transaction.
Impairment of Loans Receivable
The Company recognized a loss of $65.8 ($42.4 after-tax, or $.19 per share) in the second quarter
of 2006 for the impairment of loans receivable from a long-term supplier of sulfuric acid, used in
the production of DNT for the Companys Polyurethane
Intermediates (PUI) business. See Note 11 to the
consolidated financial statements for further information.
Other (Income) Expense, Net
Other income of $4.0 decreased $21.5. 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 $19.9 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 March |
|
|
2007 |
|
2006 |
|
Interest incurred |
|
$ |
40.7 |
|
|
$ |
29.8 |
|
Less: interest capitalized |
|
|
2.9 |
|
|
|
4.5 |
|
|
Interest expense |
|
$ |
37.8 |
|
|
$ |
25.3 |
|
|
19
Interest incurred increased $10.9. 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 $1.6 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% and 27.6% in the second quarter of 2007 and 2006,
respectively. The effective tax rate was higher in 2006 from the impact of the sale of the
Geismar, Louisiana, DNT production facility and the impairment of loans receivable.
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 $87.7 and income,
net of tax, of $7.5 in the second quarter of 2006.
Net Income
Net income was $227.6 compared to $204.0 in 2006. Diluted earnings per share was $1.02 compared to
$.89 in 2006. A summary table of changes in earnings per share is presented on page 17.
Segment Analysis
Merchant Gases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
784.5 |
|
|
$ |
669.2 |
|
|
|
17 |
% |
Operating income |
|
|
141.2 |
|
|
|
115.1 |
|
|
|
23 |
% |
Equity affiliates income |
|
|
23.3 |
|
|
|
21.1 |
|
|
|
10 |
% |
|
Merchant Gases Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business
|
|
|
|
|
Volume |
|
|
10 |
% |
Price/mix |
|
|
2 |
% |
Currency |
|
|
5 |
% |
|
Total Merchant Gases Change |
|
|
17 |
% |
|
Sales of $784.5 increased 17%, or $115.3. Underlying base business growth improved sales
by 12%. Sales increased 10% from stronger volumes and small plant sales, reflecting the
Companys continued success in utilizing applications technology.
|
|
|
Liquid bulk volumes in North America increased 6%. Liquid oxygen (LOX) and
liquid nitrogen (LIN) volumes increased 4% from higher demand across most end
markets. Liquid hydrogen increased from new growth and volume recovery and the
negative impact of supply disruption on prior year results. |
|
|
|
|
Liquid bulk volumes in Europe increased 3% due to higher demand across most end
markets. |
|
|
|
|
Packaged gas volumes in Europe increased 4% due to higher demand for industrial
cylinders and new offerings in the business. |
|
|
|
|
LOX/LIN volumes in Asia were up 14% due to solid demand growth, primarily in
China, and new plants brought on-stream. |
20
Pricing increased sales by 2%. Prices for LOX/LIN improved 3% in North America and 2% 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 declined 1% versus the prior year due to customer mix.
Sales increased 5% from favorable currency effects, primarily the weakening of the U.S.
dollar against the Euro and the Pound Sterling.
Merchant Gases Operating Income
Operating income of $141.2 increased 23%, or $26.1. Favorable operating income variances resulted
from higher volumes of $25, improved pricing and customer mix of $8, and currency effects of $6.
Operating income decreased $6 for the prior year impacts of Hurricanes Katrina and Rita as
insurance recoveries, net of property damage, exceeded estimated business interruption. Operating
income declined $5 from higher costs to support growth and due to inflation, partially offset by
productivity improvements.
Merchant Gases Equity Affiliates Income
Merchant Gases equity affiliates income of $23.3 increased $2.2, due to higher income from the
Asian affiliates.
Tonnage Gases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
606.5 |
|
|
$ |
531.1 |
|
|
|
14 |
% |
Operating income |
|
|
81.0 |
|
|
|
78.2 |
|
|
|
4 |
% |
|
Tonnage Gases Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business
|
|
|
|
|
Volume |
|
|
18 |
% |
Currency |
|
|
2 |
% |
Natural gas/raw material cost
pass-through |
|
|
(6 |
%) |
|
Total Tonnage Gases Change |
|
|
14 |
% |
|
Sales of $606.5 increased 14%, or $75.4. Underlying base business volume growth increased
sales by 18%. Volumes were higher due to the start-up of new hydrogen plants in 2006
supporting the refinery industry and improved plant loadings.
Sales increased 2% from favorable currency effects, primarily the weakening of the U.S.
dollar against the Euro and Pound Sterling. Lower natural gas cost contractually
passed-through to customers decreased sales by 6%.
