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APD > SEC Filings for APD > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for AIR PRODUCTS & CHEMICALS INC /DE/

Form 10-Q for AIR PRODUCTS & CHEMICALS INC /DE/


24-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(Millions of dollars, except for share data)

The disclosures in this quarterly report are complementary to those made in our 2013 Form 10-K. An analysis of results for the second quarter and first six months of 2014 is provided in the Management's Discussion and Analysis to follow.

All comparisons in the discussion are to the corresponding prior year unless otherwise stated. All amounts presented are in accordance with U.S. generally accepted accounting principles (GAAP), except as noted.

Captions such as income from continuing operations attributable to Air Products, net income attributable to Air Products, and diluted earnings per share attributable to Air Products are simply referred to as "income from continuing operations," "net income," and "diluted earnings per share" throughout this Management's Discussion and Analysis, unless otherwise stated.

SECOND QUARTER 2014 VS. SECOND QUARTER 2013

SECOND QUARTER 2014 IN SUMMARY

- Sales of $2,581.9 increased 4%, or $97.7. Underlying sales were flat as volume growth in Merchant Gases and Electronics and Performance Materials were offset by lower volumes in Tonnage Gases, including the exit from our polyurethane intermediates (PUI) business. Higher energy contractual cost pass-through to customers increased sales 4%.

- Operating income of $384.7 decreased 1%, or $5.0, as strong results in Electronics and Performance Materials were more than offset by lower results in Merchant Gases and Tonnage Gases. Operating margin of 14.9% decreased 80 basis points (bp), as higher costs and the effects of higher energy cost pass-through were partially offset by higher volumes.

- Income from continuing operations of $283.5 decreased 2%, or $5.8, and diluted earnings per share from continuing operations of $1.32 decreased 4%, or $.05. A summary table of changes in diluted earnings per share is presented below.

- We increased our quarterly dividend by 8% from $.71 to $.77 per share. This represents the 32nd consecutive year that we have increased our dividend payment.


Table of Contents

Changes in Diluted Earnings per Share Attributable to Air Products



                                                     Three Months Ended
                                                          31 March               Increase
                                                     2014           2013        (Decrease)
   Diluted Earnings per Share
   Net Income                                       $  1.32        $ 1.38          $  (.06 )
   Income from Discontinued Operations                   -            .01             (.01 )
   Income from Continuing Operations                $  1.32        $ 1.37          $  (.05 )

   Operating Income (after-tax)
   Underlying business
   Volume                                                                          $   .09
   Price/raw materials                                                                (.07 )
   Costs                                                                              (.04 )
   Operating Income                                                                   (.02 )

   Other (after-tax)
   Equity affiliates' income                                                          (.03 )
   Interest expense                                                                    .01
   Income tax                                                                          .01
   Weighted average diluted shares                                                    (.02 )
   Other                                                                              (.03 )
   Total Change in Diluted Earnings per Share
   from Continuing Operations                                                      $  (.05 )

RESULTS OF OPERATIONS

Discussion of Consolidated Results



                                            Three Months
                                           Ended 31 March
                                        2014            2013         $ Change       Change
       Sales                          $ 2,581.9       $ 2,484.2        $ 97.7          4%
       Operating income                   384.7           389.7          (5.0 )       (1)%
       Operating margin                    14.9 %          15.7 %                     (80bp )
       Equity affiliates' income           30.4            39.8          (9.4 )       (24)%




            Sales
                                                          % Change from
                                                            Prior Year
            Underlying business
            Volume                                                   -  %
            Price                                                    -  %
            Currency                                                 -  %
            Energy and raw material cost pass-through                 4 %
            Total Consolidated Change                                 4 %

Underlying sales were flat as higher volumes in the Merchant Gases and Electronics and Performance Materials segments were offset by lower Tonnage Gases volumes from planned outages and the exit from our PUI business. Higher energy contractual cost pass-through to customers increased sales by 4%.


Table of Contents

Operating Income

Operating income of $384.7 decreased 1%, or $5.0, as the lower recovery of raw material costs in pricing of $20, higher costs of $5, and the prior year gain on a sale of our investment of an equity affiliate of $5, were mostly offset by higher volumes of $27. The higher raw material costs included the effects of severe weather in North America, primarily in our Merchant Gases segment.

Equity Affiliates' Income

Income from equity affiliates of $30.4 decreased $9.4 primarily due to higher costs in Merchant Gases affiliates and unfavorable currency impacts in Mexico, South Africa, and India.

Selling and Administrative Expense

Selling and administrative expense of $263.4 decreased $3.2, primarily due to currency impacts. Selling and administrative expense, as a percent of sales, decreased from 10.7% to 10.2%.

Research and Development

Research and development expense of $33.2 increased $.9. Research and development expense, as a percent of sales, was 1.3% in 2014 and 2013.

