Air Products & Chemicals, Inc. annual report, FY2009

Air Products & Chemicals, Inc. — Fiscal 2009 Form 10-K Summary

Reporting period: Fiscal year ended 30 September 2009. The filing is an annual Form 10-K, not a standalone fourth-quarter filing; fourth-quarter results are included in the unaudited quarterly information. Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy, serving customers in more than 40 countries.

Key Financial Metrics

Metric	2009	2008	Change
Sales	$8,256.2 million	$10,414.5 million	Down 21%
Operating income	$846.3 million	$1,495.8 million	Down 43%
Operating margin	10.3%	14.4%	Down 410 basis points
Income from continuing operations	$639.9 million	$1,090.5 million	Down 41%
Diluted EPS from continuing operations	$3.00	$4.97	Down $1.97
Net income	$631.3 million	$909.7 million	Down 31%
Cash from operating activities	$1,322.9 million	$1,679.6 million	Down 21%
GAAP capital expenditures	$1,236.3 million	$1,159.3 million	Up 7%
Total debt	$4,501.5 million	$3,966.8 million	Up 13%
Cash and cash items	$488.2 million	$103.5 million	Up $384.7 million

Free cash flow after GAAP capital expenditures was approximately $86.6 million. On the Company’s non-GAAP capital expenditure measure, including capital-lease spending, capital expenditures were $1,474.9 million.

Merchant Gases sales were $3,610.6 million and operating income was $661.2 million; sales declined 14% and operating income declined 16%.
Tonnage Gases sales were $2,573.6 million and operating income was $399.6 million; sales declined 28%, primarily because lower energy and raw-material pass-through reduced reported revenue by 19%.
Electronics and Performance Materials sales were $1,582.2 million and operating income was $101.6 million; sales declined 28% and operating income declined 59%, reflecting a 25% volume decline and severe semiconductor-market weakness.
Equipment and Energy sales were $489.8 million and operating income was $42.2 million; sales increased 12%, but year-end equipment backlog declined to approximately $239 million from $399 million.
Dividends declared increased to $1.79 per share from $1.70. No common shares were repurchased in 2009; $649.2 million remained under the repurchase authorization at year-end.

Material Changes Versus the Prior Comparable Period

The global recession caused unprecedented demand declines. Management reported a 9% volume decline, a 6% unfavorable currency effect, and a 7% reduction from lower energy and raw-material cost pass-through.
A global cost reduction plan generated a $298.2 million pretax charge, or $200.3 million after tax and $0.94 per diluted share. The plan included approximately 2,550 position eliminations, business exits, facility closures, and asset actions.
Approximately $50 million of cost savings were realized in 2009; management expected approximately $155 million of savings in 2010 and approximately $180 million of annualized savings beyond 2010.
A $32.1 million pretax charge, including a $22.2 million customer-bankruptcy receivable write-off and $9.9 million of asset-action charges, reduced operating income.
The U.S. Healthcare business was fully divested during 2009. Discontinued operations produced an $8.6 million after-tax loss, compared with a $180.8 million loss in 2008, which included substantial impairment charges.
Operating results improved sequentially during the year: fourth-quarter sales were $2,129.3 million and operating income was $328.0 million, compared with first-quarter sales of $2,195.3 million and operating income of $114.1 million. The fourth quarter did not include a global cost-reduction charge.
Debt-to-capital increased to 47.7% from 43.4%. Current maturities of long-term debt were $452.1 million, and approximately $785.9 million of total debt was scheduled to mature within twelve months.

