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

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

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


24-Jul-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 third quarter and first nine 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.

THIRD QUARTER 2014 VS. THIRD QUARTER 2013

THIRD QUARTER 2014 IN SUMMARY

- Sales of $2,634.6 increased 3%, or $87.3. Underlying sales increased 3%, primarily from volume growth in Merchant Gases and Electronics and Performance Materials, partially offset by the exit from our polyurethane intermediates (PUI) business.

- Operating income of $413.8 increased 8%, or $30.7, primarily from strong results in Electronics and Performance Materials and improved pricing in Merchant Gases. Operating margin of 15.7% increased 70 basis points (bp), as the contribution from higher volumes was partially offset by higher costs driven by maintenance outages.

- Income from continuing operations of $314.0 increased 9%, or $26.2, and diluted earnings per share from continuing operations of $1.46 increased 7%, or $.10. A summary table of changes in diluted earnings per share is presented below.

Changes in Diluted Earnings per Share Attributable to Air Products



                                                              Three Months Ended
                                                                    30 June                  Increase
                                                              2014            2013            (Decrease)
Diluted Earnings per Share from Continuing Operations        $  1.46         $ 1.36          $     .10

Operating Income (after-tax)
Underlying business
Volume                                                                                       $     .16
Costs                                                                                             (.05 )
Operating Income                                                                                   .11

Other (after-tax)
Interest expense                                                                                   .01
Weighted average diluted shares                                                                   (.02 )
Other                                                                                             (.01 )
Total Change in Diluted Earnings per Share
from Continuing Operations                                                                   $     .10


Table of Contents

RESULTS OF OPERATIONS

Discussion of Consolidated Results



                                             Three Months
                                             Ended 30 June
                                         2014            2013         $ Change      Change
        Sales                          $ 2,634.6       $ 2,547.3        $ 87.3          3 %
        Operating income                   413.8           383.1          30.7          8 %
        Operating margin                    15.7 %          15.0 %                     70 bp
        Equity affiliates' income           43.1            44.2          (1.1 )       (2 )%


Sales

                                                          % Change from
                                                            Prior Year
            Underlying business
            Volume                                                    2 %
            Price                                                     1 %
            Currency                                                 -  %
            Energy and raw material cost pass-through                -  %
            Total Consolidated Change                                 3 %

Underlying sales were up 3% from higher volumes of 2% and higher pricing of 1%. Volumes increased from growth in the Merchant Gases and Electronics and Performance Materials segments, partially offset by the exit from our PUI business. The favorable pricing was primarily in the Merchant Gases segment.

Operating Income

Operating income of $413.8 increased 8%, or $30.7, as higher volumes of $43 were partially offset by higher costs of $13, including maintenance costs in Tonnage Gases.

Equity Affiliates' Income

Income from equity affiliates of $43.1 decreased $1.1.

Selling and Administrative Expense

Selling and administrative expense of $272.0 increased $.7, as inflation was mostly offset by productivity. Selling and administrative expense, as a percent of sales, decreased from 10.7% to 10.3%.

Research and Development

Research and development expense of $33.8 increased $.3. 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 $3.7 decreased $12.4 primarily due to lower gains from the sale of assets and unfavorable foreign exchange impacts. Additionally, the prior year included a favorable commercial contract settlement offset by a pension settlement.

Interest Expense

                                                      Three Months
                                                     Ended 30 June
                                                   2014          2013
                  Interest incurred               $ 38.9        $ 42.2
                  Less: capitalized interest         7.6           6.8
                  Interest expense                $ 31.3        $ 35.4

Interest incurred decreased $3.3. 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.


Table of Contents

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% in the third quarter of 2014 and 2013.

Outlook

Our management evaluates the Company's strategy and portfolio on an ongoing basis. Future actions and assessments that result from the ongoing review could materially impact our operating profit.

Segment Analysis

Merchant Gases



                                             Three Months
                                             Ended 30 June
                                         2014            2013         $ Change      Change
        Sales                          $ 1,077.3       $ 1,032.5        $ 44.8          4 %
        Operating income                   173.5           164.9           8.6          5 %
        Operating margin                    16.1 %          16.0 %                     10 bp
        Equity affiliates' income           36.5            36.6           (.1 )       -  %

Merchant Gases Sales



                                                      % Change from
                                                        Prior Year
                Underlying business
                Volume                                            3 %
                Price                                             1 %
                Currency                                         -  %
                Total Merchant Gases Sales Change                 4 %

Underlying sales increased 4% from higher volumes of 3% and higher pricing of 1%. Volumes were higher from continued strength in liquid oxygen and nitrogen across all regions, partially offset by lower global helium volumes.

In the U.S./Canada, sales increased 8%, with increased volumes of 3% and pricing up 5%. Higher liquid oxygen and nitrogen volumes to the metals and chemicals end markets were partially offset by lower helium and argon volumes due to supply constraints. 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 from the second quarter.