Other Income (Expense), Net

Other income (expense), net of $17.0 decreased $1.0. The current year included gains from the sales of emission credits. The prior year included a gain from the sale of our investment in an equity affiliate. Otherwise, no individual items were significant in comparison to the prior year.

Interest Expense

                                                      Three Months
                                                     Ended 31 March
                                                   2014          2013
                  Interest incurred               $ 39.4        $ 39.9
                  Less: capitalized interest         7.9           4.7
                  Interest expense                $ 31.5        $ 35.2

Interest incurred decreased $.5. The decrease was driven primarily by a lower average interest rate on the debt portfolio. The change in capitalized interest was driven by an increase in project spending.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was 24.0% and 24.3% in the second quarter of 2014 and 2013, respectively.


Table of Contents

Segment Analysis

Merchant Gases



                                           Three Months
                                          Ended 31 March
                                       2014            2013         $ Change        Change
      Sales                          $ 1,040.1       $ 1,003.2       $  36.9           4%
      Operating income                   143.4           168.1         (24.7 )       (15)%
      Operating margin                    13.8 %          16.8 %                     (300bp )
      Equity affiliates' income           28.7            34.2          (5.5 )       (16)%

Merchant Gases Sales



                                                      % Change from
                                                        Prior Year
                Underlying business
                Volume                                           4 %
                Price                                            1 %
                Currency                                        (1 )%
                Total Merchant Gases Sales Change                4 %

Underlying sales increased 5% from higher volumes of 4% and higher pricing of 1%. Volumes were higher from continued strength in liquid oxygen, nitrogen, and argon, partially offset by supply limitations for helium globally and continued packaged gases demand weakness in Europe. Currency had an unfavorable impact on sales of 1%.

In the U.S./Canada, sales increased 11%, with increased volumes of 6% and pricing up 5%. Higher liquid oxygen and nitrogen volumes to oilfield services, food, and metals were partially offset by lower helium volumes. Volumes also increased as a result of our EPCO Carbondioxide Products, Inc. acquisition. Pricing was higher primarily due to higher pricing in liquid oxygen, liquid nitrogen, and helium, including actions to recover higher weather related costs.

In Europe, sales increased 2%, due to a favorable currency impact of 4%, partially offset by volumes down 1% and lower price of 1%. Volumes were lower as higher liquid oxygen, nitrogen, and argon volumes were more than offset by lower helium volumes due to supply limitations and lower cylinder volumes. Pricing was lower as lower pricing in liquid products and packaged gases were partially offset by higher helium pricing.

In Asia, sales increased 6%, with higher volumes of 6% and increased pricing of 1%, partially offset by an unfavorable currency impact of 1%. Volumes were higher as higher liquid oxygen and nitrogen volumes were partially offset by lower helium volumes. Pricing increased as higher helium pricing was partially offset by lower pricing in liquid oxygen, nitrogen, and argon, particularly in China, driven in part by a higher mix of wholesale customers.

In South America, sales decreased 9%, with higher volumes of 3% and higher pricing of 2% more than offset by unfavorable currency impacts of 14% primarily from the Chilean Peso. Volumes increased due to higher volumes in liquid oxygen and liquid nitrogen in Brazil and modestly higher volumes in Indura as the region continues to experience slower economic growth than expected.

Merchant Gases Operating Income and Margin

Operating income was lower by $24.7 due to lower price recovery of costs of $11 from higher power and fuel costs, including severe weather impacts in North America, and higher operating costs of $8. The prior year also included the gain on a sale of our investment in an equity affiliate of $5. Operating margin decreased 300 bp from prior year, primarily due to the higher costs, including weather impacts.

Merchant Gases Equity Affiliates' Income

Merchant Gases equity affiliates' income of $28.7 decreased $5.5 due to higher costs and unfavorable currency impacts in Mexico, South Africa, and India.


Table of Contents

Tonnage Gases



                                      Three Months
                                     Ended 31 March
                                   2014          2013         $ Change        Change
            Sales                 $ 839.9       $ 808.5         $ 31.4           4%
            Operating income        112.2         123.2          (11.0 )        (9)%
            Operating margin         13.4 %        15.2 %                      (180bp )

Tonnage Gases Sales



                                                          % Change from
                                                            Prior Year
            Underlying business
            Volume                                                  (8 )%
            Energy and raw material cost pass-through               11 %
            Currency                                                 1 %
            Total Tonnage Gases Sales Change                         4 %

Sales increased 4%, or $31.4. Volumes decreased 8% as strong demand in the U.S. Gulf Coast hydrogen system was more than offset by reduced volumes due to plant outages, lower volumes in Latin America, and the exit from our PUI business. The lower PUI volumes decreased sales by 5%. As of the end of the first quarter of 2014, our exit from the PUI business was complete. Higher energy contractual cost pass-through to customers increased sales by 11% and favorable currency impacts increased sales by 1%.

