Air Products and Chemicals, Inc. — Fiscal 2011 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2011. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included in the unaudited quarterly information. Air Products supplies industrial, medical, specialty and process gases, performance materials, equipment and energy solutions in more than 40 countries through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $10,082.0 million | $9,026.0 million | Up 12% |
| Operating income | $1,622.2 million | $1,389.0 million | Up 17% |
| GAAP operating margin | 16.1% | 15.4% | Up 70 basis points |
| Income from continuing operations attributable to Air Products | $1,215.3 million | $1,029.1 million | Up 18% |
| Diluted EPS from continuing operations | $5.59 | $4.74 | Up 18% |
| Net income attributable to Air Products | $1,224.2 million | $1,029.1 million | Up 19% |
| Operating cash flow | $1,753.2 million | $1,522.4 million | Up 15% |
| GAAP capital expenditures | $1,408.3 million | $1,133.8 million | Up 24% |
| Total debt at year-end | $4,562.2 million | $4,128.3 million | Up $433.9 million |
| Cash and cash items | $422.5 million | $374.3 million | Up $48.2 million |
Underlying sales increased 10%, consisting of 9% volume growth and 1% pricing, with a favorable 2% currency effect. Management reported strong first-half performance, followed by slower growth in the second half because of product-supply and cost issues and weaker economic growth.
Non-GAAP results, excluding Airgas transaction costs, were operating income of $1,670.7 million, a 16.6% operating margin, continuing-operations income of $1,246.9 million and diluted continuing-operations EPS of $5.73.
Segment results
| Segment | 2011 sales | Sales change | 2011 operating income | Margin |
|---|---|---|---|---|
| Merchant Gases | $4,073.2 million | Up 10% | $759.8 million | 18.7% |
| Tonnage Gases | $3,316.7 million | Up 13% | $503.1 million | 15.2% |
| Electronics and Performance Materials | $2,291.5 million | Up 20% | $361.1 million | 15.8% |
| Equipment and Energy | $400.6 million | Down 15% | $62.8 million | Not clearly provided |
Electronics and Performance Materials was the strongest operating-income contributor on a growth basis, benefiting from higher volumes and lower costs. Merchant Gases margin declined 90 basis points because of higher operating, maintenance and distribution costs. Tonnage Gases margin was unchanged. Equipment and Energy declined because of lower air-separation-unit activity, although its equipment backlog increased to approximately $334 million from $274 million.
Cash flow, liquidity and capital structure
- Operating cash flow of $1,753.2 million exceeded GAAP capital expenditures of $1,408.3 million, although non-GAAP capital spending was $1,581.8 million after including capital-lease expenditures and other items.
- Cash used for investing activities was $1,212.2 million; cash used for financing activities was $484.5 million.
- Working capital was $848 million at year-end, compared with $790 million in 2010.
- Total debt represented 43.4% of total debt plus total equity, compared with 42.0% in 2010. Debt included $562.5 million of short-term borrowings, $72.2 million of current long-term debt and $3,927.5 million of long-term debt.
- The company had no borrowings under its $2.17 billion multicurrency revolving facility at September 30, 2011. The facility was extended to June 30, 2015, and its principal covenant changed to a maximum long-term-debt-to-equity ratio of 60%.
- Debt maturities totaled approximately $473.8 million in fiscal 2012, including the 4.25% Eurobond. Management stated that it expected to refinance this obligation and remain in compliance with covenants.
- Air Products repurchased 7.4 million shares for $649.2 million, completed its prior $1.0 billion authorization, and received a new $1.0 billion authorization. The quarterly dividend increased from $0.49 to $0.58 per share, producing $2.23 of declared dividends for fiscal 2011.
Fourth-quarter information
Fourth-quarter fiscal 2011 sales were $2,611.2 million, compared with $2,351.2 million in the fourth quarter of 2010. Fourth-quarter operating income was $425.3 million versus $367.0 million, and income from continuing operations attributable to Air Products was $324.8 million versus $272.1 million. Fourth-quarter diluted EPS from continuing operations was $1.51 versus $1.25. The filing text does not provide a separate fourth-quarter cash-flow statement.
