Air Products and Chemicals, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Quarterly and six-month periods ended 31 March 2015; filed 30 April 2015. The filing is unaudited and should be read with the fiscal 2014 Form 10-K. The company reorganized its reporting segments effective 1 October 2014 and restated prior-period segment information.
Business context
Air Products supplies industrial gases, related equipment, specialty gases and chemicals, and materials technologies globally. Reporting segments include Industrial Gases—Americas, EMEA, Asia and Global; Materials Technologies; Energy-from-Waste; and Corporate and other.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $2,414.5 million | $2,581.9 million | $4,975.3 million | $5,127.4 million |
| Operating income | $374.4 million | $384.7 million | $804.4 million | $770.3 million |
| Operating margin | 15.5% | 14.9% | 16.2% | 15.0% |
| Net income attributable to Air Products | $290.0 million | $283.5 million | $614.6 million | $573.7 million |
| Diluted EPS | $1.33 | $1.32 | $2.83 | $2.67 |
| Adjusted EBITDA | $708.7 million | $644.2 million | $1,431.8 million | $1,302.2 million |
| Adjusted EBITDA margin | 29.4% | 25.0% | 28.8% | 25.4% |
Adjusted results exclude restructuring and cost-reduction charges, pension settlement losses and, for the six-month period, the gain on a previously held equity interest. These non-GAAP measures are supplemental and are not substitutes for GAAP results.
Revenue, profitability and segment performance
- Q2 sales declined 6%, as 5% underlying growth was more than offset by a 5% unfavorable currency effect and a 6% reduction from lower energy cost pass-through.
- Underlying Q2 sales growth reflected 4% volume growth and 1% pricing growth. Growth was led by Industrial Gases—Asia and Materials Technologies.
- Q2 reported operating income decreased 3%, but operating margin increased 60 basis points. On an adjusted basis, operating income rose 15% and adjusted EBITDA rose 10%.
- Q2 Industrial Gases—Asia sales increased 7% and operating income increased 19%, supported by new plants and a large Chinese on-site project.
- Q2 Materials Technologies sales increased 7% and operating income increased 32%, with strong Electronics Materials performance, volume growth and pricing.
- Q2 Industrial Gases—Americas sales fell 14%, primarily because of lower energy pass-through and currency, although operating income increased 7%.
- Q2 Industrial Gases—EMEA sales fell 17% and operating income fell 19%, primarily due to currency effects and lower onsite volumes.
- For the first six months, reported sales declined 3%, while operating income rose 4%, net income attributable to Air Products rose 8%, and diluted EPS rose 6%.
Cash flow, liquidity and capital structure
| Item | Six months 2015 | Six months 2014 |
|---|---|---|
| Cash provided by operating activities | $967.2 million | $1,024.7 million |
| Capital expenditures for plant and equipment | $817.6 million | $802.2 million |
| Cash used for investing activities | $839.8 million | $791.4 million |
| Cash used for financing activities | $256.6 million | $337.7 million |
| Cash and cash items at period end | $195.7 million | $356.9 million |
- Total debt was $5,930.2 million at 31 March 2015, down from $6,118.5 million at 30 September 2014. Debt represented 43.3% of total debt and capitalization, compared with 43.9% at fiscal year-end.
- Current liabilities were $3,081.3 million, including $1,261.0 million of short-term borrowings and $157.7 million of current long-term debt. Long-term debt was $4,511.5 million.
- The company reported continued access to commercial paper markets and expects operating cash flow and financing activities to meet liquidity needs for the foreseeable future.
- No borrowings were outstanding under the revolving credit agreement at 31 March 2015. The facility was subsequently amended effective 30 April 2015 from $2,595.0 million to $2,405.0 million. The company was in compliance with its debt covenants.
- Foreign cash and cash items totaled $187.4 million of the $195.7 million total. The company intends to permanently reinvest most foreign cash outside the United States.
- The quarterly dividend increased 5% to $0.81 per share, marking the 33rd consecutive year of dividend increases. Six-month dividends paid were $329.4 million.
Material changes and unusual items
- The company recorded $55.4 million of Q2 restructuring and cost-reduction charges and $87.8 million for the first six months. Approximately 1,100 positions had been eliminated during the first six months, and additional charges are expected.
- A $12.6 million Q2 pension settlement loss was recognized; management also anticipates additional pension settlement and curtailment charges in the second half of fiscal 2015.
- The company acquired its partner’s interest in a North American liquefied industrial gases joint venture for $22.6 million, increasing ownership from 50% to 100%. A $17.9 million pretax gain was recorded on revaluing the previously held interest.
- On 12 February 2015, the company issued a 1.0% €300 million Eurobond maturing in 2025 and used the proceeds to repay a 3.875% €300 million Eurobond that matured in March 2015.
- Accumulated other comprehensive loss attributable to Air Products increased to $1,662.1 million from $1,241.9 million at 30 September 2014, primarily because of foreign-currency translation losses.
- Sales backlog was $483 million at 31 March 2015, compared with $520 million at 30 September 2014.
Guidance, outlook and risks
The filing does not provide a clear numerical full-year earnings guidance target. Management described the financial position as strong and expects liquidity to be adequate for the foreseeable future. Management expects fiscal 2015 pension contributions of approximately $130 million to $150 million, compared with $78.2 million in fiscal 2014.
- Key operating risks include global economic weakness, supply-and-demand changes, customer project cancellations or delays, competitive pricing, foreign-currency volatility, natural gas and energy prices, and the ability to recover energy and raw-material costs from customers.
- The company remains exposed to litigation, environmental remediation, regulatory investigations, political risks, tax and environmental-law changes, and execution risk from organizational and cost-reduction programs.
- A Brazilian competition matter involved a potential fine of approximately $56 million plus interest. The company’s appeal had been granted, CADE had appealed, and management assessed an adverse final judgment as possible but not probable; no provision was recorded.
- Environmental accruals totaled $83.6 million at 31 March 2015, with estimated exposure ranging from $83 million to a reasonably possible upper exposure of $97 million. Related remediation may extend for up to 30 years.
- The company faces a potential Indura minority-interest put option exercisable during a two-year period beginning 1 July 2015. The redeemable noncontrolling interest was $280.0 million at 31 March 2015.
- Goodwill associated with the Latin America reporting unit had only approximately 1.3% excess fair value over carrying value at 31 March 2015, making revenue growth and EBITDA margin assumptions important impairment sensitivities.
Important facts for investors to verify
- Whether restructuring benefits and costs, including additional severance charges, translate into sustainable improvement in reported earnings.
- Whether volume growth in Asia and Materials Technologies offsets weakness in EMEA, Latin America and equipment activity.
- The effect of currency movements and lower energy pass-through on future sales and margins.
- Actual fiscal 2015 pension contributions and any additional settlement or curtailment losses.
- Progress and economics of major capital projects, including the Saudi Arabia joint venture and Energy-from-Waste projects.
- The outcome of the Brazilian competition appeal and changes in environmental remediation estimates.
- Future cash generation relative to substantial capital expenditures, dividends and debt obligations.
- Potential impairment of Latin America goodwill if operating assumptions deteriorate.