Tonnage Gases Operating Income and Margin

Operating income was lower by 9% primarily from lower volumes of $5 and higher operating costs, including maintenance costs, of $5. Operating margin decreased 180 bp from the prior year, primarily due to the higher pass-through of energy costs and higher maintenance costs.

Electronics and Performance Materials



                                        Three Months
                                       Ended 31 March
                                     2014          2013        $ Change       Change
              Sales                 $ 591.7       $ 548.8         $42.9         8%
              Operating income        107.1          77.5          29.6         38%
              Operating margin         18.1 %        14.1 %                    400bp

Electronics and Performance Materials Sales



                                                                 % Change from
                                                                   Prior Year
    Underlying business
    Volume                                                                  9 %
    Price                                                                  (1 )%
    Currency                                                               -  %
    Total Electronics and Performance Materials Sales Change                8 %

Sales increased 8% from higher volumes of 9%, partially offset by lower pricing of 1%. Electronics sales increased 6% due to higher delivery systems equipment sales and higher materials volumes partially offset by the impact of product exits. Performance Materials sales increased 10% from higher volumes of 10% and favorable currency of 1%, partially offset by lower pricing of 1%. The higher volumes were across all product lines and major regions driven by strength in the automobile, coatings, and oilfield end markets.


Table of Contents

Electronics and Performance Materials Operating Income and Margin

Operating income increased 38%, or $29.6, primarily due to higher volumes of $29 and lower costs of $10, partially offset by unfavorable price and mix impacts of $9. The lower costs included the benefits of our recent business restructuring and cost reduction actions. Operating margin of 18.1% increased 400 bp due to the higher volumes and improved cost performance.

Equipment and Energy



                                        Three Months
                                       Ended 31 March
                                    2014           2013          $ Change      Change
             Sales                 $ 110.2        $ 123.7          $(13.5 )     (11)%
             Operating income         22.9           20.6             2.3        11%

Equipment and Energy Sales and Operating Income

Sales of $110.2 decreased as lower air separation unit (ASU) activity was partially offset by higher liquefied natural gas (LNG) activity. Operating income of $22.9 increased due to the favorable mix impact of the higher LNG activity.

The sales backlog for the Equipment business at 31 March 2014 was $338 compared to $402 at 30 September 2013.

Other

Other operating income (loss) primarily includes other expense and income that cannot be directly associated with the business segments, including foreign exchange gains and losses. Also included are LIFO inventory adjustments, as the business segments use FIFO, and the LIFO pool adjustments are not allocated to the business segments.

Other operating loss was $(.9) versus operating income of $.3 in the prior year. No individual items were significant in comparison to the prior year.

FIRST SIX MONTHS 2014 VS. FIRST SIX MONTHS 2013

FIRST SIX MONTHS 2014 IN SUMMARY

- Sales of $5,127.4 increased 2%, or $80.8. Underlying sales were flat as higher volumes in the Merchant Gases and Electronics and Performance Materials segments were offset by lower volumes in our Tonnage Gases and Equipment and Energy segments, including the exit from our PUI business. Higher energy contractual cost pass-through to customers increased sales 2%.

- Operating income of $770.3 increased 1%, or $8.2, as strong results in Electronics and Performance Materials and Equipment and Energy were partially offset by lower results in Merchant Gases and Tonnage Gases. Operating margin of 15.0% decreased 10 bp with the impact of higher costs mostly offset by higher volumes.

- Income from continuing operations of $570.6 increased 1%, or $4.4, and diluted earnings per share from continuing operations of $2.66 decreased $.01. A summary table of changes in diluted earnings per share is presented below.

- We increased our quarterly dividend by 8% from $.71 to $.77 per share. This represents the 32nd consecutive year that we have increased our dividend payment.


Table of Contents

Changes in Diluted Earnings per Share Attributable to Air Products



                                                     Six Months Ended
                                                         31 March                Increase
                                                   2014           2013          (Decrease)
  Diluted Earnings per Share
  Net Income                                        $2.67          $2.68         $    (.01 )
  Income from Discontinued Operations                 .01            .01                -
  Income from Continuing Operations                 $2.66          $2.67         $    (.01 )

  Operating Income (after-tax)
  Underlying business
  Volume                                                                         $     .21
  Price/raw materials                                                                 (.12 )
  Costs                                                                               (.05 )
  Currency                                                                            (.01 )
  Operating Income                                                                     .03

  Other (after-tax)
  Equity affiliates' income                                                           (.04 )
  Interest expense                                                                     .02
  Income tax                                                                           .01
  Weighted average diluted shares                                                     (.03 )
  Other                                                                               (.04 )
  Total Change in Diluted Earnings per Share
  from Continuing Operations                                                     $    (.01 )

