Air Products & Chemicals, Inc. — Fiscal Q2 2012 Form 10-Q
Business context and reporting period
Quarterly report for the three and six months ended 31 March 2012, filed 27 April 2012. Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. The Homecare business was classified as discontinued operations following the planned sale to Linde.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $2,344.3 million | $2,403.0 million | $4,665.8 million | $4,695.5 million |
| Operating income | $287.9 million | $393.8 million | $641.7 million | $725.0 million |
| Operating margin | 12.3% | 16.4% | 13.8% | 15.4% |
| Income from continuing operations attributable to Air Products | $279.0 million | $285.7 million | $504.9 million | $533.1 million |
| Diluted EPS from continuing operations | $1.30 | $1.31 | $2.36 | $2.44 |
| Net income attributable to Air Products | $296.0 million | $304.3 million | $544.1 million | $572.9 million |
| Diluted EPS | $1.38 | $1.39 | $2.54 | $2.62 |
Cash provided by operating activities of continuing operations was $731.2 million for the first six months, compared with $606.7 million in the prior-year period. Capital additions to plant and equipment were $734.9 million, compared with $592.0 million. Cash used for investing activities was $763.6 million, while cash used for financing activities was $73.1 million. Continuing-operations cash and cash items were $319.5 million at 31 March 2012.
Total debt was $4,739.4 million at 31 March 2012, compared with $4,561.5 million at 30 September 2011. Debt represented 42.5% of total debt plus equity, versus 43.4% at the prior year-end. Long-term debt, including the current portion, had a carrying value of $4,386.4 million and a fair value of $4,673.4 million. The company reported no borrowings under its $2,170.0 million committed revolving facility and remained in compliance with its debt covenants.
The quarterly dividend increased from $0.58 to $0.64 per share. The company repurchased approximately 0.6 million shares for $53.1 million during the first six months, leaving $946.9 million of authorization.
Material changes versus the prior comparable period
- Q2 sales decreased 2%, although underlying sales increased 2%; higher volumes and pricing were offset by lower energy and raw-material pass-through and unfavorable currency.
- GAAP Q2 operating income declined 27% and margin fell 410 basis points, primarily because of an $86.8 million cost-reduction charge. On a non-GAAP basis, operating income declined 6% and margin fell 60 basis points.
- Six-month GAAP operating income declined 11% and margin fell 160 basis points. Non-GAAP operating income declined 6% and margin fell 90 basis points.
- Merchant Gases Q2 sales declined 3% and operating income declined 8%, reflecting weaker volumes, especially in North America and Europe. Tonnage Gases operating income increased 4% despite lower pass-through revenue. Electronics and Performance Materials operating income declined 7%, while Equipment and Energy operating income declined 56%.
- The Q2 effective tax rate was 3.0%, compared with 26.1%, reflecting a $58.3 million benefit from a Spanish tax ruling and a $26.2 million tax benefit associated with the cost-reduction plan. The six-month rate was 20.8%, compared with 24.4%, after a $43.8 million charge from a separate Spanish tax settlement.
Guidance, outlook, risks, contingencies, and unusual items
- The cost-reduction plan includes approximately 600 position eliminations, primarily in Europe, and a $6.0 million asset write-down. Management expects the actions to be completed within 12 months, with approximately $60 million of annual savings by the end of 2013. Related severance actions and other cost reductions are expected to offset approximately $6 million of annual stranded Homecare costs beginning in Q4 fiscal 2012.
- The Linde Homecare transaction was approved on 18 April 2012 and was expected to close on 30 April 2012. Expected proceeds were approximately $785 million, including contingent proceeds. Management anticipated an after-tax gain of approximately $140 million to $170 million in Q3 fiscal 2012.
- On 2 April 2012, the company acquired DuPont’s 50% interest in DA NanoMaterials for approximately $150 million. The company expects to consolidate the business beginning in Q3 fiscal 2012 and anticipated a $45 million to $55 million after-tax revaluation gain.
- Key risks include weakening global or regional economic conditions, lower product demand, customer cancellations or project delays, energy and raw-material cost recovery, foreign-exchange and interest-rate volatility, competition, environmental and regulatory matters, litigation, tax outcomes, restructuring execution, acquisitions and divestitures, and access to capital.
- Air Products Brasil faces a Brazilian antitrust fine of approximately $98 million plus interest. Management considers an adverse final judgment reasonably possible but not probable and has recorded no provision.
- Environmental liabilities totaled $80.2 million at 31 March 2012, with estimated exposure ranging from $80 million to a reasonably possible upper exposure of $94 million. The liabilities may be paid over a period of up to 30 years.
- Management stated that disclosure controls and procedures were effective as of 31 March 2012 and that no material change in internal control occurred during the quarter.
Most important facts for an investor to verify
- Whether the Homecare sale closed as expected and the actual proceeds, contingent consideration, and gain recognized in Q3 fiscal 2012.
- Progress toward the cost-reduction plan, including workforce reductions, cash expenditures, stranded-cost offsets, and the targeted $60 million of annual savings.
- Whether weaker Merchant Gases and Electronics demand and lower Equipment and Energy activity persist.
- The sustainability of operating cash flow relative to elevated capital spending and capital-lease commitments.
- Debt maturities, refinancing activity following repayment of the $400.3 million Eurobond on 10 April 2012, and continued covenant compliance.
- Resolution of the Brazilian antitrust matter and changes in environmental exposure.
- Actual results from the DA NanoMaterials acquisition and the related revaluation gain.