Air Products & Chemicals, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2011, the first quarter of fiscal 2012. The filing was dated January 27, 2012. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Key Financial Metrics
Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Consolidated sales were $2,423.1 million, with Asia sales growth partly offsetting lower sales in North America, Europe, and Latin America/Other.
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $2,423.1 million | $2,391.7 million | Up 1% |
| Operating income | $384.7 million | $360.6 million | Up 7% |
| Operating margin | 15.9% | 15.1% | Up 80 basis points |
| Income before taxes | $392.4 million | $357.4 million | Up $35.0 million |
| Net income attributable to Air Products | $248.1 million | $268.6 million | Down 8% |
| Diluted EPS | $1.16 | $1.23 | Down 6% |
| Cash provided by operating activities | $430.7 million | $336.6 million | Up $94.1 million |
| Capital expenditures on a GAAP basis | $370.9 million | $306.9 million | Up $64.0 million |
Reported operating results benefited from the absence of the $43.5 million Airgas transaction loss recorded in the prior-year quarter. Excluding unusual items, non-GAAP operating income declined 5% to $384.7 million and non-GAAP operating margin declined to 15.9% from 16.9%. Non-GAAP net income was $291.9 million versus $295.8 million, while non-GAAP diluted EPS increased to $1.36 from $1.35.
Segment Performance
- Merchant Gases: Sales were essentially flat at $989.3 million; operating income declined 4% to $191.6 million and margin fell 90 basis points to 19.4%, primarily because of lower volumes.
- Tonnage Gases: Sales increased 6% to $809.8 million, driven by new plants and higher volumes. Operating income declined 4% to $111.4 million and margin fell 130 basis points to 13.8% because of higher maintenance costs and currency effects.
- Electronics and Performance Materials: Sales increased 2% to $535.2 million. Operating income rose 13% to $78.1 million and margin improved 150 basis points to 14.6%, primarily from lower operating costs.
- Equipment and Energy: Sales fell 21% to $88.8 million and operating income fell 64% to $7.3 million due to lower air separation unit and LNG heat exchanger activity. Equipment backlog was $310 million at December 31, 2011, versus $334 million at September 30, 2011.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash items were $407.3 million at December 31, 2011, compared with $422.5 million at September 30, 2011. Foreign cash represented $395.2 million of the total and was intended to remain substantially reinvested outside the United States.
- Operating cash flow of $430.7 million exceeded GAAP capital expenditures of $370.9 million. Capital spending, including capital lease expenditures and purchases of noncontrolling interests, was $405.4 million on management’s non-GAAP measure.
- Total debt was $4,616.0 million, up from $4,562.2 million at September 30, 2011. Debt represented 43.2% of total debt plus equity, compared with 43.4% at the prior fiscal year-end.
- The company issued a $400.0 million senior fixed-rate note bearing 3.0% interest and maturing November 3, 2021. It also repaid $315.4 million of commercial paper and short-term borrowings.
- The company had a $2.17 billion multicurrency revolving credit facility maturing in 2015, with no borrowings outstanding under that facility. Management reported compliance with debt covenants, including a maximum leverage ratio of 60%.
- Shareholders’ equity increased to $5,909.0 million from $5,795.8 million. The quarterly cash dividend was $0.58 per share, compared with $0.49 in the prior-year quarter. No shares were repurchased during the quarter, and the full $1.0 billion repurchase authorization remained available.
Material Changes, Unusual Items, and Outlook
- Spanish tax settlement: A $43.8 million tax expense, or $0.20 per diluted share, was recorded for a settlement with Spanish tax authorities. It raised the GAAP effective tax rate to 34.7% from 22.8%. The company reported a non-GAAP effective tax rate of 23.5%.
- Spanish tax ruling: Following a favorable Spanish Supreme Court decision in January 2012, the company expected to reduce unrecognized tax benefits by approximately $60 million, including interest, in the second quarter. The reduction was expected to lower tax expense with no cash impact.
- Homecare divestiture: The company agreed to sell Homecare operations in Belgium, Germany, France, Portugal, and Spain to The Linde Group for €590 million, approximately $767 million, subject to regulatory and employee consultation requirements. The transaction was expected to close in the second quarter of fiscal 2012, with a gain anticipated. The business was to be classified as discontinued operations beginning in the second quarter. The United Kingdom portion was expected to be sold within the following year.
- Management commentary: Overall volumes were flat. New Tonnage Gases plants supported growth, but lower Merchant Gases, Performance Materials, and Equipment volumes, unfavorable currency, raw-material recovery shortfalls, and higher maintenance costs pressured underlying profitability. Productivity efforts partially offset inflation.
- Pension funding: Fiscal 2012 contributions to funded and unfunded plans were expected to be approximately $40 million to $60 million, compared with $241 million in fiscal 2011.
- Accounting guidance: Newly issued guidance concerning goodwill impairment, multiemployer pensions, comprehensive income presentation, and fair value measurements was not expected to have a material impact on the financial statements.
Risks and Contingencies
- The company disclosed a Brazilian antitrust fine of approximately $96 million plus accrued interest. The company appealed, considered an adverse final judgment reasonably possible but not probable, and recorded no provision.
- Environmental liabilities were accrued at $81.4 million, with estimated exposure ranging from $81 million to a reasonably possible upper exposure of $95 million. Approximately 36 sites remained subject to investigation, remediation, or unresolved settlement.
- Key forward-looking risks include global economic weakness, reduced customer demand, project cancellations, competitive pricing, energy and raw-material cost inflation, supply interruptions, currency and interest-rate volatility, litigation and regulatory outcomes, environmental obligations, tax-law changes, and execution of acquisitions, divestitures, and productivity initiatives.
- Foreign currency and interest-rate derivatives were used to manage exposures. The company reported no material change in market-risk sensitivities from September 30, 2011.
Investor Verification Checklist
- Verify the second-quarter accounting and gain recognition for the Homecare divestiture, including the treatment of contingent proceeds and discontinued operations.
- Confirm recognition of the approximately $60 million Spanish tax benefit and its effect on second-quarter tax expense and EPS.
- Monitor underlying operating margins excluding the prior-year Airgas charge and the current-year Spanish tax settlement.
- Assess whether Tonnage Gases maintenance costs, Merchant Gases volume weakness, Equipment backlog declines, and Performance Materials volume reductions persist.
- Review debt maturities, refinancing requirements, commercial paper access, foreign cash restrictions, and covenant compliance.
- Track the Brazilian antitrust appeal, environmental remediation costs, and other litigation and regulatory exposures.