Tonnage
Gases Operating Income
Operating income of $81.0 increased 4%, or $2.8. Operating income increased by $19 from higher
volumes. Costs increased by $13, primarily due to increased planned
periodic maintenance costs. Operating income decreased $8 for the
prior year impacts of Hurricanes Katrina and Rita as
insurance recoveries, net of property damage, exceeded estimated business interruption.
21
Electronics and Performance Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
550.9 |
|
|
$ |
469.7 |
|
|
|
17 |
% |
Operating income |
|
|
57.7 |
|
|
|
46.8 |
|
|
|
23 |
% |
|
Electronics and Performance Materials Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
14 |
% |
Price/mix |
|
|
(2 |
%) |
Acquisitions |
|
|
4 |
% |
Currency |
|
|
1 |
% |
|
Total Electronics and Performance
Materials Change |
|
|
17 |
% |
|
Sales of $550.9 increased 17%, or $81.2. Underlying base business growth increased sales by
12%. Higher equipment sales in Electronics and volume growth in Performance Materials in
Europe and Asia improved sales by 14%. 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, primarily 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 $57.7 increased 23%, or $10.9. Operating income increased $19 from higher
volumes and $4 from the acquisition of
Tomah3
Products. Operating income declined by $13 from lower pricing, net of variable costs, primarily due to lower electronics specialty materials
pricing.
Equipment and Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
131.8 |
|
|
$ |
174.8 |
|
|
|
(25 |
%) |
Operating income |
|
|
16.4 |
|
|
|
20.0 |
|
|
|
(18 |
%) |
|
Equipment and Energy Sales and Operating Income
Sales of $131.8 decreased by $43.0, primarily as a result of lower large air separation unit
activity. Operating income of $16.4 decreased by $3.6, primarily from higher energy development
spending.
The sales backlog for the Equipment business at 31 March 2007 was $349, compared to $446 at 30
September 2006.
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
157.1 |
|
|
$ |
136.3 |
|
|
|
15 |
% |
Operating income |
|
|
7.0 |
|
|
|
(1.8 |
) |
|
|
|
|
|
22
Healthcare Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
10 |
% |
Currency |
|
|
5 |
% |
|
Total Healthcare Change |
|
|
15 |
% |
|
Sales of $157.1 increased 15%, or $20.8. Sales increased 10% due to higher volumes,
primarily from the U.K. respiratory contract awarded in the prior
year. Favorable currency effects,
primarily the weakening of the U.S. dollar against the Euro and the Pound Sterling,
increased sales by 5%.
Healthcare Operating Income
Operating income of $7.0 increased by $8.8 from higher volumes
in Europe,
particularly Spain and the U.K., and the absence of start-up costs
associated with the U.K. respiratory contract in the prior year, partially offset by lower
volumes in the U.S.
Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
242.5 |
|
|
$ |
248.4 |
|
|
|
(2 |
%) |
Operating income |
|
|
23.3 |
|
|
|
25.3 |
|
|
|
(8 |
%) |
|
Chemicals Sales and Operating Income
Sales and operating income decreased primarily from the divestiture of the DNT production facility
in Geismar, Louisiana, at the end of the second quarter in 2006.
On 31 March 2006, the Company sold its DNT production facility in Geismar, Louisiana, to BASF
Corporation which resulted in a net gain of $70 that is included in
operating income. In the second quarter of 2006, the Company
also recognized a loss in operating income of $66 for the impairment of loans receivable from a
long-term supplier of sulfuric acid used in the production of DNT for the Companys PUI business.
See Note 11 to the consolidated financial statements for additional information on these items.
Other
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended 31 March |
|
|
2007 |
|
2006 |
|
Operating loss |
|
|
($1.9 |
) |
|
|
($1.0 |
) |
|
Other operating loss includes other expense and income which cannot be directly associated with the
business segments, including foreign exchange gains and losses and interest income. The loss in
2006 includes certain costs previously allocated to the Amines business. Corporate research and
development costs are fully allocated to the business segments.
The operating loss of $1.9 increased by $.9. No individual items were material in comparison to the
prior year.
23
FIRST SIX MONTHS 2007 VS. FIRST SIX MONTHS 2006
FIRST SIX MONTHS 2007 IN SUMMARY
|
|
|
Sales of $4,906 were up 16% from the prior year, due to strong volume growth and higher equipment sales. |
|
|
|
|
Operating income of $657 increased 23% from strong volume growth and improved cost performance. |
|
|
|
|
Net income of $458 increased 19% and diluted earnings per share of $2.05 increased 21%.
