Air Products & Chemicals, Inc. — Fiscal 2011 First-Quarter Form 10-Q
Reporting period: Three months ended December 31, 2010, compared with the three months ended December 31, 2009. The filing was signed January 25, 2011. Financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Air Products operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Management attributed growth primarily to higher volumes, particularly in Electronics and Performance Materials, Tonnage Gases, and Merchant Gases.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Sales | $2,391.7 million | $2,173.5 million | Up 10% |
| Operating income | $360.6 million | $345.0 million | Up 5% |
| Operating margin | 15.1% | 15.9% | Down 80 basis points |
| Net income attributable to Air Products | $268.6 million | $251.8 million | Up 7% |
| Diluted EPS | $1.23 | $1.16 | Up $0.07 |
| Cash provided by operating activities | $336.6 million | $193.9 million | Up $142.7 million |
| Capital additions to plant and equipment | $306.9 million | $288.8 million | Up $18.1 million |
| Cash and cash items at period end | $247.2 million | $323.0 million | Down $75.8 million |
Non-GAAP results: Excluding $43.5 million of Airgas acquisition-related costs, operating income was $404.1 million, operating margin was 16.9%, net income was $295.8 million, and diluted EPS was $1.35. Management reported non-GAAP increases of 17%, 17%, and 16%, respectively, versus the prior period; these measures are not substitutes for GAAP results.
Tax and interest: GAAP income before taxes was $357.4 million and the effective tax rate was 22.8%, compared with 24.5% in the prior period. Interest expense was $31.0 million, versus $31.6 million.
Segment Performance
| Segment | Sales | Sales Change | Operating Income | Operating Income Change |
|---|---|---|---|---|
| Merchant Gases | $987.8 million | Up 6% | $200.5 million | Up 6% |
| Tonnage Gases | $766.0 million | Up 10% | $115.6 million | Up 15% |
| Electronics and Performance Materials | $526.0 million | Up 21% | $68.9 million | Up 42% |
| Equipment and Energy | $111.9 million | Up 3% | $20.2 million | Increase from $7.8 million |
Merchant Gases benefited from volume and pricing growth but faced higher distribution, maintenance, and power costs. Tonnage Gases benefited from new plant start-ups, lower costs, and improved plant efficiency. Electronics and Performance Materials benefited from higher volumes and prior-year restructuring benefits, partly offset by higher raw material costs. Equipment and Energy benefited from increased LNG project activity; its equipment backlog declined to $209 million from $274 million at September 30, 2010.
Liquidity, Debt, and Cash Flow
- Operating cash flow increased 74%, primarily from higher earnings and favorable working-capital changes, including lower pension contributions and timing effects in accrued taxes and liabilities.
- Investing cash use was $276.8 million, including $306.9 million of plant and equipment additions and $33.2 million of proceeds from asset and investment sales.
- Financing cash use was $190.6 million, including $137.6 million of long-term debt repayments, $33.3 million of net short-term borrowing reductions, and $104.8 million of dividends paid.
- Total debt declined to $3,992.0 million from $4,128.3 million at September 30, 2010. Debt represented 40.0% of total debt plus equity, compared with 42.0% at the prior fiscal year-end.
- The company had a $2.0 billion multicurrency revolving facility with no borrowings outstanding. Foreign subsidiaries had additional commitments of $519.2 million, of which $408.0 million was outstanding.
- Management stated that cash flow from operations, financing activities, and continued access to commercial paper markets were expected to meet liquidity needs for the foreseeable future. The company reported compliance with debt covenants.
Material Changes and Unusual Items
- The Airgas tender offer was increased to $70 per share, implying an approximately $7.8 billion transaction value, including $6.1 billion of equity and $1.7 billion of assumed debt. The offer was scheduled to expire February 4, 2011, unless extended.
- Air Products recorded $43.5 million of Airgas-related expense in the quarter, or $27.2 million after tax and $0.12 per diluted share. Total transaction costs were expected to be approximately $150 million to $200 million, including $96.0 million recognized in fiscal 2010.
- The company secured a committed $6.7 billion term-loan facility in connection with the proposed Airgas acquisition.
- Air Products completed its purchase of the remaining SAGA shares on November 30, 2010, for approximately $62 million.
- The company revised its estimated liability for the obligation to purchase 25% of the remaining CryoService shares, recording a $6.1 million reduction in capital in excess of par value. The liability was $48.6 million at December 31, 2010.
- Cash contributions to funded pension plans and payments under unfunded plans were $208.7 million in the quarter. Fiscal 2011 contributions were expected to total approximately $247 million.
- Beginning in fiscal 2011, the company changed its stock-option valuation model from a lattice-based model to Black-Scholes. Management stated that the effect was not material.
Guidance, Outlook, and Risks
No specific earnings or revenue guidance was provided in the filing. Management described the financial position as strong and expected liquidity resources to remain adequate. Forward-looking results depend on global economic conditions, customer demand, project timing, pricing, energy and raw-material recovery, foreign exchange and interest rates, acquisitions and synergies, regulatory developments, litigation, environmental matters, and access to capital markets.
The company disclosed a Brazilian competition matter involving a potential fine of approximately $108 million plus accrued interest. Air Products appealed, determined that an adverse judgment was reasonably possible but not probable, and recorded no provision. Environmental liabilities accrued on the balance sheet totaled $86.0 million, with reasonably possible exposure estimated at up to $100 million.
Most Important Facts to Verify
- Outcome and financing of the proposed Airgas acquisition, including tender-offer status, required divestitures, total transaction costs, and use of the $6.7 billion term-loan facility.
- Whether volume-driven growth and improved segment margins persisted after the quarter, particularly in Electronics and Performance Materials and Tonnage Gases.
- Cash generation relative to capital spending, pension contributions, dividends, and acquisition-related financing requirements.
- Progress and ultimate resolution of the Brazilian antitrust appeal and related potential fine.
- Changes in debt balances, interest rates, covenant compliance, and availability of commercial paper and revolving credit facilities.
- Actual fiscal 2011 pension contributions and environmental expenditures versus disclosed estimates.