Air Products & Chemicals, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2010, three months ended 31 December 2009; filed 26 January 2010. The filing is unaudited. Comparisons are with the three months ended 31 December 2008 unless otherwise stated.
Business Context
Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. The quarter reflected improving volumes in Tonnage Gases and Electronics and Performance Materials, continued weakness in some North American and European Merchant Gases markets, and lower energy and raw-material pass-through revenue because of lower natural gas prices.
Financial Results and Key Metrics
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Sales | $2,173.5 million | $2,195.3 million | Down 1% |
| Operating income | $345.0 million | $114.1 million | Up $230.9 million |
| Operating margin | 15.9% | 5.2% | Up approximately 10.7 points |
| Income from continuing operations | $256.8 million | $95.0 million | Up $161.8 million |
| Net income attributable to Air Products | $251.8 million | $68.6 million | Up $183.2 million |
| Diluted EPS | $1.16 | $0.32 | Up $0.84 |
| Cash provided by operating activities | $193.9 million | $199.2 million | Down $5.3 million |
- Net margin: Approximately 11.6%, compared with 3.3% in the prior-year quarter.
- Effective tax rate: 24.9%, compared with 7.3%, as prior-year tax credits had a larger relative effect.
- Equity affiliates’ income: $26.9 million, up from $24.5 million.
- Interest expense: $31.6 million, down from $36.5 million, primarily due to lower variable interest rates.
- Dividends: $0.45 per common share declared, compared with $0.44.
Segment Performance
| Segment | Sales | Sales Change | Operating Income | Income Change |
|---|---|---|---|---|
| Merchant Gases | $933.6 million | Up 1% | $189.6 million | Up 11% |
| Tonnage Gases | $697.9 million | Down 6% | $100.2 million | Down 8% |
| Electronics and Performance Materials | $433.4 million | Up 7% | $48.4 million | Up 97% |
| Equipment and Energy | $108.6 million | Down 9% | $7.8 million | Up 11% |
Consolidated sales were affected by a 7% reduction from lower energy and raw-material cost pass-through, offset by 4% favorable currency effects and 2% higher underlying sales. Underlying volume increased 3% overall.
Cash Flow, Debt and Liquidity
- Operating cash flow was $193.9 million. Capital expenditures on a GAAP basis were $301.7 million, including $288.8 million of plant additions; capital expenditures including capital-lease expenditures were $345.2 million on the company’s non-GAAP measure.
- Investing activities used $275.4 million. Financing activities used $83.7 million, including $95.1 million of dividends and a net reduction in borrowings.
- Cash and cash items declined to $323.0 million from $488.2 million at 30 September 2009.
- Total debt declined to $4,418.7 million from $4,501.5 million. Debt represented 46.0% of total debt plus equity, compared with 47.7% at fiscal year-end.
- The company had a $1,450.0 million multicurrency revolving facility maturing in May 2011, with no borrowings outstanding. Foreign subsidiary commitments totaled $449.9 million, of which $293.2 million was utilized.
- Pension contributions were unusually high at $255.7 million, compared with $42.6 million in the prior-year quarter. Fiscal 2010 contributions were expected to be approximately $360 million.
Material Changes and Unusual Items
- Operating income benefited materially from the absence of the $174.2 million global cost reduction charge recorded in the prior-year quarter. The prior-year charge reduced after-tax earnings by $116.1 million, or $0.55 per share.
- Management expected approximately $155 million of cost savings in 2010 and approximately $180 million of annualized savings beyond 2010. Remaining actions from the first-quarter 2009 charge were expected to be completed in the second quarter of 2010.
- The prior-year period included a $21.4 million loss from discontinued operations related to the divested U.S. Healthcare business, including a $30.9 million after-tax impairment charge and an $8.8 million tax benefit. No discontinued-operations loss was recorded in the current quarter.
- Environmental liabilities totaled $93.3 million at 31 December 2009, with estimated exposure ranging from $93 million to a reasonably possible upper exposure of $107 million. The company sold its Paulsboro, New Jersey facility in December 2009 and expects investigation and remediation to take several years.
- The company continued to defend Brazilian antitrust proceedings. Management could not predict the outcome; although no material adverse effect on consolidated financial position or net cash flows was expected, a future fine or damages charge could materially affect income in the period recorded.
- No shares were repurchased during the quarter; $649.2 million remained under the repurchase authorization.
Outlook, Risks and Management Commentary
Management cited improving volumes, productivity, cost reductions, and favorable currency as positive factors. Key risks include a delayed or renewed global economic downturn, weaker customer demand, customer bankruptcies or receivable losses, contract cancellations, pricing pressure, energy and raw-material cost recovery, impairments, restructuring costs, litigation and regulatory actions, environmental obligations, foreign exchange and interest-rate volatility, access to foreign funding, and changes in tax or accounting rules.
The filing provides no formal earnings-per-share or revenue guidance beyond the disclosed cost-savings expectations. The company stated that there were no material changes to contractual obligations, off-balance-sheet arrangements, or market-risk sensitivities from the 2009 Form 10-K.
Investor Verification Checklist
- Verify how much of the earnings improvement is recurring operating performance versus the absence of the prior-year $174.2 million restructuring charge and discontinued-operations losses.
- Assess whether the projected $155 million of 2010 savings and $180 million of subsequent annualized savings were achieved.
- Monitor cash conversion, capital spending, pension contributions, and the effect of working-capital movements on liquidity.
- Review debt maturities, revolving-facility availability, foreign subsidiary borrowings, and credit-rating requirements for derivative collateral.
- Track Merchant Gases demand in North America and Europe, Tonnage Gases maintenance costs, and Electronics and Performance Materials volume and pricing trends.
- Review developments in Brazilian antitrust proceedings and environmental remediation obligations, particularly the Paulsboro site.