A summary table of changes in earnings per share is presented below. |
|
|
|
|
The Company purchased 3.5 million of its outstanding shares at a cost of $247 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. The
acquisition received regulatory approval in April 2007. |
|
|
|
|
The Company issued Euro 300 ($395.1) of 4.625% Eurobonds maturing 15 March 2017, the
proceeds of which will be used to fund a portion of the BOC Gazy
Sp z o.o. acquisition. |
|
|
|
|
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 32-33. |
24
Changes in Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
31 March |
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
|
Diluted Earnings per Share |
|
$ |
2.05 |
|
|
$ |
1.69 |
|
|
$ |
.36 |
|
|
Operating Income (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying business |
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
|
|
|
|
|
|
|
|
|
.50 |
|
Price/raw materials/mix |
|
|
|
|
|
|
|
|
|
|
.04 |
|
Costs |
|
|
|
|
|
|
|
|
|
|
(.21 |
) |
Acquisitions |
|
|
|
|
|
|
|
|
|
|
.02 |
|
Divestitures |
|
|
|
|
|
|
|
|
|
|
(.02 |
) |
Currency |
|
|
|
|
|
|
|
|
|
|
.07 |
|
Prior year gain on sale of a chemical facility |
|
|
|
|
|
|
|
|
|
|
(.19 |
) |
Prior year impairment of loans receivable |
|
|
|
|
|
|
|
|
|
|
.19 |
|
Prior year European land sale |
|
|
|
|
|
|
|
|
|
|
(.03 |
) |
Prior year impact of Hurricanes (A) |
|
|
|
|
|
|
|
|
|
|
.02 |
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliates income |
|
|
|
|
|
|
|
|
|
|
.04 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(.08 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
(.03 |
) |
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
.04 |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Change in Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
$ |
.36 |
|
|
|
|
|
(A) |
|
Includes insurance recoveries, estimated business interruption, asset
write-offs, and other expenses during 2006. |
RESULTS OF OPERATIONS
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
4,905.8 |
|
|
$ |
4,245.3 |
|
|
|
16 |
% |
Cost of sales |
|
|
3,612.9 |
|
|
|
3,159.4 |
|
|
|
14 |
% |
Selling and administrative |
|
|
577.5 |
|
|
|
522.7 |
|
|
|
10 |
% |
Research and development |
|
|
69.9 |
|
|
|
75.1 |
|
|
|
(7 |
%) |
(Gain) on sale of a chemical facility |
|
|
|
|
|
|
(70.4 |
) |
|
|
|
|
Impairment of loans receivable |
|
|
|
|
|
|
65.8 |
|
|
|
|
|
Other (income) expense, net |
|
|
(11.5 |
) |
|
|
(43.4 |
) |
|
|
(74 |
%) |
Operating Income |
|
|
657.0 |
|
|
|
536.1 |
|
|
|
23 |
% |
Equity affiliates income |
|
|
62.5 |
|
|
|
52.1 |
|
|
|
20 |
% |
Interest expense |
|
|
76.9 |
|
|
|
51.6 |
|
|
|
49 |
% |
Effective tax rate |
|
|
27.0 |
% |
|
|
27.3 |
% |
|
|
|
|
Income from continuing operations |
|
|
457.9 |
|
|
|
378.3 |
|
|
|
21 |
% |
Income from discontinued operations |
|
|
|
|
|
|
6.4 |
|
|
|
|
|
Net Income |
|
|
457.9 |
|
|
|
384.7 |
|
|
|
19 |
% |
Basic Earnings per Share |
|
$ |
2.11 |
|
|
$ |
1.73 |
|
|
|
22 |
% |
Diluted Earnings per Share |
|
$ |
2.05 |
|
|
$ |
1.69 |
|
|
|
21 |
% |
|
25
Discussion of Consolidated Results
Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
15 |
% |
Price/mix |
|
|
|
|
Acquisitions |
|
|
1 |
% |
Currency |
|
|
3 |
% |
Natural gas/raw material cost pass-through |
|
|
(3 |
%) |
|
Total Consolidated Change |
|
|
16 |
% |
|
Sales of $4,905.8 increased 16%, or $660.5. Underlying base business growth accounted for 15% of
the increase. Sales increased 15% from higher volumes, across all segments as discussed in the Segment Analysis which follows. Pricing
was flat, as improved pricing in the Merchant Gases segment was offset by lower pricing in
Electronics and Performance Materials. The acquisition of Tomah3 Products increased
sales by 1%. Sales improved 3% from favorable currency effects, primarily the weakening of the
U.S. dollar against the Euro and Pound Sterling. Lower natural gas/raw material contractual cost
pass-through to customers decreased sales by 3% mainly due to lower natural gas prices.