In Europe, sales increased 6%, due to a favorable currency impact of 6% and higher price of 1%, partially offset by volumes down 1%. Volumes were lower as higher liquid oxygen, nitrogen, and argon volumes were more than offset by lower helium volumes and lower cylinder volumes as construction remains weak. Pricing was higher primarily due to improved helium and cylinder pricing. The favorable currency impacts were primarily from the Euro and the Pound Sterling.

In Asia, sales increased 5%, with higher volumes of 6% partially offset by reduced pricing of 1%. Volumes were higher as higher liquid oxygen, nitrogen, and argon volumes across the whole region, were partially offset by lower helium volumes. Pricing decreased as higher helium pricing was more than 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 8%, with higher volumes of 1% and higher pricing of 3% more than offset by unfavorable currency impacts of 12% from the Brazilian Real and the Chilean Peso. Volumes increased in Brazil and were modestly higher in Chile as slower global demand mitigated growth. This business has not performed as well as anticipated in the current year. We continue to evaluate the long-term outlook for the business.


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Merchant Gases Operating Income and Margin

Operating income was higher by $8.6 due to higher recovery of raw material costs in pricing of $6, including the prior quarter severe weather impacts in North America, and higher volumes of $5, partially offset by higher costs of $4. Operating margin increased 10 bp from prior year.

Merchant Gases Equity Affiliates' Income

Merchant Gases equity affiliates' income of $36.5 decreased $.1.

Tonnage Gases



                                       Three Months
                                       Ended 30 June
                                    2014          2013        $ Change       Change
             Sales                 $ 835.3       $ 845.5       $ (10.2 )         (1 )%
             Operating income        117.5         119.9          (2.4 )         (2 )%
             Operating margin         14.1 %        14.2 %                     (10b p)

Tonnage Gases Sales



                                                          % Change from
                                                            Prior Year
            Underlying business
            Volume                                                  (2 )%
            Currency                                                 1 %
            Energy and raw material cost pass-through               -  %
            Total Tonnage Gases Sales Change                        (1 )%

Sales decreased 1%, or $10.2. Volumes decreased 2% as strong demand in the U.S. Gulf Coast hydrogen system and volumes from new plants were more than offset by the exit from our PUI business. The lower PUI volumes decreased sales by 4%. As of the end of the first quarter of 2014, our exit from the PUI business was complete. Favorable currency impacts increased sales by 1%.

Tonnage Gases Operating Income and Margin

Operating income was lower by 2% as higher operating costs, including maintenance costs, of $17 were partially offset by favorable volume mix of $14. Operating margin decreased 10 bp from the prior year, primarily due to the higher maintenance costs mostly offset by the favorable volume mix.


Table of Contents

Electronics and Performance Materials



                                       Three Months
                                       Ended 30 June
                                    2014          2013        $ Change        Change
             Sales                 $ 617.8       $ 565.7        $ 52.1             9%
             Operating income        107.0          86.8          20.2            23%
             Operating margin         17.3 %        15.3 %                      200bp

Electronics and Performance Materials Sales



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

Sales increased 9% from higher volumes of 9% and favorable currency of 1%, partially offset by lower pricing of 1%. Electronics sales increased 6% from strength across all product lines. Performance Materials sales increased 12% primarily from higher volumes across all product lines and major regions due to higher global demand and new offerings.

Electronics and Performance Materials Operating Income and Margin

Operating income increased 23%, or $20.2, primarily due to higher volumes of $21 and lower costs of $4, partially offset by unfavorable price and mix impacts of $7. The lower costs included the benefits of our recent business restructuring and cost reduction actions. Operating margin of 17.3% increased 200 bp primarily due to the higher volumes and improved cost performance, partially offset by the unfavorable pricing impacts.

Equipment and Energy



                                        Three Months
                                       Ended 30 June
                                    2014           2013         $ Change       Change
             Sales                 $ 104.2        $ 103.6         $   .6            1 %
             Operating income         17.4           16.0            1.4            9 %

Equipment and Energy Sales and Operating Income

Sales of $104.2 and operating income of $17.4 increased due to higher liquefied natural gas (LNG) activity partially offset by lower air separation unit (ASU) activity.

The sales backlog for the Equipment business at 30 June 2014 was $584 compared to $402 at 30 September 2013. The increase was primarily due to new LNG orders as global project development activity remains high.

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 $(1.6) versus an operating loss of $(4.5) in the prior year. The prior year included a pension settlement of $4.5. No other individual items were significant in comparison to the prior year.


Table of Contents

FIRST NINE MONTHS 2014 VS. FIRST NINE MONTHS 2013

FIRST NINE MONTHS 2014 IN SUMMARY

- Sales of $7,762.0 increased 2%, or $168.1. Underlying sales increased by 1% as higher volumes in the Merchant Gases and Electronics and Performance Materials segments were partially 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 by 1%.

- Operating income of $1,184.1 increased 3%, or $38.9, 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 15.3% increased 20 bp as higher volumes were partially offset by higher costs.

