Air Products & Chemicals, Inc. annual report, FY2012

Air Products and Chemicals, Inc. — Fiscal 2012 Form 10-K Summary

Business context and reporting period

Air Products and Chemicals is a global industrial-gases, electronics-materials, performance-materials, equipment, and energy company operating in more than 50 countries. Its four reportable segments are Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. This Form 10-K covers the fiscal year ended 30 September 2012; quarterly data identifies the fourth quarter but the filing primarily reports full-year results.

Fiscal 2012 included the sale of most of the Homecare business, the acquisition of a 64.8% controlling interest in Indura S.A., acquisition of the remaining 50% of DA NanoMaterials, and a 25% investment in Saudi Arabia-based Abdullah Hashim Industrial Gases & Equipment Co. Ltd. Homecare results were classified as discontinued operations.

Financial performance and position

MetricFY2012FY2011Change
Sales$9,611.7 million$9,673.7 millionDown 1%
Operating income, GAAP$1,282.4 million$1,508.1 millionDown 15%
Operating margin, GAAP13.3%15.6%Down 230 basis points
Income from continuing operations attributable to Air Products$999.2 million$1,134.3 millionDown 12%
Diluted EPS from continuing operations$4.66$5.22Down 11%
Net income attributable to Air Products$1,167.3 million$1,224.2 millionDown 5%
Diluted EPS$5.44$5.63Down 3%
Cash provided by operating activities$1,765.1 million$1,710.4 millionUp 3%
Capital expenditures, GAAP$2,559.8 million$1,365.9 millionUp 87%
Total debt at year-end$5,291.9 million$4,561.5 millionUp 16%
Cash and cash items$454.4 million$421.4 millionUp 8%

Reported results were materially affected by $327.4 million of restructuring and cost-reduction charges, a $9.8 million customer-bankruptcy charge, and an $85.9 million gain from remeasuring the previously held DA NanoMaterials interest. Management’s non-GAAP continuing-operations results were operating income of $1,533.7 million, a 16.0% margin, income of $1,158.6 million, and diluted EPS of $5.40, compared with $5.36 in 2011.

Income from discontinued operations was $168.1 million, including a $207.4 million pretax gain on the sale of the European Homecare business and a $33.5 million impairment charge on the remaining Homecare operations. Total net income was $1,193.3 million before noncontrolling interests.

Operating cash flow exceeded reported continuing-operations income, supported by depreciation and amortization, working-capital sources of cash, and restructuring accruals. Investing cash outflow was $2,435.2 million, driven by capital spending, the Indura acquisition, the DA NanoMaterials acquisition, and the AHG investment. Financing cash outflow was $78.4 million after debt issuance, dividends, share repurchases, and stock-option proceeds.

Working capital was $726 million at year-end versus $848 million in 2011. Total debt represented 44.4% of total debt plus total equity, compared with 43.4% in 2011. The company had $1,007.7 million of debt maturing within the next twelve months, including $374.3 million of long-term debt maturities. It reported compliance with its debt covenants and had no borrowings under its $2.17 billion committed multicurrency credit facility.

Material changes versus the prior comparable period

  • Sales declined modestly because stronger currency, lower energy and raw-material pass-through, and weaker volumes offset acquisitions and higher Tonnage Gases volumes.
  • Merchant Gases sales were essentially flat and operating income declined 4%; lower volumes in North America and Europe and helium supply limitations were partly offset by pricing, acquisitions, and cost reductions.
  • Tonnage Gases sales declined 3% because lower natural-gas prices reduced contractual pass-through revenue, while operating income increased 2% and margin improved to 16.0% due to higher volumes and new plants.
  • Electronics and Performance Materials sales increased 1%. GAAP operating income rose because of the DA NanoMaterials remeasurement gain, but comparable non-GAAP operating income declined 6% and margin fell to 14.6% amid weak electronics demand, currency pressure, and product mix.
  • Equipment and Energy sales increased 5%, while operating income declined 29% because of lower LNG project activity. Equipment backlog increased to approximately $450 million from $334 million.
  • Capital intensity increased sharply, with GAAP capital expenditures of $2.56 billion, including $690 million for Indura, $147 million for DA NanoMaterials, and $155 million for AHG.
  • The quarterly dividend increased from $0.58 to $0.64 per share, producing $2.50 of dividends declared for the year. The company repurchased 0.6 million shares for $53.1 million, leaving $946.9 million of authorization.

Guidance, outlook, risks, and unusual items

Management expected modest global economic growth in 2013: approximately 2%–4% in the United States and South America, 3%–5% in Asia, and no meaningful near-term growth in Europe. Expected earnings benefits included Tonnage Gases plant onstreams, higher utilization, cost-reduction actions, and Indura. Offsetting factors included higher pension expense, unfavorable currency, PUI restructuring, and a higher effective tax rate. Planned 2013 capital expenditures were $1.75–$1.85 billion on a GAAP basis, or $2.0–$2.2 billion on a non-GAAP basis, excluding acquisitions.

Key risks include cyclical industrial and electronics demand, pricing and excess capacity, energy and raw-material availability and cost recovery, helium shortages, foreign currency movements, interest rates, integration of acquisitions, project execution, environmental and greenhouse-gas regulation, pension underfunding, litigation, cybersecurity, and political or regulatory conditions in foreign markets.

Notable contingencies include an approximately $88 million Brazilian competition-law fine that management considered reasonably possible but not probable and therefore did not accrue; environmental exposure estimated at $87 million to a reasonably possible upper range of $101 million, with an $87.5 million accrual; pension obligations with a $1.25 billion contractual-obligation estimate; and a potential Indura minority-shareholder put option for up to 30.5% of the subsidiary beginning in 2015.

The filing states that management and KPMG concluded internal control over financial reporting was effective. Indura, representing approximately 10% of consolidated assets and less than 2% of sales, was excluded from the 2012 internal-control assessment.

Important facts for investors to verify

  • Reconcile GAAP earnings with management’s non-GAAP measures and assess whether restructuring, PV, PUI, tax, acquisition, and discontinued-operation items are truly nonrecurring.
  • Evaluate debt refinancing requirements, variable-rate exposure, liquidity, and the effect of the Indura acquisition on leverage and noncontrolling interests.
  • Monitor whether the 2013 earnings outlook is supported by new Tonnage Gases plants, higher asset utilization, Indura synergies, and cost savings.
  • Assess the unresolved silane take-or-pay contract, PV-market actions, purchase commitments, and potential additional PUI closure and environmental costs.
  • Review pension funding needs, higher projected 2013 pension expense of approximately $175–$180 million, and sensitivity to discount rates and asset returns.
  • Track the Brazilian competition proceeding, environmental remediation sites, Indura and San Fu put options, and other guarantees and contingencies.
  • Verify segment trends independently, particularly weak Merchant and Electronics volumes, helium availability, LNG activity, and the quality and timing of the $450 million equipment backlog.