Air Products & Chemicals, Inc. quarterly report, Q1 FY2015

Air Products & Chemicals, Inc. — Q1 FY2015 Form 10-Q Summary

Business context and reporting period

Air Products and Chemicals supplies industrial and process gases, related equipment, specialty gases and chemicals, and energy-from-waste projects. The filing covers the three months ended 31 December 2014, the first quarter of fiscal 2015, and was filed on 30 January 2015. Effective 1 October 2014, the company reorganized its reporting segments into Industrial Gases—Americas, EMEA, Asia and Global; Materials Technologies; Energy-from-Waste; and Corporate and other.

Key financial metrics

Metric	Q1 FY2015	Q1 FY2014	Change
Sales	$2,560.8 million	$2,545.5 million	+1%
Operating income	$430.0 million	$385.6 million	+12%
Operating margin	16.8%	15.1%	+170 bp
Net income attributable to Air Products	$324.6 million	$290.2 million	+12%
Diluted EPS	$1.50	$1.35	+$0.15
Cash flow from operating activities	$486.6 million	$546.2 million	-$59.6 million
Capital expenditures on a GAAP basis	$469.1 million	$391.1 million	+$78.0 million

Adjusted, non-GAAP operating income was $444.5 million, with a 17.4% margin. Adjusted EBITDA was $723.1 million, up 10%, with a 28.2% margin. These measures exclude the $32.4 million restructuring charge and the $17.9 million gain on a previously held equity interest.

Income from continuing operations before taxes was $444.0 million, and the effective tax rate was 24.0%. Equity affiliates contributed $43.1 million, up from $38.2 million. Interest expense declined to $29.1 million from $33.3 million.

Balance sheet, debt and liquidity

Cash and cash items were $238.8 million at 31 December 2014, down from $336.6 million at 30 September 2014. Foreign cash represented $229.4 million of the balance.
Total debt was $6,089.0 million, down from $6,118.5 million; debt represented 43.9% of total debt and capitalization.
Short-term borrowings were $1,283.5 million, current long-term debt was $54.2 million, and long-term debt was $4,751.3 million.
The company had a $2,595.0 million revolving credit facility maturing 30 April 2018, with no borrowings outstanding under that facility at quarter-end. Management stated that commercial paper access and operating and financing cash flows were expected to meet foreseeable liquidity needs.
A €300 million, 3.875% Eurobond, equivalent to $363.1 million, maturing in March 2015 was classified as long-term debt because refinancing capacity was available. Management intended to refinance it through public or private debt markets.

Material changes versus the prior comparable period

Underlying sales increased 4%, reflecting 3% volume growth and 1% pricing, but a 3% unfavorable currency impact reduced reported growth to 1%. The exit from the polyurethane intermediates business reduced sales by approximately 1%.
Operating performance improved through higher volumes, lower operating costs and favorable pricing net of energy and distribution costs, partly offset by $14 million of unfavorable currency effects.
Industrial Gases—Americas sales increased 6% and operating income increased 14%; Industrial Gases—Asia sales increased 1% and operating income increased 9%; Materials Technologies sales increased 9% and operating income increased 63%.
Industrial Gases—EMEA sales declined 9%, primarily because of currency and lower energy cost pass-through; operating income declined 5%. Industrial Gases—Global sales declined 12% and its operating loss widened to $17.9 million because of lower project activity.
Selling and administrative expense declined $22.7 million to $258.2 million, and as a percentage of sales decreased to 10.1% from 11.0%, primarily due to cost reductions and favorable currency effects.
Operating cash flow declined despite higher earnings, primarily because of higher pension contributions of $76.4 million versus $31.4 million in the prior year and other operating adjustments.
Capital spending increased materially, including $446.5 million of plant and equipment additions and a $22.6 million acquisition that increased ownership of a North American liquefied industrial gases joint venture from 50% to 100%.
The company declared cash dividends of $0.77 per common share, compared with $0.71 in the prior-year quarter, and did not repurchase shares during the quarter.

Guidance, outlook, risks and unusual items

Management expected the restructuring actions to generate approximately $50 million of savings in fiscal 2015 and approximately $60 million of annual savings in fiscal 2016 and beyond.
The quarter included a $32.4 million pretax restructuring charge related to the elimination of approximately 450 positions, or $21.7 million after tax. The company expected additional severance and related charges from the reorganization.
The $17.9 million pretax gain resulted from revaluing the previously held 50% interest in the acquired joint venture; it contributed approximately $11.2 million after tax, or $0.05 per share.
Management expected pension settlement losses of approximately $20 million to $25 million in the second quarter of fiscal 2015, with additional settlement losses possible in the second half of the year. Fiscal 2015 pension contributions were expected to total approximately $130 million to $150 million.
Sales backlog was $519 million at 31 December 2014, broadly unchanged from $520 million at 30 September 2014.
Environmental liabilities totaled $84.8 million, with estimated exposure ranging from $84 million to a reasonably possible upper exposure of $98 million. The company was involved in approximately 36 unresolved environmental sites.
A Brazilian competition-law fine of approximately $67 million plus interest remained pending on appeal. No liability was accrued because management concluded an adverse final judgment was possible but not probable.
The filing identifies exposure to foreign currency, interest rates, global and regional economic conditions, customer cancellations or project delays, energy and raw-material costs, competition and pricing, litigation, environmental regulation, acquisitions and divestitures, and potential asset impairments.
The company stated that its disclosure controls and procedures were effective as of 31 December 2014 and that no material change in internal control over financial reporting had occurred.

Important facts for investors to verify

Whether the planned restructuring savings materialize and how much additional restructuring cost is recorded.
The refinancing outcome and terms for the $363.1 million Eurobond maturing in March 2015.
Quarterly operating cash conversion after elevated pension contributions and continued capital spending.
Performance of EMEA and Industrial Gases—Global, including currency effects, project activity and pricing pressure.
The timing and amount of anticipated pension settlement losses and total fiscal 2015 pension contributions.
The outcome of the Brazilian competition matter and changes in environmental remediation exposure.
Progress and returns from the North American joint-venture acquisition and the Energy-from-Waste projects.