Air Products & Chemicals, Inc. — Fiscal 2013 Third-Quarter Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended June 30, 2013, filed July 24, 2013. Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. The Homecare business is reported as discontinued operations.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales | $2,547.3 million | $2,340.1 million | $7,593.9 million | $7,005.9 million |
| Operating income | $383.1 million | $482.8 million | $1,145.2 million | $1,124.5 million |
| Operating margin | 15.0% | 20.6% | 15.1% | 16.1% |
| Income from continuing operations attributable to Air Products | $287.8 million | $357.2 million | $854.0 million | $862.1 million |
| Diluted EPS from continuing operations | $1.36 | $1.66 | $4.03 | $4.02 |
| Net income attributable to Air Products | $288.4 million | $484.5 million | $857.1 million | $1,028.6 million |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $1,051.2 million | $1,244.6 million |
- Q3 sales increased 9%, but underlying sales declined 2% as volumes fell 2% and pricing was flat. Acquisitions contributed 6% and energy and raw-material pass-through contributed 5%.
- Q3 GAAP operating income fell 21%, primarily because the prior-year period included an $85.9 million gain on the previously held DA NanoMaterials interest. On a non-GAAP basis, operating income declined 3% and margin declined 200 basis points to 15.0%.
- Nine-month sales increased 8%, while GAAP operating income increased 2%. Continuing-operations income declined 1%, but non-GAAP continuing-operations income increased slightly and non-GAAP diluted EPS rose $0.05 to $4.03.
- Operating cash flow decreased $193.4 million year over year, primarily reflecting $258.6 million of pension contributions versus $31.6 million in the prior-year period and greater working-capital usage.
- Capital expenditures were $1,115.4 million; acquisitions, net of cash acquired, were $125.6 million. Investing cash use was $1,218.2 million.
- Cash and cash items were $418.8 million at June 30, 2013, including $404.4 million held outside the United States. Total assets were $17.49 billion and total equity was $6.69 billion.
- Total debt increased to $6,130.3 million from $5,291.9 million at September 30, 2012. Debt represented 47.8% of total debt plus equity, compared with 44.4% at fiscal year-end.
- The company paid $416.8 million in dividends and repurchased 5.7 million shares for $461.6 million during the first nine months. The quarterly dividend increased 11% to $0.71 per share.
Material changes versus the prior comparable periods
- Merchant Gases sales increased 18% in Q3, largely from the Indura acquisition, but operating margin declined to 16.0% from 18.8% due to higher costs and weaker power-cost recovery.
- Tonnage Gases sales increased 10% from contractual energy-cost pass-through, while operating income declined 11% and margin fell to 14.2% as volumes declined and costs increased.
- Electronics and Performance Materials sales declined 6% in Q3. Reported operating income declined 51% because Q3 2012 included the $85.9 million DA NanoMaterials gain; comparable non-GAAP operating income declined 4%.
- Equipment and Energy sales increased 9% and operating income increased 63% in Q3, supported by LNG project activity. The equipment backlog declined to $327 million from $450 million at September 30, 2012.
- Air Products acquired EPCO Carbondioxide Products and Wuxi Chem-Gas for aggregate consideration of $134 million, recognizing $67 million of goodwill.
- The company entered into a new $2.5 billion revolving credit agreement maturing April 30, 2018, replacing the prior $2.17 billion facility. No borrowings were outstanding under the new facility at June 30, 2013.
Outlook, risks, contingencies, and unusual items
- The filing does not provide formal earnings guidance. Management stated that operating cash flow, financing activities, and continued access to commercial-paper markets were expected to meet liquidity needs for the foreseeable future.
- Management expected to complete the sale of the remaining Homecare operations, primarily in the United Kingdom and Ireland, by the end of fiscal 2013. Additional discontinued-operation charges could arise depending on the timing and method of sale.
- Fiscal 2013 pension contributions were expected to total approximately $280 million to $290 million; additional pension settlement charges were anticipated in the fourth quarter.
- A $390.3 million 3.75% Eurobond maturing in November 2013 was classified as long-term debt because refinancing capacity was available. Management intended to refinance it through public or private debt markets.
- Air Products faces an approximately $80 million Brazilian antitrust fine, plus interest, although management assessed an adverse final judgment as reasonably possible but not probable; no provision was recorded.
- Environmental accruals totaled $87.9 million for approximately 34 unresolved sites, with estimated exposure ranging from $87 million to a reasonably possible upper exposure of $101 million. Payments may extend for up to 30 years.
- Key forward-looking risks include global demand weakness, customer cancellations or project delays, energy and raw-material cost recovery, pricing pressure, supply interruptions, acquisitions and restructuring execution, foreign exchange and interest-rate volatility, litigation, environmental obligations, and regulatory or tax changes.
- Prior-year comparisons were affected by the DA NanoMaterials remeasurement gain, the 2012 cost-reduction charge, Spanish tax settlement and ruling items, and the Homecare disposal gain.
Important facts for investors to verify
- Reconcile reported GAAP results with management's non-GAAP measures and confirm the effect of prior-year unusual items.
- Monitor debt refinancing, short-term borrowings, the 70% total-debt-to-total-capitalization covenant, and the November 2013 Eurobond maturity.
- Assess whether pension funding, capital expenditures, dividends, and share repurchases remain supportable from operating cash flow.
- Track the completion and final proceeds or charges from the remaining Homecare divestiture.
- Evaluate trends in Electronics demand, Tonnage Gases volumes, Merchant Gases pricing, and energy-cost pass-through.
- Review the Brazilian antitrust appeal and environmental remediation estimates for changes in probability or expected loss.