Air Products and Chemicals, Inc. — Fiscal 2013 Form 10-K
Business context and reporting period
Air Products is a global supplier of atmospheric, process, specialty and electronics gases, performance materials, equipment and energy solutions. Operations are organized into Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. The filing covers the fiscal year ended 30 September 2013; fourth-quarter figures are presented on an unaudited basis.
Financial performance and position
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Sales | $10,180.4 million | $9,611.7 million | +6% |
| Operating income | $1,324.4 million | $1,282.4 million | +3% |
| GAAP operating margin | 13.0% | 13.3% | -30 basis points |
| Income from continuing operations attributable to Air Products | $1,004.2 million | $999.2 million | +1% |
| Diluted EPS from continuing operations | $4.73 | $4.66 | +$0.07 |
| Net income attributable to Air Products | $994.2 million | $1,167.3 million | -15% |
| Diluted EPS | $4.68 | $5.44 | -$0.76 |
| Cash flow from operating activities | $1,553.1 million | $1,765.1 million | -12% |
| Capital expenditures, GAAP | $1,747.8 million | $2,559.8 million | -32% |
Reported GAAP results included $231.6 million of restructuring and cost-reduction charges and $10.1 million of advisory costs. Excluding these items, non-GAAP operating income was $1,566.1 million, non-GAAP operating margin was 15.4%, and non-GAAP diluted EPS from continuing operations was $5.50.
Cash and cash items were $450.4 million at year-end, compared with $454.4 million in 2012. Total debt increased to $6,273.6 million from $5,291.9 million, and debt represented 45.3% of total capitalization versus 43.0%. Working capital declined to $212 million from $726 million. The Company had a $2.5 billion revolving credit facility maturing in 2018, with no borrowings outstanding at year-end, and reported compliance with debt covenants.
Dividends declared increased to $2.77 per share from $2.50. The Company repurchased 5.7 million shares for $461.6 million, leaving $485.3 million of authorization. Foreign cash and cash items totaled $438.3 million and were generally intended to remain outside the United States.
Fourth-quarter performance
| Metric | Q4 FY 2013 | Q4 FY 2012 |
|---|---|---|
| Sales | $2,586.5 million | $2,605.8 million |
| Operating income | $179.2 million | $157.9 million |
| Net income attributable to Air Products | $137.1 million | $138.7 million |
| Diluted EPS from continuing operations | $0.70 | $0.64 |
| Diluted EPS | $0.64 | $0.65 |
Fourth-quarter results included the $231.6 million restructuring charge, $10.1 million of advisory costs, and a $12.4 million pension settlement loss. The Company also recorded a $18.7 million after-tax charge related to the remaining Homecare discontinued operation.
Material changes versus the prior comparable period
- Sales growth was driven primarily by the Indura and DA NanoMaterials acquisitions and higher contractual energy and raw-material cost pass-throughs. Underlying sales declined 1% because of weaker volumes, including the planned exit from the polyurethane intermediates business and lower Electronics demand.
- Merchant Gases sales increased 12% to $4,098.6 million, largely because of Indura; operating margin declined to 16.6% from 17.6% because of acquisition effects and higher power and fuel costs.
- Tonnage Gases sales increased 6% to $3,387.3 million, while operating margin declined to 15.2% from 16.0% because of higher maintenance and other costs.
- Electronics and Performance Materials sales declined 3% to $2,243.4 million. Non-GAAP operating income declined 5% to $321.3 million, reflecting lower volumes, unfavorable price and mix, and higher operating costs.
- Equipment and Energy sales increased 7% to $451.1 million and operating income increased to $65.5 million from $44.6 million, supported by LNG project activity. Equipment backlog declined to approximately $402 million from $450 million.
- Net income attributable to Air Products fell primarily because 2012 included a $150.3 million after-tax gain from the Homecare sale and a $54.6 million after-tax gain related to the previously held DA NanoMaterials interest.
Guidance, outlook, risks and unusual items
Management expected modest global economic growth in fiscal 2014 and anticipated higher earnings from new plant start-ups, LNG activity, improved asset utilization, cost reductions and lower pension expense. These benefits were expected to be partly offset by higher maintenance costs, additional shares outstanding and the shutdown of the PUI business. Fiscal 2014 capital expenditures were projected at $1.8–$1.9 billion on a GAAP basis, excluding acquisitions.
- The fiscal 2013 restructuring plan targeted approximately 700 position eliminations and included asset actions, a silane take-or-pay settlement and executive-related costs. Management expected $45 million of savings in 2014 and approximately $75 million of annual savings thereafter.
- Helium supply shortages affected Merchant Gases during 2013. Energy, natural gas, raw-material availability, cost recovery and customer demand remain significant operating sensitivities.
- Key risks include global economic weakness, cyclical Electronics demand, foreign-exchange and geopolitical exposure, interest-rate increases, competition, project execution, environmental regulation, greenhouse-gas regulation, catastrophic events, cybersecurity and potential asset impairments.
- Air Products faced an approximately $81 million Brazilian antitrust fine, plus accrued interest, that remained under appeal. Management considered an adverse judgment reasonably possible but not probable and recorded no provision.
- Environmental exposure covered approximately 33 unresolved sites. Recorded environmental liabilities were $86.7 million, with estimated exposure ranging from $86 million to a reasonably possible upper exposure of $100 million.
- The largest minority shareholder of Indura could require Air Products to purchase up to a 30.5% interest beginning in July 2015. A separate San Fu put arrangement had an estimated purchase value of approximately $275 million and was effective through January 2015.
Investor verification points
- Reconcile GAAP performance with management’s non-GAAP measures and assess whether restructuring savings offset the continued weakness in Electronics and PUI-related operations.
- Review debt maturities, including approximately $907 million due in fiscal 2014, the planned refinancing of $400 million of commercial paper, and available revolver capacity.
- Monitor operating cash flow relative to projected fiscal 2014 capital spending of $1.8–$1.9 billion and shareholder distributions.
- Evaluate the outcome and potential interest accumulation on the Brazilian antitrust appeal, environmental matters and Indura and San Fu put options.
- Assess exposure to helium shortages, energy and feedstock costs, foreign currency movements, pension assumptions and cyclical semiconductor markets.
- Confirm the status of the Homecare sale, the $148 million contingent retender proceeds, and the expected fiscal 2014 completion of restructuring and PUI shutdown activities.