Air Products & Chemicals, Inc. — Fiscal 2010 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and nine months ended June 30, 2010, filed July 26, 2010. Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Results benefited from recovering industrial and electronics demand, higher volumes, and cost-reduction actions.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Sales | $2,252.3 million | $1,976.2 million | $6,674.8 million | $6,126.9 million |
| Operating income | $336.4 million | $143.8 million | $1,022.0 million | $518.3 million |
| Operating margin | 14.9% | 7.3% | 15.3% | 8.5% |
| Net income attributable to Air Products | $253.2 million | $113.2 million | $757.0 million | $387.4 million |
| Diluted EPS | $1.17 | $0.53 | $3.49 | $1.82 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $1,033.2 million | $865.0 million |
- Q3 sales increased 14%; underlying sales increased 12%, driven mainly by volume growth. YTD sales increased 9%.
- Q3 reported operating income increased 134%; comparable non-GAAP operating income increased 22% to $374.3 million. YTD comparable non-GAAP operating income increased 26% to $1,083.3 million.
- Q3 comparable non-GAAP diluted EPS was $1.28 versus $1.05; YTD comparable non-GAAP diluted EPS was $3.67 versus $2.91.
- Q3 GAAP effective tax rate was 23.5%, compared with 18.1%; YTD rate was 24.5%, compared with 20.1%. Management attributed the current-year rate to tax credits and adjustments.
- Cash used for investing activities was $807.9 million, including $757.2 million of plant and equipment additions. Cash used for financing activities was $300.0 million, including $294.6 million of dividends.
- Cash and cash items were $405.3 million at June 30, 2010, versus $488.2 million at September 30, 2009.
- Total debt was $4,188.0 million, down from $4,501.5 million; debt as a percentage of total debt plus equity declined to 43.8% from 47.7%. Long-term debt, including current maturities, had a $4,105.2 million fair value versus $3,846.8 million carrying value.
- The quarterly dividend increased to $0.49 per share from $0.45. The company reported 28 consecutive years of dividend increases.
Material changes versus the prior comparable period
- Merchant Gases sales increased 4% and operating income 5% in Q3, supported by Asian and liquid bulk volumes.
- Tonnage Gases sales increased 28% and operating income 37%, reflecting a 19% volume increase, improving steel and chemical markets, and contractual energy-cost pass-through.
- Electronics and Performance Materials sales increased 21% and operating income 60%, driven by stronger electronics and performance-materials volumes.
- Equipment and Energy sales declined 3%, but operating income increased 61% due to higher LNG heat-exchanger activity, an asset-sale gain, and lower project costs. Equipment backlog was $302 million versus $239 million at September 30, 2009.
- Reported comparisons were significantly affected by unusual items. Q3 2009 included a $124.0 million global cost-reduction charge and $32.1 million of customer-bankruptcy and asset-action charges. Q3 2010 included $37.9 million of Airgas acquisition-related costs and a $6.3 million pension settlement charge.
- YTD 2010 included $61.3 million of Airgas-related costs, while YTD 2009 included $298.2 million of global cost-reduction charges, $32.1 million of customer-bankruptcy and asset-action charges, and an $8.0 million pension settlement charge.
Guidance, outlook, risks and unusual items
- The global cost-reduction plan was substantially complete at June 30, 2010. Management expected approximately $155 million of savings in 2010 and approximately $180 million of annualized savings thereafter. Remaining benefit payments were expected primarily in Q4 2010.
- Air Products increased its Airgas tender offer on July 8, 2010, to $63.50 per share. The proposed transaction was valued at approximately $7.3 billion, including $5.5 billion of equity and $1.8 billion of assumed debt. The offer was scheduled to expire August 13, 2010, subject to extension.
- The company secured a $6.7 billion term-loan facility for the Airgas transaction. Borrowings would be available upon consummation, which was required no later than February 4, 2011, and would mature one year after consummation. Total Airgas transaction costs were estimated at $150 million to $200 million.
- On July 8, 2010, the company replaced its $1.45 billion revolving facility with a $2.0 billion facility maturing in July 2013. The principal covenant changed to a maximum total-debt-to-EBITDA ratio of 3.0. No borrowings were outstanding under the former facility at June 30.
- Environmental liabilities accrued were $88.5 million, with estimated exposure ranging from $88 million to a reasonably possible upper exposure of $102 million. The obligations may be paid over up to 30 years.
- The company was defending Brazilian antitrust proceedings. Management could not predict the outcome or estimate a loss range; a future fine or damages award could materially affect income in the period recorded.
- Cash contributions to pension plans were $348.2 million through nine months, with fiscal-year contributions expected to be approximately $375 million. Additional pension settlement losses of a similar amount to the Q3 $6.3 million charge were expected in Q4.
- Management stated that operating cash flow, commercial paper access, and financing activities were expected to meet liquidity needs for the foreseeable future. Principal risks included global economic deterioration, customer demand and cancellations, pricing and raw-material costs, foreign exchange and interest rates, litigation, environmental regulation, acquisition execution, and achievement of planned synergies.
Important facts for investors to verify
- Whether the Airgas tender offer was consummated, its final financing structure, resulting leverage, and integration costs.
- Actual realization and timing of the projected $155 million 2010 and $180 million annualized cost savings.
- Volume trends, pricing pressure, and raw-material pass-through in Merchant Gases, Tonnage Gases, and Electronics and Performance Materials.
- Cash requirements for capital expenditures, pensions, dividends, SAGA and Cryoservice obligations, and remaining restructuring payments.
- Exposure from Brazilian antitrust proceedings, environmental remediation, customer bankruptcy recoveries, and other contingencies.
- Reconciliation of GAAP results to management’s non-GAAP measures, particularly the effects of Airgas costs and prior-year restructuring charges.