01—Abstract
Summary
Summary of the 10-K filed December 13, 2002. Cited figures are marked; the original filing is the authoritative source.
Air Products & Chemicals (APD) closed fiscal 2002 (ended 30 September 2002) with sales of $5,401.2 milliona, down 8% from $5,857.8 million, but net income rose 13% to $525.4 million, or $2.36 diluted EPS, versus $2.12 in 2001.
Excluding special items, the picture is more mixed: operating income fell 6% to $805.7 millionb, and net income excluding special items declined slightly to $518.6 million from $519.3 million. Weakness in the electronics market and North American steel drove a 12% decline in Gases operating income, while Chemicals operating income rose 26% on productivity gains and higher Performance Materials volumes. Equipment sales grew 10%, supported by LNG heat exchangers and helium containers, though its backlog fell to $114 million from $227 million.
Balance sheet and cash flow improved meaningfully. Total debt fell to about $2.4 billionc, and debt-to-capital dropped to 40.8% from 44.4%. Operating cash flow was $1,063.9 million, which funded $805.6 million in capital spending and $175.6 million in dividends.
Return on average shareholders' equity was 15.9%. Management guided to a 0-4% U.S. manufacturing growth outlook for 2003, with higher pension expense ($72 milliond, up from $55.7 million), a modest rise in interest expense, and a higher effective tax rate of about 31%. Capital expenditures are planned at $600-700 million.
The company also completed the October 2002 acquisition of American Homecare Supply and expanded its Taiwan position through a controlling stake in San Fu. Investors should weigh the strong cost-reduction results and deleveraging against soft volumes in electronics and steel, rising pension costs, and continuing exposure to natural gas and energy cost swings. The company also disclosed a supplier in Chapter 11 that supplies sulfuric acid for its DNT operation, a $256 million residual value guarantee on leased cryogenic vessel equipment, and a change of auditors from Arthur Andersen to KPMG.
02—Key points
Key Highlights
- Net income rose 13% to $525.4 million ($2.36 diluted EPS) on a reported basis, aided by a $55.7 million gain on the sale of the U.S. packaged gas business; excluding special items, net income was flat at $518.6 million.
- Sales fell 8% to $5.4 billion, with the Gases segment down 10% on weak electronics demand and lower North American liquid bulk volumes.
- Chemicals operating income rose 26% to $172.5 million, driven mainly by productivity gains and cost discipline, with operating margin improving to 12.2%.
- Total debt was reduced to $2.4 billion, and the debt-to-total-capital ratio improved to 40.8% from 44.4%; the company had no commercial paper outstanding at year-end.
- Cost reduction plans are expected to deliver $110 million in annual benefits starting in 2003, following $87 million achieved in 2002.
- 2003 outlook calls for higher pension expense ($72 million), a 31% effective tax rate, capital spending of $600-700 million, and higher ERP-related costs.
- Equipment backlog fell sharply to $114 million from $227 million, though management expects $106 million to be completed in 2003.
03—Questions
Frequently Asked Questions
How did Air Products perform in fiscal 2002, and what drove the earnings increase?
Reported net income rose to $525.4 million ($2.36 diluted EPS) from $465.6 million ($2.12) in 2001. The increase was helped by a $55.7 million gain on the U.S. packaged gas sale and by lower interest expense, which fell $68.9 million on reduced debt and lower rates. Excluding special items, net income was essentially flat at $518.6 million, so the underlying operating results were weaker than the headline numbers suggest.
What are the main risks to the company's outlook for 2003?
Key risks include soft electronics demand (especially semiconductors), a 0-4% U.S. manufacturing growth outlook, rising pension costs from lower discount rates and expected returns, higher ERP implementation costs, and margin pressure in methylamines and performance polymers from raw material and energy cost increases. Natural gas price spikes and the company's ability to pass energy costs to customers are also highlighted. The filing additionally notes a supplier in Chapter 11 that could materially affect the Chemicals segment if its reorganization fails.
How strong is the company's balance sheet and cash generation?
The balance sheet strengthened during 2002. Operating cash flow was $1,063.9 million, which covered $805.6 million in capital spending and $175.6 million in dividends. Total debt fell to about $2.4 billion, and the company held $600 million in committed credit lines maturing in January 2005. The company is rated A/A2 for long-term debt and A-1/P-1 for commercial paper, with Moody's having upgraded its ratings during 2002.
What are the key acquisitions and portfolio changes, and how do they affect future growth?
The company sold most of its U.S. packaged gas business to Airgas in February 2002 for about $254.5 million in proceeds. It raised its stake in San Fu (Taiwan) from 48% to 70%, consolidating it in Q4 2002, and acquired American Homecare Supply in October 2002 for about $165 million to expand its U.S. healthcare business. Management expects continued growth in healthcare through smaller acquisitions, and the portfolio changes are intended to strengthen positions in Asia and electronics.
Are there any notable contingent liabilities or legal exposures?
Yes. The company guaranteed the residual value of leased U.S. cryogenic vessel equipment up to $256 million, due in 2006. It also has equity support obligations on cogeneration projects and a Trinidad air separation facility, plus guarantees of foreign affiliate borrowings of about $37 million. Environmental exposure is estimated at $9-20 million with a $15.3 million accrual, and the company faces New Jersey air emission penalties tied to its Paulsboro facility. Management does not expect these matters to have a materially adverse effect on financial position or results.
04—Continue