In 2007, 22,000 Air Products people around the globe focused on what they do better than anyone else: delivering the Air Products difference. It was a clear focus on driving top-line growth with greater improvements to the bottom line . . . on increasing our return on capital so we continued to earn the right to invest . . . on leveraging our global organization and systems . . . on really listening to customers and acting on that understanding . . . on embracing and responding to an ever-changing global landscape so we could seize market opportunities faster than ever before. We are on the path to becoming an even higher-growth, higher-return company, with results that are truly great.
Delivering the Difference
This was a milestone year. For the first time, we reached $1 billion in net income on sales
of $10 billion, up 43 and 15 percent, respectively, from the prior year. This marked our
fourth consecutive year of double-digit sales and earnings per share growth. Operating
income from continuing operations of $1,390 million increased 23 percent, and diluted
EPS of $4.37 was up 25 percent.
We met our goal to improve operating return on net assets (ORONA) by increasing the
return 110 basis points over the prior year through higher plant loading, productivity and
continued capital discipline. We further strengthened our balance sheet, continuing to
improve our solid financial position. Cash flow from continuing operations was $1.5 billion,
including pension contributions of $290 million. Our debt-to-debt plus equity ratio ended
the year at 39.3 percent, placing us squarely within an “A” credit rating range. Continuing
operations capital spending on plant and equipment, excluding acquisitions, was
$1.1 billion; acquisition spending was $539 million.
The continued strength of our operating cash flows allowed us to repurchase
$567 million in shares—the third consecutive year we’ve bought back $500 million or
more of our stock. With just under a half-billion dollars remaining under the existing
authorization, our Board approved an additional $1 billion toward share repurchases. In
keeping with our long-standing tradition, 2007 also marked our 25th consecutive year of
dividend increases for shareholders.
With this strong underlying financial performance, we focused on capturing profitable growth. Having completed our strategic business reorganization, we aligned our
people, capital, and research and development spending on growth markets. We saw
strong demand for our Merchant Gases across the broad markets and geographies we
serve, growing sales to $3.2 billion. In Tonnage Gases, our hydrogen plant investments
for clean fuels delivered great results, and we saw increased orders for large air separation
units. And we won well over half the business we bid in a strong Electronics market capital
investment cycle, while new product innovations and acquisitions moved us closer to our
goal of building a $1 billion Performance Materials business within the next five years.
Meanwhile, we continued to build on our leadership positions in growth geographies.
Our total sales to customers outside of the U.S. continued to exceed 50 percent. Our
20+ percent growth trajectory in Asia continued, as we won new business; expanded
manufacturing, engineering and research capabilities in China; built on our leading gas
supply positions in key countries like Taiwan and Korea; and completed the acquisition
of our remaining equity interests in Malaysia and our Performance Materials joint venture
in China. We also acquired a significant merchant and packaged gas business in Poland,
seizing the opportunity to become the leading industrial gas supplier in central Europe’s
fastest-growing economy. Finally, we delivered $132 million in income from equity affiliates
during the year.
With this growth came a continued commitment to reduce the cyclicality of our portfolio.
Following on our successful sale of the amines business and restructuring of polyurethane intermediates in 2006, we hope to have an agreement of sale in place for polymers by calendar year end. With a renewed focus on our electronics customers’ demands for speed, cost leadership and value-added products, we streamlined our product portfolio; closed our
specialty materials facility in Morrisville, Pennsylvania; divested our photoresist developer
business; and announced an agreement to sell our High Purity Process Chemicals business.
We also continued our efforts to improve our U.S. Healthcare business. We put a new
management team in place. We restructured our sales and customer service teams while
implementing action plans to drive our growth and productivity. We are not yet satisfied
with our business performance in this segment. We do, however, believe we are positioning
ourselves to earn a premium above our cost of capital as we look to the future.
Finally, we continued to drive productivity to benefit customers and our bottom line.
Companywide, we drove SG&A as a percent of sales down to 11.8 percent, 50 basis
points lower than last year. Our move to shared services in Europe was just one example
of our ongoing efforts to simplify and streamline our day-to-day operations. Most importantly,
our continuous improvement processes and tools, including our single instance of
SAP, continue to deliver value, creating opportunities for us to meet the needs of customers
with speed and efficiency. With our SAP deployment in China, Taiwan and Korea, we
have approximately 90 percent of Air Products’ revenues worldwide on one global system.
Above all, we accomplished all of these goals with exceptional environmental, health
and safety performance—one of our best years ever and representing one of the best
records in our industry.
