Business Context and Reporting Period
Air Products and Chemicals, Inc. filed an unaudited Form 10-Q for the quarter and six months ended 31 March 2014, its fiscal second quarter. The company operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Key Financial Metrics
| Metric | Three months ended 31 March 2014 | Prior year | Six months ended 31 March 2014 | Prior year |
|---|---|---|---|---|
| Sales | $2,581.9 million | $2,484.2 million | $5,127.4 million | $5,046.6 million |
| Operating income | $384.7 million | $389.7 million | $770.3 million | $762.1 million |
| Operating margin | 14.9% | 15.7% | 15.0% | 15.1% |
| Income from continuing operations attributable to Air Products | $283.5 million | $289.3 million | $570.6 million | $566.2 million |
| Diluted EPS from continuing operations | $1.32 | $1.37 | $2.66 | $2.67 |
| Cash provided by operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $1,024.7 million | $598.2 million |
Net income attributable to Air Products was $283.5 million, or $1.32 diluted EPS, in the quarter and $573.7 million, or $2.67 diluted EPS, for the six months. The effective tax rate was 24.0% for the quarter and 24.1% for the six-month period.
- Cash and cash items were $356.9 million at 31 March 2014, compared with $450.4 million at 30 September 2013.
- Total debt was $6,167.1 million, down from $6,273.6 million at 30 September 2013. Debt represented 43.9% of total debt and capitalization, versus 45.3% at fiscal year-end.
- Current liabilities were $3,110.3 million, including $1,061.5 million of short-term borrowings and $112.4 million of current long-term debt.
- Long-term debt was $4,993.2 million. No borrowings were outstanding under the $2,500.0 million revolving credit facility, which matures in April 2018.
- Capital expenditures were $802.2 million on a GAAP basis and $901.3 million including capital-lease expenditures.
- Dividends declared were $0.77 per share in the quarter and $1.48 per share for the six months. The quarterly dividend increased 8% year over year.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 4%, but underlying sales were flat; higher energy-cost pass-through contributed 4% of the increase.
- Quarterly operating income decreased 1% and operating margin declined 80 basis points, primarily because of higher costs, severe weather-related costs, weaker raw-material cost recovery, and lower equity-affiliate income.
- Six-month sales increased 2% and operating income increased 1%, while the operating margin declined 10 basis points.
- Merchant Gases quarterly operating income declined 15% to $143.4 million, with margin down 300 basis points to 13.8%. Higher volumes were offset by higher power and fuel costs, weather impacts, weaker cost recovery, and lower equity-affiliate income.
- Tonnage Gases quarterly operating income declined 9% to $112.2 million, with margin down 180 basis points to 13.4%. Volumes were reduced by plant outages and the completed exit from the polyurethane intermediates business.
- Electronics and Performance Materials quarterly operating income increased 38% to $107.1 million, with margin up 400 basis points to 18.1%, reflecting higher volumes and restructuring-related cost benefits.
- Equipment and Energy quarterly sales declined 11%, although operating income increased 11% to $22.9 million because of a more favorable LNG project mix. Equipment backlog was $338 million at 31 March 2014, down from $402 million at 30 September 2013.
- Operating cash flow increased substantially, primarily because the prior-year period included larger pension contributions and a negative noncash capital-lease adjustment.
- The company repaid a $401.0 million Eurobond in November 2013 and increased commercial paper and short-term borrowings by $370.9 million during the six months. No shares were repurchased during the period.
Outlook, Risks, Contingencies, and Unusual Items
- The filing states that cash flows from operations and financing activities, together with continued access to commercial paper markets, are expected to meet liquidity needs for the foreseeable future. No specific earnings or revenue guidance target is provided in the filing text.
- Management expects fiscal 2014 pension contributions of approximately $80 million to $100 million, compared with $300.8 million in fiscal 2013.
- The 2013 restructuring and cost-reduction plan carried a $231.6 million charge, with a $45.5 million accrued balance at 31 March 2014. Actions were expected to be completed by the end of fiscal 2014 and primarily affected Electronics, Merchant Gases, and corporate functions.
- The remaining Homecare business was sold in the first quarter for $9.8 million, generating a $2.4 million gain. A related operations guarantee has a maximum potential payment of approximately $33 million and expires by 2020.
- Air Products faces a Brazilian competition-law fine of approximately $79 million plus interest. Management considers an adverse final judgment reasonably possible but not probable, so no provision was recorded.
- Environmental liabilities totaled $85.4 million, with estimated exposure ranging from $85 million to a reasonably possible upper exposure of $99 million. Payments may extend for up to 30 years.
- Principal disclosed risks include economic weakness, customer project cancellations, competitive pricing, helium and raw-material availability, energy-cost recovery, foreign currency and interest-rate volatility, litigation, environmental obligations, regulatory changes, political risk, impairments, and execution of productivity programs.
- Foreign cash and cash items were $345.7 million of total cash, and most foreign funds were intended to remain permanently reinvested outside the United States.
Important Facts for Investors to Verify
- Whether margin pressure in Merchant Gases and Tonnage Gases persists after weather effects, maintenance costs, plant outages, and the polyurethane-intermediates exit.
- Whether Electronics and Performance Materials can sustain its volume growth and restructuring-related cost improvements.
- The timing and funding of the $400.0 million commercial paper and $413 million Eurobond classified as long-term debt, including the company’s intended refinancing.
- The outcome and potential cash exposure of the Brazilian competition proceeding and environmental remediation matters.
- Execution of the remaining restructuring actions and the related cash expenditures.
- Capital spending, capital-lease commitments, and the Equipment backlog, which declined to $338 million.
- The sustainability of cash generation after capital expenditures, dividends, pension contributions, and short-term borrowing activity.