Operating Income
|
|
|
|
|
|
|
Change from |
|
|
Prior Year |
|
Prior Year Operating Income |
|
$ |
536 |
|
Underlying business |
|
|
|
|
Volume |
|
|
157 |
|
Price/raw materials/mix |
|
|
13 |
|
Costs |
|
|
(62 |
) |
Acquisitions |
|
|
7 |
|
Divestitures |
|
|
(7 |
) |
Currency |
|
|
23 |
|
Prior year gain on sale of a chemical facility |
|
|
(70 |
) |
Prior year impairment of loans receivable |
|
|
66 |
|
Prior year European land sale |
|
|
(10 |
) |
Hurricanes (A) |
|
|
4 |
|
|
Operating Income |
|
$ |
657 |
|
|
|
|
|
(A) |
|
Includes insurance recoveries, estimated business interruption, asset
write-offs, and other expenses during 2006. |
Operating income of $657.0 increased 23%, or $120.9.
|
|
|
Operating income increased $157 from volume growth across all segments, as discussed in
the Segment Analysis which follows. |
|
|
|
|
Operating income improved $13 as higher pricing in Merchant Gases was offset
by price declines in Electronics and Performance Materials and other
segments benefited from favorable customer mix. |
|
|
|
|
Operating income decreased $62 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 and Pound Sterling, increased operating income by $23. |
|
|
|
|
Operating income decreased $70 due to the prior year gain on the sale of the Companys
DNT production facility in Geismar, Louisiana. |
|
|
|
|
Operating income increased $66 due to the prior year impairment of loans receivable from
a long-term supplier of sulfuric acid used in the production of DNT. |
|
|
|
|
Operating income decreased $10 due to the prior year gain on sale of land in Europe. |
26
Equity Affiliates Income
Income from equity affiliates of $62.5 increased $10.4, or 20%, due to higher income from
affiliates in all segments.
Selling and Administrative Expense (S&A)
|
|
|
|
|
|
|
% Change |
|
|
from |
|
|
Prior Year |
|
Currency |
|
|
3 |
% |
Acquisitions |
|
|
1 |
% |
Other costs |
|
|
6 |
% |
|
Total S&A Change |
|
|
10 |
% |
|
S&A expense of $577.5 increased 10%, or $54.8. S&A as a percent of sales declined to 11.8% from
12.3% in 2006. Currency effects, primarily the weakening of the U.S. dollar against the Euro and
Pound Sterling, increased S&A by 3%. S&A increased 1% from the acquisition of Tomah3
Products. Underlying costs increased S&A by 6%, 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 $5.2, as a result of the Companys organization simplification efforts. R&D
decreased as a percent of sales to 1.4% from 1.8% in 2006.
Gain on Sale of a Chemical Facility
On 31 March 2006, the Company sold its DNT production facility in Geismar, Louisiana, to BASF
Corporation for $155.0. The company wrote-off the remaining net book value of assets sold,
resulting in the recognition of a gain of $70.4 ($42.9 after-tax, or $.19 per share) on the
transaction.
Impairment of Loans Receivable
The Company recognized a loss of $65.8 ($42.4 after-tax, or $.19 per share) in the second quarter
of 2006 for the impairment of loans receivable from a long-term supplier of sulfuric acid, used in
the production of DNT for the Companys Polyurethane
Intermediates (PUI) business. See Note 11 to the
consolidated financial statements for further information.
Other (Income) Expense, Net
Other income of $11.5 decreased $31.9. 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 $27.2 related to insurance recoveries, net of property damage and other
expenses incurred due to Hurricanes Katrina and Rita and a gain of $9.5 related to the sale of land
in Europe. Otherwise, no individual items were material in comparison to the prior year.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Ended 31 March |
|
|
2007 |
|
2006 |
|
Interest incurred |
|
$ |
81.8 |
|
|
$ |
61.1 |
|
Less: interest capitalized |
|
|
4.9 |
|
|
|
9.5 |
|
|
Interest expense |
|
$ |
76.9 |
|
|
$ |
51.6 |
|
|
Interest incurred increased $20.7. 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 $4.6 due to
lower levels of construction in progress for plant and equipment built by the Company.
27
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% and 27.3% in 2007 and 2006, respectively. The
effective tax rate was higher in 2006 from the impact of the sale of the Geismar, Louisiana, DNT
production facility and the impairment of loans receivable.
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 $170.5 and income,
net of tax, of $6.4 in 2006.
Net Income
Net income was $457.9 compared to $384.7 in 2006. Diluted earnings per share was $2.05 compared to
$1.69 in 2006. A summary table of changes in earnings per share is presented on page 25.
