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Air Products' 2Q Profit Falls - Analyst Blog

Air Products & Chemicals Inc. ( APD ) reported second-quarter 2012 adjusted (excluding one-time charges and gains) EPS earnings of $1.39 a share, down from $1.41 a year-ago.

The results were above the Zacks Consensus Estimate of $1.33. Adjusted earnings from continued operations were $1.31 a share in the quarter. Profit, as reported, fell 2.7% year over year to $296 million (or $1.38 a share).

Net sales amounted to $2,344 million, down 2% year over year, missing the Zacks Consensus Estimate of $2,460 million. The decline was attributable to lower volumes, reflecting challenging conditions in Europe.

Costs and Margins

Cost of sales decreased to $1,715.8 million in the reported quarter from $1,748.2 million in the year-earlier quarter. Selling and administrative expenses also declined by 1.9% to $237.3 million. The company's operating income plunged 6% to $375 million and its operating margin dropped by 60 basis points to 16% due to volume mix between the businesses.

Segmental Performance

Merchant Gases: Segment sales were $883.6 million compared with $914.4 million in the year-ago quarter. The segment's operating income declined 8% year over year to $153 million, mainly due to decreased volumes and currency effects, partially offset by higher pricing impacts.

Tonnage Gases: Sales of the segment inched down 2% year over year to $783.5 million due to lower energy pass-through, offset by higher volumes. Operating income amounted to $125.4 million, up 3.7% year over year due to increase in volumes.

Electronics and Performance Materials: This segment reported sales of $567 million, down 2% year over year, on account of lower Electronics volumes, which were offset by higher volumes of Performance Materials. Operating income decreased by 7% year over year to $85.5 million, primarily due to lower volumes and high raw material costs in Electronics. These were partially offset by higher Performance Materials volumes.

Equipment and Energy: Sales declined 3% year over year to $110.2 million. The poor performance is due to a lesser number of projects. Operating income also decreased by 56% to $9.8 million due to lower LNG activity.

Financial Position

Cash and cash equivalents were $319.5 million as of March 31, 2012 versus $421.4 million as of September 30, 2011. The company's long-term debt decreased to $3,879.8 million as of March 31, 2012, from $3,927.5 million as of September 30, 2011.

Homecare Business

In January 2012, Air Products reached agreements with The Linde Group, under which the latter will purchase its Homecare business in Belgium, Germany, France, Portugal and Spain. This business represents approximately 80% of the total Homecare business revenues.

The transaction received regulatory approval in April 2012 and is expected to close by the end of April 2012. Total sales proceeds of approximately $785 million will be received in cash at closing. Air Products expects an after-tax gain in the range of approximately $140-$170 million on the sale of this business in the third quarter of fiscal 2012.

Air Products expects to sell the remaining portion of its Homecare business, which is primarily in the UK, within the next year. The Homecare business is now accounted as discontinued operations.

Outlook

The company's second quarter profit and sales were lower than expected. Going forward, Air Products anticipates that both earnings and sales will rise for the rest of 2012 and also in 2013. The capital spending for 2012 is forecast to be at the high end of its range at roughly $2.2 billion. The company expects to enter into new business deals in 2012, which will make it profitable.

The company expects third quarter adjusted earnings from continuing operations to be in the range of $1.40 and $1.45 per share. The company's adjusted earnings guidance for continuing operations for fiscal 2012 is expected to be in the range of $5.47 to $5.60 per share.

Our Take

Based in Pennsylvania, Air Products benefits from a long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. However, soaring energy and raw material costs pose a threat to margin expansion. In order to compensate for escalating raw material costs, Air Products has been increasing the price for a range of chemicals it manufactures for industrial use.

Air Products faces stiff competition from Praxair Inc. ( PX ) and The Linde Group. The company currently retains a Zacks #4 Rank, reflecting a short-term (1 to 3 months) Sell rating. Currently, we have a long-term (more than 6 months) Neutral recommendation on the stock.

AIR PRODS & CHE ( APD ): Free Stock Analysis Report

PRAXAIR INC ( PX ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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