Air Products & Chemicals, Inc. — Fiscal 2011 Q2 Form 10-Q
Reporting period: Quarterly and six months ended 31 March 2011; filed 26 April 2011. Financial statements are unaudited. The company operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Financial highlights
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|
| Sales | $2,501.3 million | $2,249.0 million | $4,893.0 million | $4,422.5 million |
| Operating income | $419.5 million | $340.6 million | $780.1 million | $685.6 million |
| Operating margin | 16.8% | 15.1% | 15.9% | 15.5% |
| Net income attributable to Air Products | $304.3 million | $252.0 million | $572.9 million | $503.8 million |
| Diluted EPS | $1.39 | $1.16 | $2.62 | $2.32 |
| Cash flow from operations | Not separately presented | Not separately presented | $626.7 million | $542.7 million |
- Q2 sales increased 11%, operating income increased 23%, net income increased 21%, and diluted EPS increased 20% year over year.
- Six-month sales increased 11%, operating income increased 14%, net income increased 14%, and diluted EPS increased 13%.
- Underlying volume growth was the primary earnings driver. Q2 underlying sales increased 12%, including volume growth of 11%; pricing increased 1%, currency contributed 1%, and energy and raw-material pass-through reduced sales by 2%.
- Q2 operating income included a $5.0 million net loss related to the Airgas transaction; six-month operating income included a $48.5 million loss. Excluding this item, Q2 diluted EPS was $1.41 versus $1.23, and six-month diluted EPS was $2.76 versus $2.39.
- Q2 GAAP operating margin improved 170 basis points; the comparable non-GAAP margin improved 80 basis points. Six-month GAAP margin improved 40 basis points and non-GAAP margin improved 90 basis points.
Liquidity, debt and capital allocation
- Cash and cash items were $270.3 million at 31 March 2011, compared with $374.3 million at 30 September 2010.
- Total debt increased to $4,395.9 million from $4,128.3 million. Total debt represented 42.3% of total debt plus equity, compared with 42.0% at fiscal year-end.
- Short-term borrowings increased to $662.1 million from $286.0 million; long-term debt, including the current portion, was $3,733.8 million.
- The company reported consistent access to commercial paper markets and stated that operating cash flow and financing activities were expected to meet liquidity needs for the foreseeable future. It was in compliance with debt covenants.
- The multicurrency revolving facility was increased by $170.0 million to $2.17 billion, with no borrowings outstanding under that facility. Foreign subsidiaries had additional commitments of $499.6 million, of which $401.0 million was outstanding.
- Capital additions to plant and equipment were $612.7 million for the six months, versus $516.9 million in the prior-year period. Capital expenditures on the company’s non-GAAP basis, including capital lease spending, were $752.9 million.
- Financing cash outflows included $350.0 million of treasury-stock purchases and $210.1 million of shareholder dividends. The company repurchased 3.8 million shares, with $299.2 million remaining under the authorization.
- The quarterly dividend increased from $0.49 to $0.58 per share, representing the 29th consecutive annual dividend increase.
Segment performance and material changes
| Segment | Q2 sales change | Q2 operating income change | Q2 margin |
|---|
| Merchant Gases | +10% | +4% | 18.3%, down 100 bps |
| Tonnage Gases | +6% | +13% | 15.1%, up 90 bps |
| Electronics and Performance Materials | +28% | +61% | 15.9%, up 330 bps |
| Equipment and Energy | -5% | +24% | 19.8%, approximately 460 bps improvement |
- Electronics and Performance Materials was the strongest growth contributor, driven by higher electronics and performance-materials volumes, pricing, and productivity.
- Tonnage Gases benefited from refinery hydrogen volumes, new plants, and improved plant efficiencies.
- Merchant Gases volume growth was strong, particularly in Asia, but higher operating, maintenance, distribution, and healthcare-related costs compressed margins.
- Equipment and Energy sales declined because of lower air-separation-unit sales, while operating income benefited from increased liquefied-natural-gas heat-exchanger activity. Equipment backlog was $184 million at 31 March 2011, down from $274 million at 30 September 2010.
- The Airgas tender offer was withdrawn on 15 February 2011 following an adverse Delaware Chancery Court decision. The related $6.7 billion term-loan facility was terminated on 16 February without an early-termination penalty. Air Products sold its Airgas shares for $94.7 million, recognizing a $25.1 million pretax gain, but recorded a $48.5 million six-month net transaction loss after other costs.
- The company completed the purchase of the remaining SAGA shares in November 2010 for approximately $62 million, increasing ownership to 100%.
- Accounting guidance adopted for variable-interest entities and multiple-deliverable revenue arrangements had no material impact. A change from a lattice model to Black-Scholes for stock-option valuation was not significant.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance is provided in the filing. Management stated that liquidity was expected to remain adequate and continued to emphasize volume growth, productivity, and capital investment.
- Management identified risks from economic weakness, reduced demand, customer cancellations or project delays, competitive pricing, raw-material and energy costs, interest rates, foreign currency, capital availability, acquisitions and divestitures, environmental and regulatory requirements, litigation, natural disasters, and changes in accounting or tax rules.
- A Brazilian competition matter involves a potential fine of approximately $110 million plus interest. The company appealed, believes an adverse final judgment is reasonably possible but not probable, and recorded no provision.
- Environmental accruals were $84.0 million at 31 March 2011, with reasonably possible exposure estimated at up to $98 million. Approximately 30 sites remained subject to unresolved environmental investigation or remediation.
- Pension and other benefit plan contributions and payments were $221.4 million during the six months; fiscal 2011 contributions were expected to be approximately $247 million.
- The company reported no material changes to contractual obligations or off-balance-sheet arrangements and stated that disclosure controls and procedures were effective.
Investor verification points
- Reconcile GAAP results with management’s non-GAAP measures and assess the recurring impact of Airgas-related costs.
- Monitor debt growth, commercial-paper reliance, variable-rate exposure, and available liquidity following the share repurchases and higher capital spending.
- Evaluate whether strong volume growth, particularly in Electronics and Performance Materials, can offset higher operating, maintenance, distribution, energy, and raw-material costs.
- Track the Equipment and Energy backlog decline and its potential effect on future revenue.
- Review the Brazilian competition appeal and environmental contingencies, including the disclosed maximum or reasonably possible exposures.
- Confirm the sustainability of the increased dividend and share-repurchase program against operating cash flow and capital requirements.