Segment Analysis
Merchant Gases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
1,524.5 |
|
|
$ |
1,291.3 |
|
|
|
18 |
% |
Operating income |
|
|
280.4 |
|
|
|
220.4 |
|
|
|
27 |
% |
Equity affiliates income |
|
|
44.4 |
|
|
|
42.8 |
|
|
|
4 |
% |
|
Merchant Gases Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
10 |
% |
Price/mix |
|
|
3 |
% |
Currency |
|
|
5 |
% |
|
Total Merchant Gases Change |
|
|
18 |
% |
|
Sales of $1,524.5 increased 18%, or $233.2. Underlying base business growth improved sales
by 13%. Sales increased 10% from stronger volumes, reflecting the Companys continued
success in utilizing applications technology.
|
|
|
Liquid bulk volumes in North America increased 8%. Liquid oxygen (LOX) and
liquid nitrogen (LIN) volumes increased 2% from higher demand across most end
markets. Liquid hydrogen and liquid argon volumes increased as supply disruptions
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 17% due to solid demand growth,
primarily in China, and new plants brought on-stream. |
Pricing increased sales by 3%. Prices for LOX/LIN improved 6% in North America and 4% 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.
28
Sales increased 5% from favorable currency effects, primarily the weakening of the U.S.
dollar against the Euro and the Pound Sterling.
Merchant Gases Operating Income
Operating income of $280.4 increased 27%, or $60.0. Favorable operating income variances resulted
from higher volumes of $48, improved pricing and customer mix of $26, and currency effects of $12.
Operating income declined $21 from higher costs to support growth and inflation partially offset by
productivity improvements. Operating income decreased $4 as the prior year included Hurricane
insurance recoveries that exceeded estimated business interruption,
asset write-offs, and other
expenses.
Merchant Gases Equity Affiliates Income
Merchant Gases equity affiliates income of $44.4 increased $1.6, as higher income from the
Asian affiliates was partially offset by lower income from the European affiliates.
Tonnage Gases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
1,211.0 |
|
|
$ |
1,063.7 |
|
|
|
14 |
% |
Operating income |
|
|
169.8 |
|
|
|
152.0 |
|
|
|
12 |
% |
|
Tonnage Gases Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
25 |
% |
Currency |
|
|
2 |
% |
Natural gas/raw material cost pass-through |
|
|
(13 |
%) |
|
Total Tonnage Gases Change |
|
|
14 |
% |
|
Sales of $1,211.0 increased 14%, or $147.3. Underlying base business volume growth
increased sales by 25%. Volumes were higher due to the start-up of new hydrogen plants in
2006 supporting the refinery industry. Prior year volumes were negatively impacted by the
effects of Hurricane Katrina as one major pipeline customer had not returned to
pre-hurricane operations.
Sales increased 2% from favorable currency effects, primarily the weakening of the U.S.
dollar against the Euro and Pound Sterling. Lower natural gas cost contractually
passed-through to customers decreased sales by 13%.
Tonnage Gases Operating Income
Operating income of $169.8 increased 12%, or $17.8. Operating income increased by $36 from higher
volumes, $3 from Hurricane effects, and $3 from favorable
currency effects. Costs increased by $29 due to higher
maintenance and operating costs, costs to support growth, and inflation.
Electronics and Performance Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
1,060.8 |
|
|
$ |
886.5 |
|
|
|
20 |
% |
Operating income |
|
|
108.6 |
|
|
|
85.3 |
|
|
|
27 |
% |
|
29
Electronics and Performance Materials Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
17 |
% |
Price/mix |
|
|
(2 |
%) |
Acquisitions |
|
|
4 |
% |
Currency |
|
|
1 |
% |
|
Total Electronics and Performance Materials Change |
|
|
20 |
% |
|
Sales of $1,060.8 increased 20%, or $174.3. Underlying base business growth increased sales
by 15%. Higher volumes across most Electronics product lines and from Performance Materials
in Europe and Asia improved sales by 17%. 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, primarily 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 $108.6 increased 27%, or $23.3. Operating income increased $51 from higher
volumes, $6 from the acquisition of
Tomah3
Products, and $5 from favorable currency effects. Operating
income declined by $26 from lower pricing, net of variable costs, primarily due to lower electronics specialty materials
pricing, and $15 from inflation and higher costs to support growth.
Equipment and Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
327.4 |
|
|
$ |
268.6 |
|
|
|
22 |
% |
Operating income |
|
|
43.2 |
|
|
|
34.5 |
|
|
|
25 |
% |
|
Equipment and Energy Sales and Operating Income
Sales of $327.4 increased by $58.8, primarily from higher natural gas liquefaction (LNG) and large
air separation unit activity and a one-time energy related equipment sale. Operating income of
$43.2 increased by $8.7, primarily from higher LNG heat exchanger activity, and the cancellation of
an exchanger order due to a project termination by a customer, partially offset by higher spending
in the Energy business.
