Air Products & Chemicals, Inc. — Fiscal 2010 Form 10-K
Reporting period: Fiscal year ended 30 September 2010. The filing also reports fourth-quarter fiscal 2010 results. Air Products supplies atmospheric, process and specialty gases, performance materials, equipment and energy solutions globally through four segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Key financial metrics
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Sales | $9,026.0 million | $8,256.2 million | +9% |
| Operating income | $1,389.0 million | $846.3 million | +64% |
| Operating margin | 15.4% | 10.3% | +510 bps |
| Net income attributable to Air Products | $1,029.1 million | $631.3 million | +63% |
| Diluted EPS | $4.74 | $2.96 | +60% |
| Cash from operating activities | $1,522.4 million | $1,329.4 million | +15% |
| GAAP capital expenditures | $1,133.8 million | $1,236.3 million | −8% |
| Cash and cash items | $374.3 million | $488.2 million | −23% |
| Total debt | $4,128.3 million | $4,501.5 million | −8% |
| Debt to total debt plus equity | 42.0% | 47.7% | −570 bps |
Fourth-quarter sales were $2,351.2 million, operating income was $367.0 million, net income attributable to Air Products was $272.1 million, and diluted EPS was $1.25.
Working capital increased to $790 million from $494 million. The Company had a $2.0 billion multicurrency revolving credit facility, with no borrowings outstanding at year-end, and remained in compliance with its debt covenants. Approximately $468.5 million of debt was scheduled to mature within twelve months, including $182.5 million of long-term debt maturities and short-term borrowings.
Material changes versus the prior comparable period
- Sales growth reflected an 8% increase in underlying business, driven principally by volume recovery in Electronics and Performance Materials and Tonnage Gases. Volume increased 9% overall, while pricing declined 1%.
- Operating income benefited from higher volumes, lower costs, favorable currency effects and completion of restructuring actions. On a non-GAAP basis, operating income increased 25% to $1,485.0 million.
- Electronics and Performance Materials sales increased 20% and operating income increased to $251.8 million from $101.6 million, reflecting a significant recovery in semiconductor, display, photovoltaic and performance-materials demand.
- Tonnage Gases sales increased 14% and operating income increased 11%, supported by stronger steel and chemical markets, new plant start-ups and new contracts.
- Merchant Gases sales increased 3% and operating income increased 10%, primarily from higher Asian volumes, lower costs and favorable currency effects.
- Equipment and Energy sales declined 4%, but operating income increased 59% to $67.3 million. Equipment backlog rose to approximately $274 million from $239 million.
- Cash from operations increased despite working-capital use associated with higher sales, receivables, inventories and projects. Financing cash flow was negative $579.7 million, largely because of debt repayments and dividends.
- The Company increased its quarterly dividend from $0.45 to $0.49 per share, resulting in fiscal-year dividends of $1.92 per share. No share repurchases occurred during fiscal 2010.
Guidance, outlook, risks and unusual items
2011 outlook: Management expected continued gradual economic recovery, with manufacturing growth of approximately 3%–4% globally, stronger growth in Asia, and more gradual recovery in the United States and Europe. Volume growth, new plant start-ups and asset utilization were expected to drive earnings. Higher pension expense was expected to offset part of the benefit, and currency was not expected to have a significant impact at then-current rates.
- Excluding acquisitions, 2011 GAAP capital expenditures were projected at $1.4–$1.5 billion; non-GAAP capital expenditures were projected at $1.5–$1.7 billion.
- 2011 pension expense was estimated at approximately $122 million, with defined-benefit plan contributions and payments estimated at approximately $247 million.
- The 2009 global cost-reduction plan was substantially completed. It generated approximately $155 million of savings through 2010, with expected ongoing annualized savings of approximately $180 million.
- Fiscal 2010 included $96.0 million of Airgas-related acquisition costs, or $60.1 million after tax and $0.28 per diluted share. Total Airgas transaction costs were expected to be approximately $150–$200 million.
- Air Products commenced a tender offer for Airgas at $65.50 per share. The proposed transaction was valued at approximately $7.4 billion, including $5.7 billion of equity and $1.7 billion of assumed debt. A $6.7 billion bridge financing facility had been secured, but the acquisition had not closed as of the filing date.
- If completed, the Airgas transaction would materially increase leverage, interest expense, integration requirements and potential divestitures. The FTC Consent Decree required divestiture of certain liquid-bulk and on-site atmospheric-gas assets.
- Key operating risks include weak economic or industry demand, excess capacity and pricing pressure, energy and raw-material cost volatility, supply interruptions, foreign exchange, interest rates, environmental and greenhouse-gas regulation, operational incidents, litigation and pension funding requirements.
- Environmental liabilities were accrued at $87.0 million, with estimated exposure ranging from $87 million to a reasonably possible upper exposure of $101 million. Approximately 30 sites remained subject to investigation or remediation.
- Air Products Brasil faced a R$179.2 million competition-law fine from Brazilian authorities. The Company appealed, considered an adverse final judgment reasonably possible but not probable, and recorded no provision.
- The Company reported effective internal control over financial reporting, and KPMG issued an unqualified audit opinion on the financial statements and internal controls.
Important facts investors should verify
- Whether the Airgas tender offer closed, the final acquisition consideration, financing structure, required divestitures and resulting leverage.
- Actual 2011 volume growth and recovery in electronics, steel, chemicals and refining markets versus management’s outlook.
- Progress toward the stated $180 million of annualized cost savings and the sustainability of the 2010 margin improvement.
- Debt maturities, interest-rate exposure, covenant headroom and any credit-rating effects from Airgas financing.
- Actual pension contributions and expense relative to the projected $122 million expense and $247 million cash requirement.
- Resolution of the Brazilian competition proceeding and any developments in environmental remediation liabilities.
- Whether planned 2011 capital expenditures generate adequate returns and remain primarily funded by operating cash flow.