What drove the large increase in Air Products' earnings in fiscal 2004?

Earnings rebounded mainly because of higher volumes across Gases and Chemicals as the global economy and manufacturing improved, which contributed $222 million to operating income. Favorable currency effects (+$49 million) and acquisitions (+$25 million) also helped. The comparison is also flattered by 2003, which included a $152.5 million restructuring charge that reduced that year's EPS by $0.43.

Why is the Chemicals segment a concern for investors?

Raw material costs, especially vinyl acetate monomer and methanol-linked inputs, rose faster than the company could pass them through to customers. Management said Chemicals has not reached acceptable profit levels. Operating income was $116 million on $1.83 billion in sales. Management's 2005 goal is for segment returns to exceed the cost of capital, relying on price increases, a long-term methanol supply contract expected to begin in early 2005, and the planned sale of the European methylamines business.

How much of the business is exposed to energy and raw material price swings?

Electricity is the largest cost input for producing atmospheric gases, and the company's on-site and pipeline contracts generally pass energy costs through to customers. Liquid bulk and some Chemicals products carry more exposure, as costs are not always recoverable. In Chemicals, raw material costs not contractually passed through reduced operating income by $31 million in 2004. The company also has a $55.3 million loan exposure to a sulfuric acid supplier used in DNT production, which it says would materially affect the Chemicals segment if that supplier failed.

What is the company's financial position and capital spending plan?

At year-end, total debt was $2.4 billion, shareholders' equity was $4.44 billion, and there were no commercial paper borrowings. Cash from operations was $1.09 billion, covering $705.5 million in plant additions and $84.6 million in acquisitions. Capital expenditures for 2005 are expected at $850-900 million, funded by operating cash flow, with a further $75-100 million planned for U.S. homecare acquisitions. The company is rated A/A2 by S&P and Moody's.

What are the key forward-looking risks and cost items for 2005?

Management cites raw material and energy price volatility and slower economic growth as the main risks to its 2005 EPS growth outlook. Productivity implementation costs are expected at $0.10-0.15 per share. Pension expense is projected to fall to $112 million from $130.1 million, though the company's 2004 year-end underfunded pension obligation remained significant at roughly $879 million on a funded-status basis. Environmental spending is estimated at $32 million after tax in 2005, and the company does not expect environmental or legal matters to be materially adverse.

APD 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 13, 2004. Cited figures are marked; the original filing is the authoritative source.

Air Products & Chemicals (APD) closed fiscal 2004 (year ended 30 September 2004) with a strong operating recovery.

Sales rose 18% to $7.41 billion^a, driven by volume growth of 9% in the underlying business, acquisitions (5%), and favorable currency (4%). Operating income more than doubled from a depressed 2003 base that carried a $152.5 million global cost reduction charge, reaching $879.6 million. Net income climbed to $604.1 million, or $2.64 diluted EPS, versus $1.78 a year earlier, which had been burdened by $0.43 per share of restructuring costs.

Gases, the core segment at about 70% of sales, delivered the bulk of the improvement, with segment operating income up roughly 39% to $800.5 million^b. The Chemicals segment remained the weak spot. Higher raw material costs that were not contractually passed through to customers compressed margins, and management acknowledged the segment had not yet reached acceptable profit levels.

Management's stated 2005 goal is for Chemicals returns to exceed its cost of capital, supported by price increases, a long-term methanol supply arrangement expected to start in early 2005, and a planned sale of the European methylamines business. Management also flagged a $55.3 million^c loan exposure to a sulfuric acid supplier that is critical to DNT production. Looking ahead, management guided to further EPS growth in 2005, with capital expenditures of $850-900 million, a 2005 pension expense estimate of $112 million (down from $130.1 million), and a $0.10-0.15 per share cost for productivity initiatives.

Balance sheet metrics improved: total debt fell to $2.4 billion^d, the debt-to-capitalization ratio dropped to 34.2% from 38.7%, and shareholders' equity rose to $4.44 billion. The quarterly dividend was increased 26% to $0.29 in May 2004.

02—Key points

Key Highlights

Sales grew 18% to $7,411.4 million, with underlying volume up 9%, acquisitions adding 5%, and favorable currency adding 4%.
Operating income rose to $879.6 million from $594.5 million, which included a $152.5 million global cost reduction charge in 2003.
Diluted EPS was $2.64, up from $1.78 in 2003, with volume growth contributing $0.70 per share of the $0.86 increase.
Gases segment sales rose 18% to $5.2 billion and operating income rose 39% to $800.5 million, making it the primary earnings driver.
Chemicals segment operating income improved to $116.0 million but remained under pressure from unrecovered raw material costs, and management has not yet reached acceptable profit levels.
Total debt declined to $2.4 billion and the debt-to-capitalization ratio improved to 34.2% from 38.7%; cash from operations was $1,085.9 million.
Dividends rose 26% to $0.29 per quarter, and 2005 capital expenditures are guided to $850-900 million with 2005 EPS growth expected.

03—Questions

Frequently Asked Questions

What drove the large increase in Air Products' earnings in fiscal 2004?
Earnings rebounded mainly because of higher volumes across Gases and Chemicals as the global economy and manufacturing improved, which contributed $222 million to operating income. Favorable currency effects (+$49 million) and acquisitions (+$25 million) also helped. The comparison is also flattered by 2003, which included a $152.5 million restructuring charge that reduced that year's EPS by $0.43.
Why is the Chemicals segment a concern for investors?
Raw material costs, especially vinyl acetate monomer and methanol-linked inputs, rose faster than the company could pass them through to customers. Management said Chemicals has not reached acceptable profit levels. Operating income was $116 million on $1.83 billion in sales. Management's 2005 goal is for segment returns to exceed the cost of capital, relying on price increases, a long-term methanol supply contract expected to begin in early 2005, and the planned sale of the European methylamines business.
How much of the business is exposed to energy and raw material price swings?
Electricity is the largest cost input for producing atmospheric gases, and the company's on-site and pipeline contracts generally pass energy costs through to customers. Liquid bulk and some Chemicals products carry more exposure, as costs are not always recoverable. In Chemicals, raw material costs not contractually passed through reduced operating income by $31 million in 2004. The company also has a $55.3 million loan exposure to a sulfuric acid supplier used in DNT production, which it says would materially affect the Chemicals segment if that supplier failed.
What is the company's financial position and capital spending plan?
At year-end, total debt was $2.4 billion, shareholders' equity was $4.44 billion, and there were no commercial paper borrowings. Cash from operations was $1.09 billion, covering $705.5 million in plant additions and $84.6 million in acquisitions. Capital expenditures for 2005 are expected at $850-900 million, funded by operating cash flow, with a further $75-100 million planned for U.S. homecare acquisitions. The company is rated A/A2 by S&P and Moody's.
What are the key forward-looking risks and cost items for 2005?
Management cites raw material and energy price volatility and slower economic growth as the main risks to its 2005 EPS growth outlook. Productivity implementation costs are expected at $0.10-0.15 per share. Pension expense is projected to fall to $112 million from $130.1 million, though the company's 2004 year-end underfunded pension obligation remained significant at roughly $879 million on a funded-status basis. Environmental spending is estimated at $32 million after tax in 2005, and the company does not expect environmental or legal matters to be materially adverse.

04—Continue

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