The sales backlog for the Equipment business at 31 March 2007 was $349, compared to $446 at 30
September 2006.
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
312.9 |
|
|
$ |
271.8 |
|
|
|
15 |
% |
Operating income |
|
|
16.4 |
|
|
|
16.2 |
|
|
|
1 |
% |
|
30
Healthcare Sales
|
|
|
|
|
|
|
% Change from |
|
|
Prior Year |
|
Underlying business |
|
|
|
|
Volume |
|
|
10 |
% |
Acquisitions |
|
|
1 |
% |
Currency |
|
|
4 |
% |
|
Total Healthcare Change |
|
|
15 |
% |
|
Sales of $312.9 increased 15%, or $41.1. Sales increased 10% due to higher volumes,
primarily from the new respiratory contract in the U.K., 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, primarily the weakening of the U.S. dollar against
the Euro and Pound Sterling, increased sales by 4%.
Healthcare Operating Income
Operating income of $16.4 increased 1%, as higher volumes in Europe were mostly offset by lower
volumes in the U.S. and prior year results that included a gain on the sale of land in Europe.
Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended 31 March |
|
|
|
|
2007 |
|
2006 |
|
% Change |
|
Sales |
|
$ |
469.2 |
|
|
$ |
463.4 |
|
|
|
1 |
% |
Operating income |
|
|
42.2 |
|
|
|
34.2 |
|
|
|
23 |
% |
|
Chemicals Sales
Sales of $469.2 increased 1%, or $5.8. Sales increased primarily from higher volumes in both
Polymer Emulsions and Polyurethane Intermediates (PUI) and favorable currency impacts as the U.S. dollar
weakened against the Euro. Sales decreased from the divestiture of the DNT production facility in
Geismar, Louisiana, in the second quarter of 2006.
Chemicals Operating Income
Operating income of $42.2 increased $8.0. Operating income in 2007 increased primarily from higher
volumes, partially offset by the divestiture and an environmental charge.
On 31 March 2006, the Company sold its DNT production facility in Geismar, Louisiana, to BASF
Corporation which resulted in a net gain of $70 that is included in
operating income. In the second quarter of 2006, the Company
also recognized a loss in operating income of $66 for the impairment of loans receivable from a
long-term supplier of sulfuric acid used in the production of DNT for the Companys PUI business.
See Note 11 to the consolidated financial statements for additional information on these items.
Other
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Ended 31 March |
|
|
2007 |
|
2006 |
|
Operating loss |
|
|
($3.6 |
) |
|
|
($6.5 |
) |
|
Other operating loss includes other expense and income which cannot be directly associated with the
business segments, including foreign exchange gains and losses and interest income. The loss in
2006 includes certain costs previously allocated to the Amines business. Corporate research and
development costs are fully allocated to the business segments.
The operating loss of $3.6 decreased by $2.9. No individual items were material in comparison to
the prior year.
31
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 six months of 2007 improved 3.0% from the prior year.
The Company still anticipates domestic manufacturing growth between 2% and 3%. The Companys
forecast for global manufacturing growth during fiscal 2007 remains largely unchanged.
Segments
|
|
|
Third quarter results in Merchant Gases are expected to be higher than the second
quarter from continued volume growth. Overall results for 2007 should benefit from
operating leverage on existing assets, increased productivity, improved pricing, and new
investments. |
|
|
|
|
Tonnage Gases should continue to benefit from the new hydrogen facilities brought
on-stream in 2006. Additionally, results for the third quarter should improve over the
second quarter due to fewer maintenance turnarounds benefiting both volumes and operating
costs. |
|
|
|
|
Third quarter results in Electronics and Performance Materials should improve compared
to the second quarter from higher fabrication utilization rates in Electronics and
seasonally higher volumes in Performance Materials. |
|
|
|
|
Equipment and Energy results were lower in the second quarter as the Company continued
to work through its equipment backlog and increased spending on energy project
opportunities. Overall segment results should be lower for the remainder of 2007 as the
LNG backlog continues to decline and from higher energy development spending. |
|
|
|
|
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 hopeful that it will be able to
conclude these efforts in calendar year 2007. |
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 six months of 2007, 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 during the
third quarter for approximately $500. The Company intends to continue to evaluate acquisition
opportunities and investments in affiliated entities.
32
Asset Management
The Company evaluates the best utilization of its asset base on an ongoing basis. Results in the
second half of 2007 could benefit from certain asset management actions taken by the Company.
Income Taxes Resolution
The Company is in the process of resolving prior year audits with the Internal Revenue Service.
