APD Air Products and Chemicals Inc

Air Products & Chemicals Inc. (APD) reported second quarter fiscal 2011 EPS of $1.39, versus $1.16 in the year-earlier quarter and matching the Zacks Consensus Estimate of $1.39.

The result included an after-tax cost of $4 million or 2 cents per share, excluding which adjusted EPS amounted to $1.41 versus $1.23 in the year-ago quarter.

Net sales amounted to $2.5 billion, versus $2.2 billion in the prior-year quarter, moving ahead of the Zacks Consensus Estimate of $2.4 billion. The improved results were mainly driven by higher volumes in the Electronics and Performance Materials, Merchant Gases and Tonnage Gases segments.

Costs and Margins

Cost of sale increased to $1.8 billion in the quarter from $1.6 billion in the year-earlier quarter. Selling and administrative expenses also increased to $259.4 million from $240.4 million in the prior-year quarter.

The company reported an operating profit of $419.5 million, increasing from $340.6 million in the year-ago quarter, thereby increasing the operating margin by 80 basis points year over year to 17% in the reported quarter.

Segmental Performance

Merchant Gases: Sales of the segment increased 10% to $1,012.7 million from $921.7 million in the year-ago-quarter. Operating income of the segment increased to $185.1 million from $178.1 million in the prior-year quarter, mainly due to increased volumes that were offset by the higher operating, maintenance and distribution costs and lower pricing in the European healthcare business.

Tonnage Gases: Sales of the segment rose 6% to $799.2 million from $756.7 million in the year-ago quarter. The results were driven by 10% increase in hydrogen volumes to refining customers. Operating income amounted to $120.9 million, up from $107.2 million in the year-earlier quarter, driven by higher new plant volumes and increased operating efficiencies.

Electronics and Performance Materials: This segment reported sales of $575.9 million, up 28% from $451.2 million in the year-ago quarter, led by strong volumes and higher pricing. Operating income increased by a whopping 61% to $91.6 million from $57 million in the year-earlier quarter. The drastic improvement was solely driven by improved volumes.

Equipment and Energy: Sales declined 5% to $113.5 million from $119.4 million in the prior-year quarter. The poor performance is due to the lower sale of air separation units. However, operating income increased to $22.5 million from $18.2 million in the year-ago quarter, led by higher LNG activity.

Financial Position

Cash and cash equivalents were $270.3 million as of March 31, 2011, down from $374.3 million as of September 30, 2010.

Long-term debt of the company increased slightly to $3,711.8 million as of March 31, 2011 from $3,659.8 million as of September 30, 2011.

Cash from operating activities increased to $626.7 million at the end of six months from $542.7 million during the year-earlier period.

Capital expenditure increased to $383.9 million at the end of the quarter, versus $354 million at the end of the prior-year quarter.

Debt-to-capitalization ratio was 38.2% as of March 31, 2011 and 37.7% as of December 31, 2011.

Outlook

Management seems confident and committed to improving operating performance driven by increased productivity along with growth in key markets to help the company register strong results year after year.

Management expects double-digit growth in earnings and revenue, improved return on capital and targets a margin of 17%. The company has also raised the full year earnings guidance range to between $5.65 and $5.75 per share. The third quarter EPS is projected in the range of $1.42 to $1.47 per share.

Airgas Update

In February 2010, the company commenced a tender offer to acquire all the outstanding common stock of Airgas Inc. (ARG), including the associated preferred stock purchase rights, for $60.00 per share in cash. Airgas, a Delaware company, is the largest U.S. distributor of industrial, medical, and specialty gases, and hard goods.

On December 9, 2011, the company increased the value of its tender offer to $70.00 per share, which made the total value of the transaction $7.8 billion, including $6.1 billion of equity and $1.7 billion of assumed debt. Based on a decision by the Delaware Chancery Court to uphold the decision of Airgas' board of directors to retain the preferred stock purchase rights, Air Products withdrew its offer on 15 February 2011.

We currently have a Zacks #2 Rank (short-term 'Buy' recommendation) on the stock.

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 makes for industrial use. Air Products faces stiff competition from Praxair Inc. (PX) and The Linde Group.

 
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