RESULTS OF OPERATIONS

Discussion of Consolidated Results



                                            Six Months
                                          Ended 31 March
                                       2014            2013          $ Change       Change
      Sales                          $ 5,127.4       $ 5,046.6         $ 80.8           2 %
      Operating income                   770.3           762.1            8.2           1 %
      Operating margin                    15.0 %          15.1 %                      (10 bp)
      Equity affiliates' income           68.6            81.2          (12.6 )       (16 )%

Sales



                                                          % Change from
                                                            Prior Year
            Underlying business
            Volume                                                   -  %
            Price                                                    -  %
            Currency                                                 -  %
            Energy and raw material cost pass-through                 2 %
            Total Consolidated Change                                 2 %

Volumes were flat as higher volumes in the Merchant Gases and Electronics and Performance Materials segments were offset by lower volumes in our Tonnage Gases and Equipment and Energy segments, including the exit from our PUI business. Pricing was flat as higher pricing in Merchant Gases was offset by lower pricing in Electronics and Performance Materials. Higher energy contractual cost pass-through to customers increased sales 2%.


Table of Contents

Operating Income

Operating income of $770.3 increased 1%, or $8.2 primarily due to higher volumes of $57, partially offset by lower recovery of raw material costs in pricing of $34 and higher operating costs, including maintenance costs in Tonnage Gases, of $8. Prior year operating income included the gain on a sale of our investment in an equity affiliate of $5.

Equity Affiliates' Income

Income from equity affiliates of $68.6 decreased $12.6, due to lower results in a Tonnage Gases affiliate, higher costs in Merchant Gases affiliates, and unfavorable currency impacts in Mexico, South Africa, and India.

Selling and Administrative Expense

Selling and administrative expense of $544.3 increased $9.5, including the impacts of inflation. Selling and administrative expense, as a percent of sales, was 10.6% in 2014 and 2013.

Research and Development

Research and development expense of $66.7 increased $1.1 primarily due to inflation. Research and development expense, as a percent of sales, was 1.3% in 2014 and 2013.

Other Income (Expense), Net

Other income (expense), net of $37.4 increased $7.8. The current year included gains from the sales of emissions credits. The prior year included the gain on a sale of our investment in an equity affiliate. Otherwise, no individual items were significant in comparison to the prior year.

Interest Expense

                                                       Six Months
                                                     Ended 31 March
                                                  2014           2013
                 Interest incurred                 $80.2          $82.6
                 Less: capitalized interest         15.4           11.6
                 Interest expense                  $64.8          $71.0

Interest incurred decreased $2.4. The decrease was driven primarily by a lower average interest rate on the debt portfolio, partially offset by a higher average debt balance. The change in capitalized interest was driven by an increase in project spending.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was 24.1% and 24.3% in 2014 and 2013, respectively.

Discontinued Operations

The Homecare business, which had been previously reported as part of the Merchant Gases business segment, has been accounted for as a discontinued operation.

In the third quarter of 2012, we sold the majority of our Homecare business to The Linde Group for total sale proceeds of 590 million ($777) and recognized a gain of $207.4 ($150.3 after-tax, or $.70 per share). In the third quarter of 2012, an impairment charge of $33.5 ($29.5 after-tax, or $.14 per share) was recorded to write down the remaining business, which was primarily in the United Kingdom and Ireland, to its estimated net realizable value. In the fourth quarter of 2013, we recorded an additional charge of $18.7 ($13.6 after-tax, or $.06 per share) to update our estimate of net realizable value. In the first quarter of 2014, we sold the remaining portion of the Homecare business for 6.1 million ($9.8) and recorded a gain on the sale of $2.4.

Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional details on this business.


Table of Contents

Segment Analysis

Merchant Gases



                                            Six Months
                                          Ended 31 March
                                       2014            2013          $ Change        Change
      Sales                          $ 2,087.8       $ 2,012.3         $ 75.5            4 %
      Operating income                   312.6           339.1          (26.5 )         (8 )%
      Operating margin                    15.0 %          16.9 %                      (190 bp)
      Equity affiliates' income           63.4            69.9           (6.5 )         (9 )%

Merchant Gases Sales



                                                      % Change from
                                                        Prior Year
                Underlying business
                Volume                                           4 %
                Price                                            1 %
                Currency                                        (1 )%
                Total Merchant Gases Sales Change                4 %

Underlying sales increased 5% due to higher volumes of 4% and higher pricing of 1%. Currency had an unfavorable impact on sales of 1%.

In the U.S./Canada, sales increased 8%, with volumes up 5% and price up 3%. Volumes increased as higher liquid oxygen and liquid nitrogen volumes to . . .

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