01—Abstract
Summary
Summary of the 10-K filed November 26, 2008. Cited figures are marked; the original filing is the authoritative source.
Air Products & Chemicals (APD) closed fiscal 2008 (year ended 30 September 2008) with sales up 14% to $10.4 billiona and continuing-operations diluted EPS up 9% to $4.97, driven by volume growth, higher Merchant Gases pricing, favorable currency effects and natural gas cost pass-through.
Operating income rose 9% to $1.50 billionb. However, reported net income fell to $909.7 million ($4.15 diluted EPS) from $1,035.6 million, because of a $329 million pre-tax charge (about $246 million after tax) to write down the U.S. Healthcare business, which was moved to discontinued operations and put up for sale, along with a net loss on discontinued operations of $180.8 million. The company also completed a series of portfolio exits, including Polymer Emulsions (sold to Wacker and Ashland) and High Purity Process Chemicals.
Balance sheet and cash flow picture: operating cash flow was $1.68 billionc, but capital spending ($1.16 billion GAAP, $1.36 billion non-GAAP including capital leases) and $793 million of share repurchases were funded partly with debt. Total debt rose to $3.97 billion, and debt-to-capital reached 43.4% from 39.8%. Ratings remained A/A2 with commercial paper access intact.
Management guided 2009 capital expenditures up $200d-400 million and flagged a challenging economic downturn, with plans to cut discretionary spending and improve operating margin. The dividend was raised 16% to $0.44 quarterly, marking the 26th consecutive annual increase.
Key risks for investors include the economic slowdown, energy and raw material cost exposure, currency and interest rate exposure (about $3.97 billion of debt, of which roughly 51% is variable-rate), an open Brazilian antitrust referral that could bring significant fines, and a Pasadena, Texas RCRA referral. Environmental accruals stand at $82.9 million against a reasonably possible upper exposure of $95 million.
02—Key points
Key Highlights
- Sales rose 14% to $10,414.5 million, with volume, pricing, currency (+4%) and natural gas pass-through (+5%) all contributing; Merchant Gases sales grew 18% to $4,192.7 million.
- Operating income increased 9% to $1,495.8 million; continuing diluted EPS rose 9% to $4.97, while reported diluted EPS fell to $4.15 from $4.64.
- A $329.2 million pre-tax ($246.2 million after-tax, $1.12/share) charge to write down U.S. Healthcare, which is now a discontinued operation being prepared for sale, drove the reported net income decline.
- Portfolio reshaping: sold Polymer Emulsions to Wacker and Ashland (a $120 million pre-tax gain combined, including the $89.5 million VAE gain and $30.5 million Elkton/Piedmont gain) and divested the HPPC business; closed the BOC Gazy (Poland) acquisition in 2007.
- Operating cash flow of $1,679.6 million funded $1,159.3 million of GAAP capex and $793.4 million of share repurchases; total debt rose to $3,966.8 million and debt-to-capital rose to 43.4% from 39.8%.
- Dividend increased 16% to $0.44 per quarter ($1.70 for the year), the 26th consecutive annual increase; $649.2 million of repurchase authorization remains.
- Outlook: 2009 capex (ex-acquisitions) expected to rise by $200-400 million, backlog of $399 million in Equipment with about $289 million to be completed in 2009, and management cites an economic downturn as the key 2009 challenge.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Air Products & Chemicals, Inc. kept $0.09.
- Revenue$10.41B100.0%
- Cost of revenue−$7.69B73.9%
- Gross profit$2.72B26.1%
- Operating costs−$1.23B11.8%
- Operating income$1.50B14.4%
- Interest, other & tax−$586.1M5.6%
- Net income$909.7M8.7%
Where FY2008 revenue went
$10.41B- Cost of revenue: $7.69B, 74% of revenue
- Net income: $909.7M, 8.7% of revenue
- R&D: $130.7M, 1.3% of revenue
- SG&A: $1.09B, 10% of revenue
- Interest, other & tax: $586.1M, 5.6% of revenue
Kept 8.7% as net incomeNet income $909.7M · 8.7%R&D $130.7M · 1.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed November 26, 2008Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $10.41B$9.15B | +13.8% |
| Cost of Revenue | $7.69B$6.70B | +14.8% |
| Gross Profit | $2.72B$2.45B | +11.1% |
| R&D Expenses | $130.70M$129.00M | +1.3% |
| SG&A Expenses | $1.09B$999.80M | +9.1% |
| Operating Income | $1.50B$1.38B | +8.7% |
| Interest Expense | $162.00M$162.40M | −0.2% |
| Net Income | $909.70M$1.04B | −12.2% |
| EPS (Basic) | $4.29$4.79 | −10.4% |
| EPS (Diluted) | $4.15$4.64 | −10.6% |
| Shares Outstanding (Basic) | 212.20M216.20M | −1.9% |
| Shares Outstanding (Diluted) | 219.20M223.20M | −1.8% |
05—Questions
Frequently Asked Questions
Why did reported net income fall in fiscal 2008 even though sales and operating income grew?
Net income fell to $909.7 million from $1,035.6 million mainly because of losses from discontinued operations ($180.8 million net loss). The largest item was a $329.2 million pre-tax write-down of the U.S. Healthcare business, which was reclassified as discontinued after management decided to pursue its sale in July 2008. Continuing operations performed well, with income from continuing operations up about 7% to $1,090.5 million.
How much debt does Air Products carry, and is its leverage rising?
Total debt was $3,966.8 million at 30 September 2008, up from $3,667.8 million a year earlier, and debt-to-capital rose to 43.4% from 39.8%. About $451 million matures within twelve months, and roughly 51% of the debt portfolio is variable-rate, so rising interest rates would increase interest expense (a 100 basis point rise adds about $20 million per year). Management says its A/A2 credit ratings and commercial paper access remain intact, and it projects limited need for long-term debt markets in 2009.
What are the main risks to earnings going forward?
Key risks include weaker economic demand across industries served, energy and natural gas cost volatility (pass-through contracts can lag and reduce volumes), currency exposure since most sales are outside the U.S., and the outcome of a Brazilian antitrust investigation that could result in a material fine. Environmental accruals total $82.9 million, with a reasonably possible upper exposure of $95 million, and the company also faces additional potential charges from the U.S. Healthcare sale.
How is the company returning cash to shareholders?
In fiscal 2008, Air Products repurchased 8.7 million shares for $787.4 million and paid $349.3 million in dividends. The $1.5 billion program from 2006 was completed, and $649.2 million remains under the $1 billion authorization approved in September 2007, which has no expiration date. The quarterly dividend was raised 16% to $0.44 in March 2008.
What is the outlook for capital spending and 2009 performance?
Capital expenditures excluding acquisitions are expected to rise by $200 to $400 million in 2009, supported by a strong project workload that will be funded mainly from operating cash flow. Management plans to focus on operating margin improvement through volume growth, pricing actions, cost control and energy efficiency, while cutting discretionary spending in response to the economic downturn. The Equipment and Energy backlog of $399 million (about $289 million expected to be completed in 2009) provides some visibility.
06—Continue