Material changes, outlook and unusual items
- The Airgas tender offer was withdrawn on February 15, 2011, after a Delaware court upheld Airgas’s defenses. The related $6.7 billion term-loan facility was terminated. Air Products recorded a $48.5 million pretax net loss on the transaction in 2011, compared with $96.0 million in 2010, and sold its Airgas shares for $94.7 million.
- The 2009 global cost-reduction plan was completed by September 30, 2011. No related charge was recorded in 2011; the 2009 charge was $298.2 million.
- A fiscal 2011 tax benefit of $8.9 million from the completed U.S. tax audit related to the divested U.S. Healthcare business was recorded in discontinued operations.
- Management expected 2012 global economic growth of approximately 2% to 5%, U.S. growth of 1% to 5%, European growth ranging from negative 2% to positive 1%, and Asian growth of 4% to 9%. New plant start-ups, productivity and cost controls were expected to support earnings.
- Expected 2012 offsets included higher pension expense, lower Equipment and Energy results, a higher tax rate of approximately 26% before specified tax matters, and weaker first-half performance in portions of Electronics and Performance Materials.
- Fiscal 2012 GAAP capital expenditures were expected to be $1.6 billion to $1.8 billion, with non-GAAP spending of $1.9 billion to $2.2 billion, principally for Tonnage Gases plants and pipelines.
- The company expected Equipment and Energy results to decline because of lower LNG activity. It also expected to close an agreement to acquire a 25% interest in Saudi Arabia’s Abdullah Hashim Industrial Gases & Equipment Co. Ltd., subject to approvals.
Risks and contingencies
- Demand is sensitive to global economic conditions, particularly refining, chemicals, steel, semiconductor and electronics markets. The company reported helium supply shortages during 2011.
- Electricity, natural gas and other raw-material costs are significant; contractual pass-through mechanisms may not fully offset cost increases or may reduce volumes.
- Foreign-currency exposure, interest-rate risk, competition, project execution, plant and pipeline operating hazards, customer concentration within industries, and potential asset impairments could affect results.
- Environmental liabilities were accrued at $82.3 million, with estimated exposure ranging from $82 million to a reasonably possible upper exposure of $96 million. Approximately 35 sites remained subject to investigation or remediation.
- A Brazilian competition fine of R$179.2 million, approximately $95 million at year-end exchange rates, remained under appeal. No provision was recorded because an adverse outcome was considered reasonably possible but not probable.
- Defined-benefit pension plans were underfunded; the projected benefit obligation was $3,765.8 million versus plan assets of $2,823.7 million. 2012 pension expense was estimated at $120 million to $125 million, with cash contributions estimated at $40 million to $60 million.
- In November 2011, after year-end, the company reached a Spanish tax settlement of approximately €40 million, or approximately $55 million. A significant portion was expected to increase fiscal 2012 tax expense.
- Contractual obligations totaled approximately $7.413 billion, including $4.516 billion of debt-related principal and interest, $1.675 billion of unconditional purchase obligations, $942 million of pension obligations and $220 million of operating leases.
Investor verification checklist
- Reconcile GAAP earnings and cash flow with management’s non-GAAP measures, particularly the Airgas transaction adjustment.
- Assess whether new Tonnage Gases and Merchant Gases projects generate expected volumes and returns relative to the elevated capital-spending program.
- Monitor debt refinancing, the 2012 Eurobond maturity, commercial-paper access and compliance with the revised debt covenant.
- Evaluate exposure to pension expense, asset returns, discount rates and required cash contributions.
- Track the Brazilian competition appeal, Spanish tax settlement, uncertain tax positions and environmental remediation costs.
- Test the outlook assumptions for European weakness, electronics-cycle recovery, LNG activity, energy-cost recovery and currency movements.
- Verify the timing, regulatory approval and purchase price of the proposed Abdullah Hashim investment.