Air Products & Chemicals, Inc. — Fiscal 2009 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended 30 June 2009; filed 24 July 2009. Results are unaudited and presented in millions of dollars unless otherwise indicated. The company operates through Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Key Financial Metrics
| Metric | Three months ended 30 June 2009 | Three months ended 30 June 2008 | Nine months ended 30 June 2009 | Nine months ended 30 June 2008 |
|---|---|---|---|---|
| Sales | $1,976.2 | $2,749.7 | $6,126.9 | $7,699.8 |
| Operating income | $143.8 | $393.7 | $518.3 | $1,122.7 |
| Income from continuing operations | $114.6 | $295.0 | $393.9 | $817.1 |
| Net income | $113.2 | $70.1 | $387.4 | $648.1 |
| Diluted EPS | $0.53 | $0.32 | $1.82 | $2.95 |
| Diluted EPS from continuing operations | $0.54 | $1.35 | $1.85 | $3.72 |
Margins: Third-quarter operating margin was approximately 7.3%, compared with 14.3% in the prior-year quarter. Continuing-operations margin was approximately 5.8%, compared with 10.7%. Nine-month operating margin was approximately 8.5%, compared with 14.6%; continuing-operations margin was approximately 6.4%, compared with 10.6%.
- Third-quarter sales declined 28%, reflecting an 11% decline in underlying business, a 6% currency headwind, and an 11% reduction from lower energy and raw-material pass-through.
- Nine-month sales declined 20%; underlying business declined 8%, with volume down 10%, partially offset by 2% pricing.
- Cash provided by operating activities was $857.2 million for the first nine months, down from $1,129.5 million. Capital expenditures were $899.3 million, producing negative operating cash flow after plant additions of approximately $42.1 million before other investing activity.
- Cash and cash items were $70.3 million at 30 June 2009, versus $103.5 million at 30 September 2008.
- Total debt increased to $4,145.2 million from $3,966.8 million. Debt represented 45.0% of debt, equity, and minority interest, compared with 43.4% at fiscal year-end.
- Long-term debt, including the current portion, had a carrying value of $3,759.6 million and fair value of $3,901.9 million. Short-term borrowings were $385.6 million.
- The company had a $1,450.0 million multicurrency revolving facility maturing in May 2011, with no borrowings outstanding; foreign subsidiary facilities totaled $313.0 million, of which $307.1 million was utilized.
- Dividends paid during the first nine months were $278.8 million. The quarterly dividend increased to $0.45 per share from $0.44, marking the 27th consecutive annual increase.
Material Changes Versus the Prior Comparable Period
- Operating income fell 63% in the quarter and 54% for the nine-month period, driven by lower volumes, unfavorable currency, and restructuring and other unusual charges.
- Third-quarter segment sales and operating income were: Merchant Gases $882.6 million and $168.8 million, down 19% and 17%; Tonnage Gases $565.0 million and $87.6 million, down 42% and 30%; Electronics and Performance Materials $409.2 million and $39.0 million, down 29% and 45%; and Equipment and Energy $119.4 million and $13.1 million, up 12% and 228%.
- Electronics and Performance Materials was particularly affected by the global semiconductor and flat-panel manufacturing downturn; nine-month segment operating income fell 74%.
- Equipment and Energy benefited from higher large air separation unit activity and improved cost performance, although its backlog declined to $253 million from $399 million at 30 September 2008.
- Interest expense declined to $27.5 million in the quarter and $94.0 million for nine months, primarily because of lower average variable-rate interest costs.
- The effective tax rate declined to 18.1% from 25.0% in the quarter and to 20.1% from 25.7% for nine months, principally because tax credits had a greater relative effect at lower pretax income.
- Net income increased year over year only because the prior-year period included a large discontinued-operations impairment charge; continuing-operations earnings declined substantially.
Guidance, Outlook, Risks, and Unusual Items
- The global cost-reduction plan generated $298.2 million of charges for the first nine months, including $124.0 million in the third quarter. The third-quarter charge included approximately 1,150 workforce reductions, facility closures, and $34.0 million of asset impairments.
- Management expects approximately $20 million to $30 million of additional cost-reduction and asset-action charges over the following several quarters. Expected savings from the 2009 plan were approximately $50 million in 2009, $155 million in 2010, and approximately $180 million annually beyond 2010, before approximately $20 million of capitalized project execution costs.
- Management expected Merchant Gases volumes to remain near third-quarter levels, with weak European demand and improving Asian volumes. Tonnage Gases volumes were expected to improve modestly with higher steel, chemical, refinery, and polyurethane-intermediates activity.
- Electronics and Performance Materials volumes were expected to improve slightly but remain subject to restructuring costs. Equipment and Energy operating results were expected to decline because of restructuring costs.
- Capital expenditures for fiscal 2009 were expected to be approximately equal to fiscal 2008 spending.
- A $32.1 million charge was recorded for a customer bankruptcy and manufacturing-facility asset actions, including a $22.2 million receivable write-off. Remaining receivables from the bankrupt customer were $16.4 million, and management did not expect additional charges at the filing date.
- An $8.0 million pension settlement charge was recognized in the quarter; an additional $2 million to $3 million was expected in the fourth quarter. Pension contributions totaled $169.5 million through nine months, with approximately $185 million expected for the full year.
- More than half of the remaining U.S. Healthcare business was sold for $38.1 million during the quarter. The remaining business was expected to be sold in 2009. Discontinued operations generated a nine-month after-tax loss of $6.5 million.
- Environmental accruals totaled $95.5 million, with estimated exposure ranging from $95 million to a reasonably possible upper exposure of $109 million. The company also disclosed ongoing litigation and regulatory matters, including Brazilian competition proceedings and a proposed EPA-related fine concerning the Pasadena, Texas facility.
- Key forward-looking risks include prolonged economic weakness, customer demand and bankruptcy risk, project cancellations, pricing and cost recovery, foreign currency and interest-rate volatility, raw-material supply and costs, restructuring execution, environmental and regulatory obligations, litigation, and asset impairments.
- Management concluded that disclosure controls and procedures were effective as of 30 June 2009, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether expected cost savings materialize and whether the anticipated additional $20 million to $30 million of charges are complete.
- Recovery in industrial-gas volumes, especially in steel, chemicals, manufacturing, semiconductor, and flat-panel end markets.
- Cash generation relative to capital expenditures, pension contributions, dividends, and debt maturities.
- Debt reduction, revolving-facility availability, and the company’s ability to maintain investment-grade credit ratings.
- Progress and proceeds from the remaining U.S. Healthcare divestiture and any additional discontinued-operations adjustments.
- Potential outcomes and timing of environmental, competition, regulatory, and litigation matters.
- Equipment and Energy backlog trends and the effect of restructuring on future segment profitability.