How did Air Products perform financially in fiscal 2006?

Sales grew 14% to $8.85 billion and net income rose slightly to $723.4 million. Diluted EPS increased to $3.18 from $3.08. Results were supported by volume growth across most segments, though one-time charges including a cost reduction plan, a loan impairment, and stock option expense weighed on operating income, which still rose 7% to $1.06 billion.

What were the main one-time items affecting 2006 results?

Negative items included a $72.1 million global cost reduction charge, a $65.8 million impairment of loans receivable from a sulfuric acid supplier, a $17 million Healthcare inventory adjustment, and $43 million of stock option expense from SFAS 123R. Positive items included a $70.4 million gain on the sale of the Geismar DNT facility and $56 million in net hurricane insurance recoveries.

Why did the Healthcare segment underperform, and what is expected next?

Healthcare operating income fell to $8.4 million from $81.7 million, reflecting operational issues in the U.S., bad debt expense, infrastructure costs, and higher startup costs for a new UK respiratory contract. Management expects improvement in 2007 from U.S. volume growth, cost actions, and a full year of the UK contract, but the segment has not yet demonstrated a turnaround.

What is the company's capital allocation and balance sheet picture?

Capital expenditures were $1.41 billion, and total debt rose to $2.85 billion, with debt at 35.8% of total capitalization. The company repurchased $482 million of stock in 2006 under a $1.5 billion authorization and raised its quarterly dividend 6% to $0.34. Pension contributions are expected to be about $280 million in 2007, which will increase cash needs.

What portfolio changes should investors be aware of?

Air Products sold its Amines business to Taminco in September 2006 for $211.2 million, recording a $40 million loss and a $42 million environmental charge tied to the Pace, Florida facility. It is marketing its Polymer Emulsions business and restructuring its Polyurethane Intermediates business. The company also reorganized into six reporting segments and reduced its exposure to cyclical chemicals.

APD 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 13, 2006. Cited figures are marked; the original filing is the authoritative source.

Air Products & Chemicals (APD) closed fiscal 2006 (year ended 30 September 2006) with sales of $8.85 billion^a, up 14%, and net income of $723.4 million, versus $711.7 million in 2005.

Diluted EPS rose to $3.18^b from $3.08. Growth was driven mainly by volume gains in Merchant Gases, Tonnage Gases, and Electronics and Performance Materials, along with strong LNG equipment activity. Operating income grew 7% to $1,060.9 million, but was held back by a $72.1 million global cost reduction plan, a $65.8 million impairment of loans receivable tied to a sulfuric acid supplier, and $43 million of stock option expense from the adoption of SFAS 123R.

Partly offsetting these charges were a $70.4 million^c gain on the sale of the Geismar DNT facility and $56 million of net hurricane insurance recoveries. Portfolio reshaping was a major theme. The company realigned into six reporting segments, sold its Amines business in September 2006 (a $40 million pre-tax loss on sale and retained obligations, with a $42 million environmental charge for the Pace, Florida facility), and was marketing its Polymer Emulsions business.

Healthcare was the weak spot, with operating income falling to $8.4 million^d from $81.7 million on U.S. operational issues and higher UK contract start-up costs. Management guides to EPS growth in 2007, with Healthcare expected to improve and Tonnage Gases benefiting from new hydrogen plants. Balance sheet and capital allocation remain significant considerations.

Total debt rose to $2.85 billion, the debt-to-capitalization ratio reached 35.8%, and capital expenditures were $1.41 billion. The company repurchased $482 million of stock under a $1.5 billion authorization.

Cash contributions to defined benefit pension plans are expected to be about $280 million in 2007, and the quarterly dividend was raised to $0.34 from $0.32. Operating cash flow from continuing operations was steady at $1.32 billion.

02—Key points

Key Highlights

Sales rose 14% to $8,850.4 million, driven by a 11% volume increase and LNG equipment activity; Tonnage Gases sales grew 28%.
Diluted EPS was $3.18, up from $3.08, but net income of $723.4 million was only modestly higher after discontinued operations and a $6.2 million accounting-change charge.
Operating income of $1,060.9 million included $72.1M global cost reduction charge, $65.8M loan impairment, $43M stock option expense, offset by a $70.4M facility sale gain and $56M hurricane insurance recoveries.
Healthcare segment operating income collapsed to $8.4 million from $81.7 million due to U.S. operational problems and UK contract start-up costs.
Total debt increased to $2.85 billion (debt-to-capitalization 35.8%); the company repurchased $482 million of shares under a $1.5 billion program.
The company is exiting Chemicals: Amines was sold in September 2006, Polymer Emulsions is being marketed, and the PUI business is being restructured.
2007 guidance calls for further EPS growth, approximately $1.0 billion in capital spending, about $280 million in pension contributions, and a 6% dividend increase to $0.34 per quarter.

03—Questions

Frequently Asked Questions

How did Air Products perform financially in fiscal 2006?
Sales grew 14% to $8.85 billion and net income rose slightly to $723.4 million. Diluted EPS increased to $3.18 from $3.08. Results were supported by volume growth across most segments, though one-time charges including a cost reduction plan, a loan impairment, and stock option expense weighed on operating income, which still rose 7% to $1.06 billion.
What were the main one-time items affecting 2006 results?
Negative items included a $72.1 million global cost reduction charge, a $65.8 million impairment of loans receivable from a sulfuric acid supplier, a $17 million Healthcare inventory adjustment, and $43 million of stock option expense from SFAS 123R. Positive items included a $70.4 million gain on the sale of the Geismar DNT facility and $56 million in net hurricane insurance recoveries.
Why did the Healthcare segment underperform, and what is expected next?
Healthcare operating income fell to $8.4 million from $81.7 million, reflecting operational issues in the U.S., bad debt expense, infrastructure costs, and higher startup costs for a new UK respiratory contract. Management expects improvement in 2007 from U.S. volume growth, cost actions, and a full year of the UK contract, but the segment has not yet demonstrated a turnaround.
What is the company's capital allocation and balance sheet picture?
Capital expenditures were $1.41 billion, and total debt rose to $2.85 billion, with debt at 35.8% of total capitalization. The company repurchased $482 million of stock in 2006 under a $1.5 billion authorization and raised its quarterly dividend 6% to $0.34. Pension contributions are expected to be about $280 million in 2007, which will increase cash needs.
What portfolio changes should investors be aware of?
Air Products sold its Amines business to Taminco in September 2006 for $211.2 million, recording a $40 million loss and a $42 million environmental charge tied to the Pace, Florida facility. It is marketing its Polymer Emulsions business and restructuring its Polyurethane Intermediates business. The company also reorganized into six reporting segments and reduced its exposure to cyclical chemicals.

04—Continue

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