The timing and amount of the resolution is uncertain at this point. Results in the second half of
2007 could be favorably impacted by the resolution of the audits.
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 pages 6-7.
Operating Activities from Continuing Operations
For the first six months, net cash provided by operating activities decreased $165.0, or 30%, as
compared to 2006. This decline was primarily due to changes in working capital partially offset by
higher earnings. Prepaid expenses increased $164.6 as a result of prepayment of U.S. federal
income taxes in 2007. Cash used for payables and accrued liabilities increased by $93.5, due
mainly to higher pension contributions in 2007 and a reduction in customer advances in 2007.
Customer advances declined due to increases in percentage completion
on projects. In the prior year there was a significant increase in accrued income taxes which
favorably impacted cash provided by operating activities. This increase was due to the sale of a
chemical facility, higher book versus tax depreciation, and the timing of payments. These
working capital changes were partially offset by higher earnings of $79.6, additional depreciation
and amortization expense of $34.6, and an increase in deferred income taxes of $20.7.
Investing Activities from Continuing Operations
Cash used for investing activities decreased $232.3, or 32%. Capital expenditures totaled $517.1
for the six months ended 31 March 2007, compared to $944.0. Additions to plant and equipment
totaled $494.8 for the six months ended 31 March 2007, compared to $807.6. This decrease is
primarily related to the $297.2 repurchase of cryogenic vessel equipment in 2006. Acquisitions
totaled $20.0 for the six months ended 31 March 2007, compared to $127.0. Acquisitions in 2006
principally included Tomah3 Products. Proceeds from the sale of assets and investments
decreased $176.3 principally due to the sale of the Geismar, Louisiana, DNT production facility in
2006. Additionally, insurance proceeds received for Hurricane Katrina property damage were lower
by $20.9 in 2007.
33
Capital expenditures for continuing operations are detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
31 March |
|
|
2007 |
|
2006 |
|
Additions to plant and equipment |
|
$ |
494.8 |
|
|
$ |
510.4 |
|
Purchase cryogenic vessel equipment |
|
|
|
|
|
|
297.2 |
|
Acquisitions, less cash acquired |
|
|
20.0 |
|
|
|
127.0 |
|
Investment in and advances to unconsolidated affiliates |
|
|
1.5 |
|
|
|
8.3 |
|
Capital leases |
|
|
.8 |
|
|
|
1.1 |
|
|
Total Capital Expenditures |
|
$ |
517.1 |
|
|
$ |
944.0 |
|
|
Financing Activities from Continuing Operations
Cash provided by financing activities decreased $81.2. This decrease is primarily attributable to
the 2007 use of cash of $255.2 for the purchase of Treasury Stock, partially offset by a net
increase in Company borrowings (short- and long-term proceeds net of repayments) of $122.8 and
higher proceeds from stock option exercises of $43.1.
Total debt at 31 March 2007 and 30 September 2006, expressed as a percentage of the sum of total
debt, shareholders equity, and minority interest, was 37.8% and 35.8%, respectively. Total debt
increased from $2,849.8 at 30 September 2006 to $3,313.9 at 31 March 2007. This increase was due
primarily to long- and short-term debt proceeds exceeding repayments by $379.7 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 March 2007. No borrowings were outstanding under these commitments. Additional commitments
totaling $219.2 are maintained by the Companys foreign subsidiaries, of which $141.9 was utilized
at 31 March 2007.
The estimated fair value of the Companys long-term debt, including current portion, as of 31 March
2007 was $2,982.5 compared to a book value of $2,923.2.
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 six months ended 31 March 2007 purchased
3.5 million of its outstanding shares at a cost of $247.4.
On 8 January 2007, the Company announced it had reached a definitive agreement with The Linde Group
to acquire the Polish industrial gas business of BOC Gazy Sp z o.o. for 370 million Euros. The
transaction has received regulatory approval and is subject to customary closing conditions. The
Company expects to finance the acquisition using a combination of operating cash flows and new
debt. On 12 March 2007, the Company issued Euro 300.0 ($395.1) of 4.625% Eurobonds maturing 15
March 2017, the proceeds of which will be used to fund a portion of this acquisition.
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments under various contracts such as debt
agreements, lease agreements, unconditional purchase obligations and other long-term obligations.
Other than the 4.625% Eurobonds discussed above, 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.
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.
34
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 $269 and $216 in the net liability position of financial instruments
at 31 March 2007 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 $270 and $215 in the net
liability position of financial instruments at 31 March 2007 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 $101 and $71 in the net liability position of financial instruments at 31 March 2007
and 30 September 2006, respectively. A 100 basis point decrease in market interest rates would
result in an increase of $110 and $71 in the net liability position of financial instruments at 31
March 2007 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 $3,008.8 at 31 March 2007 primarily due to the issuance of new
long-term debt and the impact of a weaker U.S. dollar on the translation of foreign currency debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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.
