Air Products & Chemicals, Inc. — Fiscal 2014 First-Quarter Form 10-Q
Reporting period: Three months ended 31 December 2013, filed 29 January 2014. Comparative period was the three months ended 31 December 2012. Results are unaudited and presented under U.S. GAAP. The company operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales | $2,545.5 million | $2,562.4 million | Down 1% |
| Operating income | $385.6 million | $372.4 million | Up 4% |
| Operating margin | 15.1% | 14.5% | Up 60 basis points |
| Income from continuing operations attributable to Air Products | $287.1 million | $276.9 million | Up 4% |
| Net income attributable to Air Products | $290.2 million | $278.3 million | Up 4% |
| Diluted EPS from continuing operations | $1.34 | $1.30 | Up $0.04 |
| Diluted EPS including discontinued operations | $1.35 | $1.31 | Up $0.04 |
| Cash flow from operations | $546.2 million | $278.4 million | Up $267.8 million |
| Capital expenditures | $391.1 million | $357.0 million | Up $34.1 million |
| Cash and cash items at period end | $387.6 million | $545.6 million | Down $158.0 million |
Underlying sales declined 2%, driven primarily by lower volumes, while contractual energy and raw-material cost pass-through increased reported sales by 1%. The effective tax rate was 24.2%, compared with 24.4% in the prior-year quarter. Equity-affiliate income declined 8% to $38.2 million, while interest expense declined to $33.3 million from $35.8 million.
Total debt was $6,168.3 million at 31 December 2013, down from $6,273.6 million at 30 September 2013. Debt represented 44.2% of total debt and capitalization, compared with 45.3% at fiscal year-end. The company had no borrowings under its $2.5 billion revolving credit facility, which matures in April 2018, and was in compliance with its debt covenants. Cash and cash items included $375.9 million held outside the United States, which the company intends to permanently reinvest primarily outside the United States.
Operating cash flow exceeded GAAP capital expenditures by $155.1 million. Including $48.1 million of capital-lease expenditures, management reported non-GAAP capital expenditures of $439.2 million. Financing cash flow was negative $238.2 million, reflecting a $434.0 million repayment of long-term debt, a $149.9 million dividend payment, and a $339.1 million increase in commercial paper and short-term borrowings.
Material changes versus the prior comparable period
- Merchant Gases: Sales increased 4% to $1,047.7 million, but operating income fell 1% to $169.2 million and margin declined 80 basis points to 16.1%, primarily because higher operating costs and incomplete recovery of power and fuel costs offset volume growth.
- Tonnage Gases: Sales declined 10% to $808.1 million and operating income declined 15% to $117.6 million. Lower volumes, plant outages, Latin American weakness, the completed exit from Polyurethane Intermediates, and higher maintenance costs were principal factors.
- Electronics and Performance Materials: Sales increased 5% to $579.1 million, while operating income rose 36% to $83.5 million. Margin expanded 320 basis points to 14.4%, supported by higher volumes and restructuring-related cost reductions.
- Equipment and Energy: Sales increased 4% to $110.6 million and operating income increased 144% to $20.5 million, primarily because of higher LNG activity. Equipment backlog was $343 million at 31 December 2013, down from $402 million at 30 September 2013.
- Operating income benefited from higher volumes across most businesses, but was partially offset by lower price recovery for raw-material costs and higher Tonnage Gases maintenance costs. Selling and administrative expense increased 5% to $280.9 million, or 11.0% of sales versus 10.5%.
- Cash from operations increased substantially, principally because the prior-year period included a $220 million voluntary pension contribution; current-quarter pension contributions and unfunded-plan payments were $31.4 million.
- The company paid down a €300 million Eurobond, approximately $401.0 million, in November 2013, while increasing short-term borrowings. No shares were repurchased during the quarter; $485.3 million remained under the repurchase authorization.
Outlook, commentary, risks, and unusual items
Management stated that the company maintained a strong financial position, continued to have access to commercial paper markets, and expected operating cash flow and financing activities to meet liquidity needs for the foreseeable future. The filing does not provide a specific quantitative earnings or sales guidance range.
- Management identified continued weakness in the photovoltaic and LED markets, weaker-than-expected conditions in parts of Europe and Asia, plant outages, customer project delays, and maintenance costs as operating pressures.
- During the prior fiscal fourth quarter, the company recorded a $231.6 million restructuring and cost-reduction charge, including $157.9 million after tax, primarily affecting Electronics, Merchant Gases, and corporate functions. The related actions were expected to be completed by the end of fiscal 2014; the accrued balance was $58.6 million at 31 December 2013.
- The remaining Homecare business was sold for $9.8 million in the quarter, producing a $2.4 million gain. Discontinued operations contributed $3.1 million of after-tax income, including the gain on sale.
- The company faces a Brazilian competition-law fine of approximately $76 million plus interest. Management considered an adverse final judgment reasonably possible but not probable and recorded no provision.
- Environmental accruals totaled $85.2 million. Estimated exposure ranged from $85 million to a reasonably possible upper exposure of $99 million, with payments potentially extending up to 30 years.
- The company provided an operations guarantee related to assigned Homecare contracts, with a maximum potential payment of approximately $33 million and exposure extinguishing by 2020.
- Key forward-looking risks include global economic weakness, customer cancellations or project delays, energy and raw-material price volatility, inability to recover cost increases, foreign-exchange and interest-rate movements, litigation and regulatory outcomes, environmental obligations, political risks, and asset impairments.
Investor verification points
- Verify whether Tonnage Gases volume weakness and the completed Polyurethane Intermediates exit are temporary or represent a sustained reduction in earnings capacity.
- Assess the sustainability of the improved Electronics and Performance Materials margin and the expected benefits from the restructuring program.
- Monitor the shift toward commercial paper and short-term borrowings following the Eurobond repayment, including refinancing of the $400.0 million commercial paper classified as long-term debt.
- Reconcile operating cash flow with capital expenditures, capital-lease expenditures, pension funding, and expected fiscal-year investment needs.
- Track the Brazilian competition matter, environmental remediation exposures, and the Homecare operations guarantee for changes in probability or estimated amounts.
- Review the Equipment backlog decline and the effect of global industrial, energy, construction, photovoltaic, and LED demand on future revenue and margins.