10-QPeriod: Q3 FY2012

Air Products & Chemicals, Inc. Quarterly Report for Q3 Ended Jun 30, 2012

Filed July 27, 2012For Securities:APD

Summary

Air Products & Chemicals, Inc. (APD) reported solid financial results for the third quarter of fiscal year 2012, demonstrating resilience despite a 5% decrease in reported sales year-over-year to $2,340.1 million. This top-line decline was primarily attributed to lower natural gas prices leading to reduced cost pass-through and unfavorable currency movements, which together accounted for a 7% reduction. However, underlying sales saw a modest 1% increase, driven by higher pricing in the Merchant Gases segment. Despite the sales dip, operating income surged by 25% to $482.8 million, and operating margin expanded significantly to 20.6% (GAAP basis), largely due to improved cost performance, operational efficiencies, and the positive impact of a cost reduction plan in Europe. Net income from continuing operations rose 20% to $357.2 million, with diluted EPS climbing 21% to $1.66. The company also successfully completed the acquisition of DuPont's stake in their joint venture, DA NanoMaterials, in April 2012. This transaction, while contributing to sales, also resulted in a significant one-time gain of $85.9 million ($0.25 per share) in the quarter due to the revaluation of the previously held equity interest. Furthermore, APD realized a substantial gain of $207.4 million ($0.70 per share) from the sale of the majority of its Homecare business to The Linde Group. These significant one-time items, while boosting reported GAAP figures, highlight the importance of analyzing non-GAAP performance for a clearer view of operational trends. On a non-GAAP basis, which excludes these items, operating income grew 2% and diluted EPS from continuing operations increased 3%, indicating underlying business strength.

Financial Statements
Beta

Key Highlights

  • 1Reported a 25% increase in operating income to $482.8 million and a significant expansion in operating margin to 20.6% (GAAP) for Q3 2012 compared to Q3 2011, driven by improved cost performance and operational efficiencies.
  • 2Achieved a 20% increase in income from continuing operations to $357.2 million and a 21% rise in diluted EPS to $1.66 (GAAP) for Q3 2012, demonstrating strong profitability despite a 5% decrease in reported sales.
  • 3Completed the acquisition of DuPont's 50% interest in DA NanoMaterials, consolidating the joint venture into the Electronics and Performance Materials segment and recognizing a $85.9 million gain on the revaluation of the previously held equity interest.
  • 4Successfully divested the majority of its Homecare business to The Linde Group, realizing a gain of $207.4 million ($0.70 per share) in Q3 2012.
  • 5Underlying sales increased by 1% in Q3 2012, driven by higher pricing in Merchant Gases, even as reported sales declined 5% due to lower natural gas cost pass-through and unfavorable currency impacts.
  • 6The Tonnage Gases segment showed strength with a 17% increase in operating income, primarily due to higher volumes and lower operating costs.
  • 7APD increased its quarterly dividend to $0.64 per share, marking the 30th consecutive year of dividend increases, and continued its share repurchase program with $946.9 million authorization remaining.

Frequently Asked Questions

The reported sales for the third quarter of 2012 decreased by 5% to $2,340.1 million compared to the prior year. This decline was primarily due to lower energy and raw material contractual cost pass-through to customers resulting from lower natural gas prices (a 4% reduction in sales) and unfavorable currency impacts (a 3% reduction in sales). These factors more than offset a 1% increase in underlying sales.

Air Products acquired DuPont's 50% interest in DA NanoMaterials in April 2012, consolidating it into the Electronics and Performance Materials segment. This acquisition contributed 1% to sales growth. Importantly, the transaction also resulted in a non-cash gain of $85.9 million ($54.6 million after-tax, or $0.25 per share) in the third quarter, recognized from revaluing the previously held equity interest to fair market value. While this boosted reported income, the non-GAAP results exclude this gain for a clearer view of ongoing operational performance.

Air Products completed the sale of the majority of its Homecare business to The Linde Group in April 2012, receiving €590 million ($777 million) in cash. This transaction resulted in a significant gain of $207.4 million ($150.3 million after-tax, or $0.70 per share) which was recognized in the third quarter of fiscal year 2012. This divestiture is part of the company's strategy to focus on core industrial gas businesses.

Operating income saw a substantial increase of 25% to $482.8 million, and the operating margin expanded by 490 basis points to 20.6% on a GAAP basis. This improvement was driven by several factors including favorable cost performance from improved plant operations, reduced maintenance spending due to fewer turnarounds, and the positive impact of the company's cost reduction plan in Europe. On a non-GAAP basis, operating income still increased by 2%, indicating underlying operational improvements.