35
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 35 of Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be
disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported
accurately and within the time periods specified in the SECs rules and forms. As of 31 March 2007
(the Evaluation Date), an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, the design and operation of these disclosure controls and procedures were
effective to provide reasonable assurance of the achievement of the objectives described above.
During the quarter that ended on the Evaluation Date, there was no change in internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth above under Note 10 contained in the Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number (or |
|
|
(a) Total |
|
|
|
|
|
(c) Total Number of |
|
Approximate Dollar |
|
|
Number of |
|
|
|
|
|
Shares (or Units) |
|
Value) of Shares (or |
|
|
Shares (or |
|
|
|
|
|
Purchased as Part of |
|
Units) that May Yet Be |
|
|
Units) |
|
(b) Average Price Paid |
|
Publicly Announced |
|
Purchased Under the |
Period |
|
Purchased |
|
per Share (or Unit) |
|
Plans or Programs |
|
Plans or Programs(1) (2) |
1/1/07 1/31/07
|
|
|
559,786 |
|
|
$ |
71.44 |
|
|
|
559,786 |
|
|
$ |
838,272,803.69 |
|
2/1/07 2/28/07
|
|
|
498,900 |
|
|
$ |
76.05 |
|
|
|
498,900 |
|
|
$ |
800,331,782.30 |
|
3/1/07 3/31/07
|
|
|
591,100 |
|
|
$ |
74.17 |
|
|
|
591,100 |
|
|
$ |
756,490,249.95 |
|
Total
|
|
|
1,649,786 |
|
|
$ |
73.81 |
|
|
|
1,649,786 |
|
|
$ |
756,490,249.95 |
|
|
|
|
(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 March 2007, the company expended $121.8 million in cash for
the repurchase of shares which was composed of $115.8 million for shares repurchased during the
quarter and $6.0 million for shares repurchased in December 2006 and settling in January 2007.
$6.0 million was reported as an accrued liability on the balance sheet for share repurchases
executed in March 2007 and settling in April 2007. |
Item 4. Submission of Matters to a Vote of Security Holders
|
a. |
|
The Annual Meeting of Shareholders of the Registrant was
held on 25 January 2007. |
|
|
b. |
|
The following directors were elected at the meeting:
William L. Davis, III, W. Douglas Ford, Evert Henkes and Margaret
G. McGlynn. Directors whose term of office continued after the
meeting include: Michael J. Donahue, Ursula O. Fairbairn, John P.
Jones III, Lawrence S. Smith, Mario L. Baeza, Edward E. Hagenlocker
and Charles H. Noski. |
|
|
c. |
|
The following matters were voted on at the Annual Meeting: |
|
|
1. |
|
Election of Directors |
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF VOTES CAST |
NAME OF DIRECTOR |
|
FOR |
|
AGAINST OR WITHHELD |
William L. Davis, III
|
|
|
188,702,365 |
|
|
|
2,870,778 |
|
W. Douglas Ford
|
|
|
188,517,687 |
|
|
|
3,055,456 |
|
Evert Henkes
|
|
|
188,386,334 |
|
|
|
3,186,809 |
|
Margaret G. McGlynn
|
|
|
125,386,841 |
|
|
|
66,186,302 |
|
37
|
|
|
2. |
|
Ratification of the appointment of KPMG LLP of Philadelphia, Pennsylvania, as
independent auditor for the registrant for the fiscal year ending 30 September 2007 |
|
|
|
|
|
|
|
|
|
NUMBER OF VOTES CAST |
|
|
AGAINST |
|
|
|
|
OR |
|
|
FOR |
|
WITHHELD |
|
ABSTENTIONS |
188,083,463
|
|
|
1,654,450 |
|
|
|
1,835,230 |
|
Item 6. Exhibits.
Exhibits required by Item 601 of Regulation S-K
|
|
|
12.
|
|
Computation of Ratios of Earnings to Fixed Charges. |
|
|
|
31.1.
|
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2.
|
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.
|
|
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Air Products and Chemicals, Inc. |
|
|
|
(Registrant) |
|
|
|
|
|
|
|
Date: 27 April 2007 |
By: |
/s/Paul E. Huck
|
|
|
|
Paul E. Huck |
|
|
|
Vice President and Chief Financial Officer |
|
|
39
EXHIBIT INDEX
|
|
|
12.
|
|
Computation of Ratios of Earnings to Fixed Charges. |
|
|
|
31.1.
|
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2.
|
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.
|
|
Certification by the Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
40