Air Products & Chemicals, Inc. — Form 10-Q Summary
Business context and reporting period
Air Products is an industrial gases and related equipment and materials company operating through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. This unaudited Form 10-Q covers the three and nine months ended 30 June 2012, compared with the corresponding 2011 periods. The filing was dated 27 July 2012.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Sales | $2,340.1 million | $2,472.0 million | $7,005.9 million | $7,167.5 million |
| Operating income | $482.8 million | $387.7 million | $1,124.5 million | $1,112.7 million |
| Operating margin | 20.6% | 15.7% | 16.1% | 15.5% |
| Income from continuing operations attributable to Air Products | $357.2 million | $297.0 million | $862.1 million | $830.1 million |
| Diluted EPS from continuing operations | $1.66 | $1.37 | $4.02 | $3.80 |
| Net income attributable to Air Products | $484.5 million | $326.5 million | $1,028.6 million | $899.4 million |
| Diluted EPS | $2.26 | $1.50 | $4.79 | $4.12 |
- Operating cash flow for the nine months was $1,244.6 million, versus $1,097.1 million in 2011.
- Investing cash outflow was $1,441.3 million, including $1,166.5 million of plant and equipment additions, $173.8 million of acquisitions, and $175.4 million invested in unconsolidated affiliates.
- Financing cash outflow was $637.6 million, including $379.4 million of dividends and net debt repayments.
- Continuing-operations cash and cash items were $361.2 million at 30 June 2012; $334.9 million was held outside the United States.
- Total debt was $4,216.9 million, down from $4,561.5 million at 30 September 2011. Debt represented 38.8% of total debt plus equity, compared with 43.4% at the prior fiscal year-end.
- Current assets were $3,033.1 million versus current liabilities of $2,135.4 million. The company reported no borrowings under its $2,170.0 million committed revolving facility, which matures in 2015, and was in compliance with debt covenants.
- Capital expenditures on management’s non-GAAP basis were $1,661.9 million, compared with $1,136.5 million in the prior-year period.
- The quarterly dividend increased to $0.64 per share from $0.58; nine-month dividends declared were $1.86 per share versus $1.65.
Material changes versus the prior comparable period
- Q3 sales declined 5%, while underlying sales increased 1%. Pricing contributed 1% and acquisitions 1%, offset by a 3% currency headwind and a 4% reduction from lower energy and raw-material pass-through.
- Q3 reported operating income rose 25%, but non-GAAP operating income increased only 2% to $396.9 million. Reported results benefited from an $85.9 million gain on remeasurement of the previously held DA NanoMaterials interest.
- For the first nine months, sales fell 2%, while reported operating income increased 1%. On a non-GAAP basis, operating income decreased 3% and operating margin declined to 16.1% from 16.2%.
- Q3 Merchant Gases sales declined 5%, but operating income increased 4% and margin expanded to 18.8%. Tonnage Gases sales declined 12% because of lower pass-through, while operating income increased 17% and margin expanded to 17.5%.
- Electronics and Performance Materials sales were approximately flat in Q3. Reported operating income increased 62% because of the DA NanoMaterials gain; non-GAAP operating income declined 17% and margin fell to 15.0%.
- Equipment and Energy Q3 sales increased 19% and operating income increased 14%. The equipment backlog was $434 million at 30 June 2012, compared with $334 million at 30 September 2011.
- Operating cash flow improved despite increased capital spending. The prior-year period included $156.2 million of Airgas acquisition-related cash payments and substantially higher pension contributions.
Guidance, outlook, management commentary, risks and unusual items
- No formal consolidated revenue or earnings guidance is provided in the filing. Management expected the cost-reduction actions to be completed by the end of fiscal Q2 2013 and expected approximately $60 million of annual savings by the end of calendar 2013.
- The cost-reduction plan generated an $86.8 million charge, including $80.8 million for severance and related costs associated with eliminating approximately 600 positions and $6.0 million of asset write-downs. The company expected fourth-quarter savings and related cost reductions to offset $6 million of stranded Homecare costs.
- The Homecare business sale to Linde closed on 30 April 2012 for proceeds of approximately $777 million. Air Products recognized a $207.4 million pretax gain and a $33.5 million pretax impairment charge on the remaining primarily U.K. business. Additional charges may occur before its planned sale.
- DA NanoMaterials was acquired and consolidated beginning in Q3. The transaction produced an $85.9 million pretax remeasurement gain and added approximately $125 million of goodwill and $100 million of identified intangible assets.
- On 1 and 3 July 2012, after the reporting date, Air Products acquired a controlling interest in Indura S.A. for approximately $699 million in cash and assumed approximately $196 million of debt. Indura results were not included in this Form 10-Q. Air Products drew approximately $701 million under a short-term Chilean peso acquisition facility and expected to repay it in Q4 2012.
- The Indura agreement includes a commitment to purchase up to an additional 2.0% interest within 12 months and a minority shareholder put right covering up to 30.5% of Indura during a two-year period beginning 1 July 2015.
- Management identified challenging European economic conditions, weaker Merchant Gases demand, currency movements, energy and raw-material costs, competitive pricing, customer cancellations or project delays, and execution of productivity and acquisition programs as key risks.
- The company continues to monitor photovoltaic-market weakness, including excess silane capacity, related assets, and minimum purchase commitments.
- Air Products is appealing an approximately $89 million Brazilian competition fine, plus interest. Management considered an adverse final judgment reasonably possible but not probable and recorded no provision.
- Environmental liabilities were accrued at $79.2 million, with estimated exposure ranging from $79 million to a reasonably possible upper exposure of $93 million across approximately 33 sites.
- Foreign-exchange, interest-rate, and derivative exposures remain material. A 100-basis-point increase in market interest rates was estimated to reduce the net liability position of financial instruments by $148 million at 30 June 2012; a decrease would increase it by $158 million.
Most important facts for investors to verify
- Separate recurring operating performance from the $85.9 million DA NanoMaterials gain, the $86.8 million restructuring charge, Spanish tax items, and Homecare disposal effects.
- Confirm the post-quarter Indura acquisition funding, debt repayment plan, purchase-price allocation, minority put exposure, and resulting leverage.
- Track whether the cost-reduction plan delivers the expected $60 million of annual savings and whether additional Homecare impairment or disposal charges arise.
- Assess European demand, Merchant Gases volumes, photovoltaic-market exposure, raw-material recovery, and currency effects on margins.
- Review liquidity after the Indura transaction, including foreign cash restrictions, commercial-paper access, debt maturities, and covenant compliance.
- Monitor the Brazilian litigation appeal and environmental remediation estimates for changes that could affect earnings or cash flow.