Air Products & Chemicals, Inc. — Fiscal Second Quarter 2010 Form 10-Q
Reporting period: Three and six months ended 31 March 2010; filed 26 April 2010. The interim financial statements are unaudited. Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales | $2,249.0 million | $1,955.4 million | $4,422.5 million | $4,150.7 million |
| Operating income | $340.6 million | $260.4 million | $685.6 million | $374.5 million |
| Operating margin | 15.1% | 13.3% | 15.5% | 9.0% |
| Income attributable to Air Products | $252.0 million | $205.6 million | $503.8 million | $274.2 million |
| Net margin | 11.2% | 10.5% | 11.4% | 6.6% |
| Diluted EPS from continuing operations | $1.16 | $0.89 | $2.32 | $1.32 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $542.7 million | $459.3 million |
- Q2 sales increased 15%, with 10% volume growth, a 4% favorable currency impact, and 2% energy and raw-material pass-through, partly offset by 1% lower pricing.
- Q2 operating income increased 31%; excluding $23.4 million of Airgas-related acquisition costs, non-GAAP operating income increased 40% to $364.0 million.
- Six-month GAAP operating income increased 83%, but the prior-year comparison includes a $174.2 million global cost-reduction charge. On a comparable non-GAAP basis, operating income increased 29% to $709.0 million.
- Six-month operating cash flow funded capital spending and dividends. Investing cash use was $578.7 million, including $516.9 million of plant additions, $34.9 million for acquisitions, and $69.6 million invested in Airgas stock.
- Cash and cash items declined to $230.9 million at 31 March 2010 from $488.2 million at 30 September 2009. Total debt declined to $4,343.4 million from $4,501.5 million, and debt as a percentage of debt plus equity declined to 44.5% from 47.7%.
- Total equity increased to $5,418.3 million from $4,930.0 million, supported by earnings and favorable other comprehensive income.
- Quarterly dividends increased to $0.49 per share from $0.45; the company reported its 28th consecutive annual dividend increase.
Material changes versus the prior comparable period
- Segment performance: Q2 Electronics and Performance Materials sales increased 36% and operating income rose to $57.0 million from a $11.1 million loss, reflecting stronger electronics and performance-materials demand and cost actions.
- Q2 Tonnage Gases sales increased 21% and operating income increased 9%, driven by higher volumes and new plant start-ups, partly offset by maintenance costs.
- Q2 Merchant Gases sales increased 6% and operating income increased 14%; Asia was strong, while North American and European manufacturing demand remained weaker.
- Q2 Equipment and Energy sales decreased 7%, although operating income increased 12%. Equipment backlog increased to $343 million at 31 March 2010 from $239 million at 30 September 2009.
- Research and development expense declined 11% in Q2 and 15% for the six-month period, primarily due to cost-reduction actions. Selling and administrative expense rose 4% in Q2 but declined as a percentage of sales to 10.7% from 11.8%.
- The prior-year six-month results included the global cost-reduction charge and discontinued U.S. Healthcare impairment and tax items. The U.S. Healthcare business generated no discontinued-operation income in 2010.
- Effective tax rate increased to 25.1% for the six months from 20.9%, primarily because tax credits had a lower relative impact on higher taxable income.
Outlook, transactions, risks, and unusual items
- Airgas tender offer: Air Products commenced a $60-per-share cash tender offer for Airgas, with an estimated transaction value of approximately $7 billion, including assumed debt. The offer was scheduled to expire 4 June 2010 unless extended. Air Products had purchased approximately 1.5 million Airgas shares for $69.6 million and secured a $6.7 billion term-loan facility.
- Airgas-related costs were $23.4 million through six months, and total transaction costs were expected to be approximately $150 million to $200 million. Moody’s lowered Air Products’ ratings from A2/P-1 to A3/P-2 in connection with the tender offer.
- Air Products acquired 51.47% of French industrial-gas provider SAGA on 1 March 2010 for $25.0 million net of cash acquired. The remaining shares were expected to be purchased in November 2010 for approximately $61 million under a put and call structure accounted for as short-term borrowing.
- Management expected approximately $155 million of cost savings in 2010 and approximately $180 million of annualized savings beyond 2010 from the global cost-reduction plan. Remaining related benefit payments were expected in the third quarter of 2010.
- No formal earnings or revenue guidance is provided in the filing. Management stated that operating cash flow, financing activities, and continued access to commercial paper were expected to meet liquidity needs for the foreseeable future.
- Key risks include global economic weakness, demand and customer concentration, customer bankruptcies and receivable collectability, pricing and energy-cost recovery, foreign exchange and interest-rate volatility, acquisition financing and execution, anticipated synergies, litigation, environmental obligations, regulatory actions, and potential Airgas transaction costs.
- The company disclosed an antitrust proceeding involving its Brazilian subsidiary for which the outcome and potential loss range could not reasonably be estimated. Environmental accruals totaled $92.4 million, with estimated exposure ranging from $92 million to a reasonably possible upper exposure of $106 million.
- An unplanned February 2010 shutdown at a Texas nitric-acid plant released nitrogen dioxide and nitric acid. Regulatory authorities were investigating; any resulting fines or penalties were expected to be immaterial, although the final outcome was not known.
Important facts for investors to verify
- Whether the Airgas tender offer was completed, withdrawn, or materially modified after the 31 March 2010 reporting date, and the resulting debt, ratings, and leverage impact.
- Whether the projected $155 million of 2010 and $180 million of subsequent annualized cost savings were achieved and whether additional restructuring charges occurred.
- The final purchase accounting and cash requirements for SAGA, including the remaining share purchase obligation.
- Whether volume recovery, especially in Electronics and Performance Materials and Tonnage Gases, continued without further price pressure or variable-cost inflation.
- Subsequent developments in the Brazilian antitrust matter, environmental remediation obligations, and the Texas plant incident.
- Liquidity after capital expenditures, pension contributions, dividends, Airgas-related spending, and any subsequent borrowing under committed facilities.
- The filing text does not provide a clear full-year earnings or revenue guidance value; investors should verify subsequent company guidance separately.