Business Context and Reporting Period
Air Products and Chemicals, Inc. filed this Form 10-K for the fiscal year ended 30 September 2014. The company supplies atmospheric, process and specialty gases, performance materials, equipment and related services globally across energy, electronics, chemicals, metals and manufacturing markets. Operations were reported through four segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. A major geographic and organizational reorganization became effective 1 October 2014.
Key Financial Metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $10,439.0 million | $10,180.4 million |
| Operating income | $1,328.2 million | $1,324.4 million |
| Operating margin | 12.7% | 13.0% |
| Income from continuing operations attributable to Air Products | $987.1 million | $1,004.2 million |
| Diluted EPS from continuing operations | $4.59 | $4.73 |
| Net income attributable to Air Products | $991.7 million | $994.2 million |
| Adjusted EBITDA | $2,764.8 million | $2,640.9 million |
| Cash provided by operating activities | $2,186.4 million | $1,553.1 million |
| Capital expenditures, GAAP | $1,682.2 million | $1,747.8 million |
| Cash and cash items | $336.6 million | $450.4 million |
| Total debt | $6,118.5 million | $6,273.6 million |
| Working capital | $332 million | $212 million |
Adjusted EBITDA increased 5%, while non-GAAP operating income increased 6% to $1,656.5 million and non-GAAP diluted EPS increased 5% to $5.78. The GAAP effective tax rate was 27.0%, compared with 22.8% in 2013. Total debt represented 43.9% of total capitalization, versus 45.3% in 2013.
Segment Results
- Merchant Gases: Sales increased 4% to $4,250.7 million, but operating income declined 1% to $671.6 million and margin declined to 15.8%, primarily due to higher operating, power and fuel costs and lower helium availability.
- Tonnage Gases: Sales declined 3% to $3,288.9 million and operating income declined 6% to $484.9 million. Volumes fell 7%, reflecting completion of the Polyurethane Intermediates exit, maintenance costs and customer outages.
- Electronics and Performance Materials: Sales increased 9% to $2,449.0 million and operating income increased 32% to $425.3 million. Margin improved to 17.4% on stronger volumes, operating leverage and cost performance.
- Equipment and Energy: Sales were essentially flat at $450.4 million, while operating income increased 35% to $88.2 million. Equipment backlog rose to approximately $520 million from $402 million, with approximately $320 million expected to be completed in fiscal 2015.
Material Changes Versus the Prior Comparable Period
- Sales grew 3%, including 2% volume growth and a 1% benefit from higher energy and raw-material cost pass-through.
- GAAP continuing-operations income declined 2% and diluted EPS declined 3%, despite higher underlying operating performance, because of unusual fourth-quarter charges and tax items.
- A $310.1 million goodwill and intangible-asset impairment charge was recorded for the Latin America Merchant Gases reporting unit, primarily associated with Indura. The charge was driven by weaker Latin American economic conditions, lower Chilean manufacturing growth, weaker commodity exports and Chilean tax reform.
- The company recorded $12.7 million of reorganization and cost-reduction charges and $5.5 million of pension settlement losses in 2014. These amounts were materially lower than the $231.6 million of restructuring charges and $10.1 million of advisory costs recorded in 2013.
- Fourth-quarter 2014 operating income was $144.1 million and net income was $79.0 million, reflecting the impairment and other unusual items.
- Operating cash flow increased $633.3 million, primarily because 2013 included substantial pension contributions and restructuring-related payments.
- The quarterly dividend increased from $0.71 to $0.77 per share, representing the 32nd consecutive year of dividend increases. No share repurchases occurred in fiscal 2014.
Guidance, Outlook, Risks and Unusual Items
Management's fiscal 2015 priorities are to improve cash flow, reduce costs, execute pricing actions and drive earnings growth under expectations for modest global economic growth. The company expects fiscal 2015 GAAP capital expenditures of $1.65 billion to $1.80 billion, or $1.70 billion to $1.90 billion on its non-GAAP measure, excluding acquisitions. Cash from operations is expected to fund most capital spending.
- The company expects approximately $10 million of annual savings from actions taken in the 2014 reorganization and approximately $75 million of annual savings from the 2013 restructuring plan beyond 2014, although additional charges may be recorded.
- Management expects to access long-term debt markets modestly in 2015, primarily to refinance maturities, including a $378.9 million Eurobond maturing in March 2015. The company had an undrawn $2.595 billion revolving credit facility and was in compliance with its debt covenants.
- Approximately $1,672.9 million of consolidated debt was scheduled to mature within the next twelve months, including short-term borrowings and current maturities.
- An Indura minority shareholder may require the company to purchase up to a 30.5% additional interest during a two-year period beginning 1 July 2015. The redeemable noncontrolling interest was $287.2 million at year-end; the potential payment was excluded from contractual obligations because timing was uncertain.
- Helium supply shortages continued to constrain volumes. The company also experienced syngas availability interruptions affecting U.S. Gulf Coast hydrogen and carbon monoxide sales.
- Key risks include global economic and supply-demand conditions, energy and raw-material availability and pricing, foreign currency exposure, interest rates, international political and regulatory conditions, environmental and greenhouse-gas regulation, operational disruptions, litigation, technology execution, cybersecurity, pension obligations and potential asset impairments.
- The Brazilian antitrust matter remained pending on appeal. The potential fine was approximately $73 million plus interest, but management concluded an adverse final judgment was not probable and recorded no provision.
- Environmental liabilities were accrued at $86.2 million, with reasonably possible exposure estimated at $86 million to $99 million across approximately 36 sites.
- Pension contributions were $78.2 million in 2014 and were estimated at $130 million to $150 million for 2015. Pension settlement losses of $25 million to $35 million were expected in 2015, depending on retirements.
Important Facts for Investors to Verify
- Reconcile GAAP results with management's non-GAAP measures, particularly the $310.1 million impairment, restructuring charges, pension settlement loss and tax items.
- Assess whether the new seven-segment organizational structure delivers the expected cost reductions, pricing improvements and cash-flow benefits.
- Monitor Latin American and Indura performance, including potential additional goodwill impairment and the 2015-2017 minority-interest put option.
- Verify refinancing plans and liquidity coverage for debt maturities, particularly the March 2015 Eurobond and other short-term borrowings.
- Track helium and syngas supply constraints, maintenance costs, customer outages and their effect on Merchant and Tonnage Gases margins.
- Evaluate the sustainability of the improved operating cash flow after adjusting for noncash impairment charges and working-capital movements.
- Review environmental, Brazilian antitrust, tax, pension and guarantee contingencies for changes that could produce future cash charges.