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Air Products & Chemicals Inc. ((APD - Analyst Report)) reported fourth quarter 2011 EPS of $1.51, versus $1.35 in the year-earlier quarter and matched the Zacks Consensus Estimate of $1.51. For full year 2011, the company reported an EPS of $5.73, up 14% year over year and also matched the Zacks Consensus Estimate of $5.73.

Net sales amounted to $2.6 billion, versus $2.4 billion in the prior-year quarter, in line with the Zacks Consensus Estimate of $2.6 billion. The improved results were mainly driven by growth in emerging markets and strong performance in its Tonnage Gases business. Despite a slowing global economy in the second half of 2011, the company won several projects and also witnessed double digit sales and earnings growth.

For fiscal 2011, sales increased 12% year over year to $10,082 million driven by a 9% volume increase and were in line with the Zacks Consensus Estimate.

Costs and Margins

Cost of sales increased to $1.9 billion in the reported quarter from $1.7 billion in the year-earlier quarter. Selling and administrative expenses also increased to $257.5 million from $231.2 million in the prior-year quarter.

The company reported an operating profit of $425.3 million, increasing from $367.0 million in the year-ago quarter.

Segmental Performance

Merchant Gases: Sales of the segment increased 10% to $1,045.0 million from $948.0 million in the year-ago-quarter based on higher volumes in Asia and U.S./Canada. Operating income of the segment increased to $192.4 million from $185.3 million in the prior-year quarter, mainly due to increased volumes and positive pricing in Asia and U.S./Canada that were offset by higher costs and lower Healthcare pricing in Europe.

Tonnage Gases: Sales of the segment rose 17.4% to $882.8 million from $751.7 million in the year-ago quarter mainly because of higher volumes which were driven by new projects. Operating income amounted to $151.7 million, up 30% from $117.0 million in the year-earlier quarter due to higher volumes, lower costs and gains related to contract modifications.  

Electronics and Performance Materials: This segment reported sales of $587.2 million, up 12% from $523.2 million in the year-ago quarter, led by higher Electronics volumes and Performance Materials pricing. Operating income increased by 9% to $91.5 million versus $84.0 million in the year-earlier quarter.

Equipment and Energy: Sales declined 25% to $95.8 million from $128.3 million in the prior-year quarter. The poor performance is due to lower LNG and air separation unit activity. Operating income also decreased substantially to $11.5 million from $20.2 million in the year-ago quarter.

Financial Position

Cash and cash equivalents were $422.5 million as of September 30, 2011, up from $374.3 million as of September 30, 2010.

Long-term debt of the company increased to $3,927.5 million as of September 30, 2011 from $3,659.8 million as of September 30, 2011.

Discounted Operations

A tax benefit of 4 cents per share was recognized as income from discontinued operations for the twelve months ended 30 September 2011 as it relates to the previously divested healthcare business.

Outlook

Though the near-term economic outlook looks bleak and has a lot of global economic and policy uncertainties, Air Products remains confident of its large backlog of projects backed by signed customer contracts and  remains committed to achieving its 2015 goals for growth, margin, and return on capital.

The company expects fiscal year 2012 EPS to be in the range of $5.90 to $6.30 per share, representing year-over-year earnings growth of 3% to 10%. For the first quarter of fiscal 2012 the company expects to earn $1.31 to $1.39 per share.

The company also forecasts capital spending in fiscal 2012 to be between $1.9 and $2.2 billion.  

Airgas Update

In February 2010, the company had made a tender offer to acquire all the outstanding common stock of Airgas Inc. ((ARG - Analyst Report)), including the associated preferred stock purchase rights, for $60.00 per share in cash.

Airgas, a Delaware company, is the largest U.S. distributor of industrial, medical, and specialty gases, and hard goods. However, a year later Air Products terminated the offer. For the twelve months ended September 30, 2011, a net loss of $48.5 ($31.6 after-tax, or $.14 per share) was recognized related to this transaction.

We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock.

Based in Pennsylvania, Air Products benefits from a long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. However, soaring energy and raw material costs pose a threat to margin expansion.

In order to compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it makes for industrial use. Air Products faces stiff competition from Praxair Inc. ((PX - Analyst Report)) and The Linde Group.

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