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The goals we set for ourselves in fiscal 2004 were clear.
First . . .
Make Air Products more attractive to shareholders by driving earnings growth and
improving our return on capital.
Second . . .
Build even more value into our relationships with our customers and our communities.
And third . . .
Strengthen our leading positions serving growth markets and geographies and
continue to improve our portfolio.
Coming off a rough couple of years marked by a difficult manufacturing environment,
our people were more determined than ever to deliver on these commitments.
No explanations. No excuses. Just passionate about performance.
Our Results
We posted fiscal 2004 earnings per share of $2.64, up 19 percent excluding last year's global cost reduction charge.* We had record sales of $7.4 billion, an increase of 32 percent from 2000. At that time, when we rolled out our Deliver the Difference strategy, we said it was all about growth. And this year, our hard work paid off. Top-line revenue growth was a robust 18 percent, with about half coming from strong volume gains across our Gases, Chemicals and Equipment segments, but particularly in our growth businesses. Acquisitions in these growth businesses and currency effects each contributed four percent to this result. And operating income increased 18 percent*, in line with our sales growth.
- Worldwide Gases sales of $5.2 billion were up 18 percent, driven primarily by higher volumes in Electronics, Energy and Process Industries, and Asia, along with acquisitions in Electronics and Healthcare. Record Gases operating income of $801million was up 20 percent* on strong volumes across our growth and base businesses, favorable currency effects and acquisitions.
- Chemicals revenues of $1.8 billion increased 15 percent, mainly on strong volumes across the businesses. Operating income of $116 million was down* versus the prior year as strong volumes were offset by approximately $36 million in higher raw material costs, mainly for isopropyl alcohol, ammonia, methanol and vinyl acetate monomer used in our emulsions and amines manufacturing. While our epoxy, polyurethane chemicals and surfactants businesses remained above our cost of capital, our goal for 2005 is to get our total Chemicals group above our cost of capital. Our people are committed to bringing significant margin improvements through pricing actions and managing our raw material costs. Our long-term off-shore supply agreement for methanol, which we expect to begin in early 2005, will be a very significant step.
- In our Equipment segment, we posted 35 percent revenue growth over the prior year on higher air separation plant sales. We also received orders for five main cryogenic liquefied natural gas (LNG) heat exchangers this year, and the quality of our backlog continued to improve.
Cash flow from operations hit $1.1 billion. Our debt-to-debt plus equity ratio ended the year at 37 percent**, placing us solidly within the "A" credit rating range. Capital spending including acquisitions came in at $816 million, with plant and equipment spending at $705 million, once again reflecting our disciplined approach to resourcing our businesses. We also significantly increased our dividend by 26 percent, demonstrating our confidence in the future and marking our 22nd consecutive year of increases. Importantly, we turned the corner on improving our return on capital, increasing it to 9.5 percent. Improving it remains our highest priority.
We know we still have a lot of work to do. Our markets are improving. We have unparalleled positions of strength in our growth businesses, which positions us well in a recovering economy. And we're constantly making improvements to our base businesses in Gases and Chemicals. We've also made strategic investments in production facilities and productivity tools to help us deliver to the bottom line. With SAP and integrated supply chain teams in place in each of our businesses, we've committed to significantly step up our productivity over the next three years.
A Step-change in Productivity
With all of that good work as our foundation, we are well positioned to drive a step-change in productivity to the bottom line. We won't do it in one year. We won't do it with one tactic. And we won't have to sacrifice growth to achieve our operating return on net assets targets in fiscal 2005, and ultimately, 13 percent in fiscal 2007.
Our single-instance SAP system is now enabling 70 percent of the business we transact in nine countries on three continents. That gives us a distinct advantage to drive significant supply chain improvements. We now have better information about our customers, products, purchases and costs. And this can lead to better material sourcing, reduced inventories, more efficient plants and more cost-effective distribution and logistics.
In addition, continuous improvement is becoming a way of life at Air Products. By the end of 2005, our goal is to have about two percent of our employees devoted full-time to lead these activities. We are using Six Sigma/Lean tools and already have more than 500 productivity initiatives under way. This is only the beginning. As we train and engage increasing numbers of our employees in these activities, we will deliver even more.
Also, as the economy continues to recover, we are well positioned to take our capacity utilization levels significantly higher. This is especially true in chemicals, electronic specialty materials and merchant gases. There is about $300 million of opportunity from capacity that's already in the ground. As we load it, we will continue to drive operating leverage benefits directly to the bottom line.