- Income from continuing operations of $884.6 increased 4%, or $30.6, and diluted earnings per share from continuing operations of $4.12 increased $.09. 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.

Changes in Diluted Earnings per Share Attributable to Air Products



                                                     Nine Months Ended
                                                          30 June                Increase
                                                    2014           2013         (Decrease)
   Diluted Earnings per Share
   Net Income                                       $ 4.13        $ 4.04         $     .09
   Income from Discontinued Operations                 .01           .01                -
   Income from Continuing Operations                $ 4.12        $ 4.03         $     .09

   Operating Income (after-tax)
   Underlying business
   Volume                                                                        $     .37
   Price/raw materials                                                                (.12 )
   Costs                                                                              (.10 )
   Currency                                                                           (.01 )
   Operating Income                                                                    .14

   Other (after-tax)
   Equity affiliates' income                                                          (.04 )
   Interest expense                                                                    .03
   Income tax                                                                          .01
   Weighted average diluted shares                                                    (.05 )
   Other                                                                              (.05 )
   Total Change in Diluted Earnings per Share
   from Continuing Operations                                                    $     .09


Table of Contents

RESULTS OF OPERATIONS

Discussion of Consolidated Results



                                             Nine Months
                                            Ended 30 June
                                        2014            2013         $ Change       Change
       Sales                          $ 7,762.0       $ 7,593.9       $ 168.1           2 %
       Operating income                 1,184.1         1,145.2          38.9           3 %
       Operating margin                    15.3 %          15.1 %                      20 bp
       Equity affiliates' income          111.7           125.4         (13.7 )       (11 )%

Sales



                                                          % Change from
                                                            Prior Year
            Underlying business
            Volume                                                    1 %
            Price                                                    -  %
            Currency                                                 -  %
            Energy and raw material cost pass-through                 1 %
            Total Consolidated Change                                 2 %

Volumes up 1% 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 by 1%.

Operating Income

Operating income of $1,184.1 increased 3%, or $38.9 primarily due to higher volumes of $101, partially offset by lower recovery of raw material costs in pricing of $35 and higher operating costs, including maintenance costs in Tonnage Gases, of $21. 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 $111.7 decreased $13.7, 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 $816.3 increased $10.2, as inflation was partially offset by productivity. Selling and administrative expense, as a percent of sales, decreased from 10.6% to 10.5%.

Research and Development

Research and development expense of $100.5 increased $1.4 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 $41.1 decreased $4.6. The prior year included the gain on a sale of our investment in an equity affiliate and a favorable commercial contract settlement, partially offset by a pension settlement. Otherwise, no individual items were significant in comparison to the prior year.


Table of Contents

Interest Expense



                                                      Nine Months
                                                     Ended 30 June
                                                  2014           2013
                 Interest incurred               $ 119.1        $ 124.8
                 Less: capitalized interest         23.0           18.4
                 Interest expense                $  96.1        $ 106.4

Interest incurred decreased $5.7. 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 24.2% 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.

Segment Analysis

Merchant Gases



                                            Nine Months
                                           Ended 30 June
                                       2014            2013         $ Change        Change
      Sales                          $ 3,165.1       $ 3,044.8       $ 120.3             4%
      Operating income                   486.1           504.0         (17.9 )         (4)%
      Operating margin                    15.4 %          16.6 %                     (120bp )
      Equity affiliates' income           99.9           106.5          (6.6 )         (6)%

Merchant Gases Sales



                                                      % Change from
                                                        Prior Year
                Underlying business
                Volume                                            3 %
                Price                                             1 %
                Total Merchant Gases Sales Change                 4 %

Underlying sales increased 4% due to higher volumes of 3% and higher pricing of 1%.

In the U.S./Canada, sales increased 8%, with volumes up 4% and price up 4%. Volumes increased as higher liquid oxygen and liquid nitrogen volumes to metals were partially offset by lower helium volumes. Volumes also increased as a result of our EPCO Carbondioxide Products, Inc. acquisition.


Table of Contents

In Europe, sales increased 4% due to favorable currency impacts of 4%. Volumes were flat as higher liquid oxygen, nitrogen, and argon volumes were offset by lower helium volumes and lower packaged gases volumes. The favorable currency impacts are primarily due to the Euro and the Pound Sterling.

In Asia, sales increased 6%, due to volumes up 7% partially offset by pricing down 1%. Volumes were higher as higher liquid oxygen, nitrogen, and argon volumes were partially offset by lower helium volumes. Pricing decreased in liquid oxygen, nitrogen, and argon, particularly in China, driven by a higher mix of wholesale customers.

In South America, sales decreased 7%, as unfavorable currency impacts of 11%, were partially offset by higher volumes of 2% and higher pricing of 2%. The unfavorable currency impacts included both the Brazilian Real and the Chilean Peso.

Merchant Gases Operating Income and Margin

Operating income of $486.1 was lower by $17.9, or 4%, as higher operating costs . . .

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