Liquidity, Debt, Pension, and Contingencies

Management stated that liquidity remained solid. The Company retained A/A2 long-term and A-1/P-1 short-term ratings and access to commercial-paper markets.
The multicurrency revolving credit facility totaled $1.45 billion and had no borrowings outstanding at year-end. Foreign subsidiaries had additional commitments of $396.6 million, of which $294.8 million was borrowed.
Long-term debt maturities were $452.1 million in 2010, $195.4 million in 2011, $455.5 million in 2012, $311.3 million in 2013, and $470.0 million in 2014.
Pension plan assets were $2,251.0 million against a projected benefit obligation of $3,386.0 million. Management expected approximately $360 million of pension contributions and benefit payments in 2010, including $200 million contributed in October 2009.
Environmental liabilities were accrued at $95.0 million, with reasonably possible exposure estimated at up to $109 million. Approximately 28 environmental sites remained unresolved with regulators or other potentially responsible parties.
The Company disclosed unresolved Brazilian antitrust proceedings and other routine litigation. Management did not expect currently pending matters to materially affect consolidated financial position or cash flows, but acknowledged that future fines or adverse rulings could materially affect net income in a particular period.
Contractual obligations totaled approximately $8.091 billion, including $4.159 billion of debt maturities, $1.144 billion of pension obligations, and $1.785 billion of unconditional purchase obligations.

Guidance, Outlook, and Management Commentary

Management projected a gradual and modest economic recovery in fiscal 2010, with global manufacturing growth of 1% to 2%; projected growth was 1% in the United States, flat in Europe, and 6% to 7% in Asia led by China.
Management expected improved capacity utilization, benefits from new plant startups, pricing actions, productivity initiatives, and the full-year effect of the cost-reduction plan.
Merchant Gases and Tonnage Gases were expected to improve with manufacturing, chemical, steel, and refining recovery. Electronics was expected to benefit from 10% to 15% silicon growth, stronger flat-panel demand, and photovoltaic expansion, although restructuring costs and pricing pressure were expected to continue.
Equipment and Energy results were expected to be comparable to 2009, with two to three LNG orders expected in fiscal 2010.
Fiscal 2010 capital expenditures were projected at $1.0 billion to $1.2 billion on a GAAP basis and $1.3 billion to $1.5 billion on the Company’s non-GAAP basis, primarily for new Tonnage Gases plants.
Management expected 2010 interest expense to be modestly higher, pension expense of approximately $125 million, and an effective tax rate of approximately 25.5% to 26.0%.

Principal Risks and Unusual Items

Demand remains exposed to global economic conditions, manufacturing utilization, semiconductor cycles, customer bankruptcies, contract cancellations, and project delays.
Energy and raw-material costs, particularly electricity and natural gas, are significant cost drivers. Pass-through mechanisms may not fully or immediately offset cost increases and may reduce volumes if prices rise.
Foreign-currency movements materially affected 2009 results and remain a risk because of the Company’s substantial international operations.
Higher debt levels, variable-rate borrowings, refinancing requirements, and potential credit-rating changes could increase interest expense and reduce financial flexibility.
Pension expense and required funding are sensitive to discount rates, asset returns, and other actuarial assumptions. The Company reported $739.2 million of actuarial losses in 2009.
Environmental, greenhouse-gas, regulatory, antitrust, litigation, operational, cybersecurity, and catastrophic-event risks could increase costs or disrupt operations.
Goodwill impairment testing in the fourth quarter of 2009 identified no impairment, but asset impairment remains a risk if demand, customer contracts, or cash-flow expectations deteriorate.

Important Facts for Investors to Verify

Whether the expected $155 million of fiscal 2010 cost savings and approximately $180 million of annualized savings were achieved.
Whether industrial, refining, steel, chemical, semiconductor, flat-panel, and photovoltaic demand recovered as projected.
The timing and funding of the $452.1 million of 2010 debt maturities and approximately $360 million of pension funding and benefit payments.
Changes in equipment backlog, particularly the $239 million backlog at 30 September 2009 and expected 2010 LNG orders.
Actual fiscal 2010 capital spending relative to the $1.0 billion to $1.2 billion GAAP outlook.
Developments in the Brazilian antitrust matter, environmental sites, greenhouse-gas regulation, and other litigation or regulatory contingencies.
The effect of currency, interest-rate, and pension assumption changes on earnings, cash flow, and shareholders’ equity.
Execution of the completed U.S. Healthcare divestiture and any remaining environmental or other obligations associated with disposed businesses.