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Building Lasting Relationships through Understanding
When we set out our Deliver the Difference strategy four years ago, we said we wanted to become the best company to buy from. Based on our customers' feedback, we worked hard this year to increase the value of the products and services we provide. We are constantly using our global survey capabilities to collect data and measure the strength of our customer relationships so that we can better understand what is most important to them. In our liquid bulk business, for example, we've been able to segment our customers and develop targeted offerings based on the services they need and value.
We know this approach works. The proof is in a long list of awards and recognitions we received this year across our businesses. Again, our focus on performance is what makes the difference to our customers. |
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Customer Awards and Recognitions
- Samsung Electronics Co. Ltd.'s 2004 Excellent Supplier award
- Intel Corporation's Preferred Quality Supplier (PQS) award
- Taiwan Semiconductor Manufacturing Company's (TSMC) Electronic Gas
Supplier of the Year award
- Siemens Medical Systems' Best Practices—Logistics award for ºKeepCOLD© MRI services
- The Queen's Awards for Enterprise: Innovation 2004 for BIP© cylinder technology
- Home Medical Equipment (HME) Excellence award for respiratory therapy
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Our passion for safety, protecting the environment and being a good neighbor in our communities also continued to set us apart. This year, we further improved our safety and environmental performance, particularly in Europe and Asia. We were again named to the Dow Jones Sustainability Index as a leader within our sector, and we were included in the FTSE4Good Index. We completed a comprehensive assessment of our EH&S Management System against the new Responsible Care© Management System and are making further improvements. And in the area of greenhouse gas emissions, the Carbon Disclosure Project's report ranked us among the top 10 percent of FT500 companies. With our expertise in developing technologies that produce cleaner energy and improve energy efficiency, we will continue to help our customers address climate change concerns.
Keeping Our Promises on Growth
We said we would strengthen and resource our growth businesses this year, and we did. Today, we're putting 75 percent of our research and capital dollars into electronics, performance materials, refinery hydrogen and energy solutions, healthcare, and Asia. About five years ago, they represented 30 percent of a $5.2 billion company. Today, these businesses represent 50 percent of a $7.4 billion company. You can read more about our future opportunities in the "our commitment" section of this report.
Of course, Asia is already playing a major role in our growth and will continue to do so. Today we have a $1.1 billion business there. By combining our technology and global capabilities with strong local relationships, we've become the number 2 gases company in the region outside of Japan. And we are number 1 in growing countries like Korea and Taiwan. We also continue to see healthy demand in China, and we are making smart investments to build our position there. New business signings remain strong, and we are expanding our capacity strategically in the north and the south to meet the demand.
Meanwhile, our base businesses are still very important to Air Products. They generate strong cash flows and support our growth businesses in important ways. This year, we saw return improvements in our North American and European merchant gas businesses where our focus on strengthening our customer base, improving our assets and continuously reducing costs is paying off. Although rising feedstock costs hampered our emulsions and intermediate chemicals performance, we continued to manage our portfolio by restructuring underperforming businesses and selling operations where we could not be a market leader. For example, we divested our emulsions joint venture in Mexico during the fourth quarter, and we have obtained approval to close the sale of our European methylamines and derivatives business.
We Know We Have to Earn It
The bottom line is that we must continue to earn the right to invest and grow. Together, our employees know this is our company. But we also know it's our shareholders' money.
As I watched the summer Olympics this year, it was clear that the athletes had gone through four years of strenuous preparation—training, practicing, dieting, and the aches and pains that come with it. But when it came time to compete, all the training and sacrifice in the world didn't get them the gold unless they really wanted the gold. It was a desire . . . a passion that drove them forward.
Similarly, all of the groundwork we have laid since 2000—restructuring our portfolio, resourcing our growth businesses and focusing on work process improvement—paid off in fiscal 2004. Those four years presented great challenges for Air Products, but our focus and desire to win came through. And this will continue into fiscal 2005 and beyond . . . there's still much important work left to do. Our strategies will help drive top-line growth and return on capital. And it will be our passion that delivers that difference.
John P. Jones III
Chairman, President and Chief Executive Officer
* Fiscal 2003 results on a GAAP basis included a charge of $153 million (Gases—$92 million, Chemicals—$58 million, and Equipment—$3 million), or $.43 per share, related to a global cost reduction plan. This charge is excluded from all references to 2003 and any comparisons made to the prior year in order to provide shareholders with a representation of the company's underlying performance. On a GAAP basis, diluted EPS and consolidated operating income in 2004 were up 48% from 2003. Gases operating income in 2004 increased 39% while Chemicals operating income improved 73% on a GAAP basis.
** Debt included $298 million for the synthetic tank lease for the debt-to-debt plus equity ratio of 37%. On a GAAP basis, the synthetic operating lease is considered an operating lease. The debt-to-debt plus equity ratio was 34% at the end of 2004 on a GAAP basis.
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