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Air Products' Earnings In Line, Sales Miss

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Industrial gas giant Air Products and Chemicals Inc. (APD - Analyst Report) logged fourth-quarter fiscal 2013 (ended Sep 30, 2013) adjusted earnings from continued operations of $1.47 a share, up 3.5% from the year-ago earnings of $1.42. The results were at par with the Zacks Consensus Estimate

The adjusted earnings exclude after-tax charges of $164 million (or 77 cents per share) mainly associated with cost reduction, and asset and product rationalization actions in the company's Electronics and Merchant Gases businesses, and for streamlining corporate functions.

Consolidated net income, as reported, decreased 1.2% year over year to $137.1 million (or 64 cents a share) from $138.7 million (or 65 cents a share) a year ago.

Revenues declined 0.7% year over year to $2,586.5 million, missing the Zacks Consensus Estimate of $2,681 million. The decline was due to lower base volumes and a negative impact resulting from the exit decision of the Polyurethane Intermediates (PUI) business, partly offset by higher energy pass-through and favorable currency translation.

For fiscal 2013, adjusted earnings of $5.50 a share was at par with the Zacks Consensus Estimate and exceeded the year-ago adjusted earnings of $5.40 a share. Sales for the year increased around 6% year over year to $10,180.4 million, beating the Zacks Consensus Estimate of $10,264 million.

Sales for fiscal 2013 were boosted by acquisitions and higher energy cost pass-through, partly offset by lower volumes driven by the PUI business exit. Acquisitions and higher energy cost pass-through boosted sales. Underlying sales barring the PUI business impact increased 1% due to higher North America and Asia Tonnage Gases volumes, higher Performance Materials volumes, and LNG equipment activity.

Segmental Highlights

Revenues from the core Merchant Gases segment increased 4% year over year to $1,054 million in the fourth quarter on account of higher volumes and improved pricing.

Sales from the Tonnage Gases division were down 1% to $835 million as lower PUI volumes offset higher energy pass through and favorable currency impact.

Revenues from the Electronics and Performance Materials segment fell 6% year over year to $580 million, affected by lower electronics equipment sales.

In the Equipment and Energy division sales declined 7% year over year to $118 million due to lower ASU sales, partly offset by higher LNG project activity.

Financial Position

Air Products’ cash and cash equivalents stood at $450.4 million as of Sep 30, 2013, down 0.8% from $454.4 million as of Sep 30, 2012. Long-term debt stood at $5,056.3 million as of Sep 30, 2013, up 10.2% from $4,584.2 million as of Sep 30, 2012.

Hydrogen Deal

Air Products and its unit Air Products Canada Ltd. recently signed a long-term contract with North West Redwater Partnership. Under the terms of this contract, the company will supply around 25 million standard cubic feet per day (MMSCFD) hydrogen to North West’s Sturgeon Refinery near Edmonton, Alberta, Canada.

The supply of hydrogen will come from Air products’ existing Canada's Heartland Hydrogen Pipeline as well as the new world-scale hydrogen production plant Air Products Canada will construct in Scotford, Canada. This new plant will be constructed, owned and operated by the company and located adjacent to Shell Canada’s Scotford facility, northeast of Edmonton, Alberta.

Outlook

For fiscal 2013, Air Products plans to take a number of steps including execution against backlog, winning profitable new projects, loading existing assets, and implementing further productivity and cost initiatives measures. The company expects that its recent strategic moves will position it for future growth and profitability and help to build momentum and accelerate earnings growth despite the weak macroeconomic backdrop.

The company anticipates earnings for fiscal 2014 from continuing operations to be in the range of $5.70 and $5.90 per share. For first-quarter fiscal 2014, earnings are expected in the band of $1.30 to $1.35 per share.

Our View

Air Products is well positioned to capitalize on the cyclical recovery in its core industrial end-markets. It has sufficient capacity to meet the expected upturn in demand without incurring additional capital expenditures.

New business wins in the Merchant Gases segment should drive results in the near term. The acquisition of EPCO is an excellent fit for the Air Products’ North American Merchant Gases set of core competencies. It will also help expand the company’s market share by offering an extended product portfolio to existing and new customers. It will also provide cost and revenue synergy benefits to Air Products.

In Equipment and Energy, Air Products is encouraged by the opportunities in liquefied natural gas (LNG) market with Air Products chosen for a major off-shore LNG project in Malaysia. To address the growing demand for LNG technology and equipment, Air Products is also building a new manufacturing facility in Manatee County, Florida.

However, sluggish economic conditions across the U.S. and Europe may continue to impact the demand for the company’s products. Soaring energy costs pose a risk to margin expansion.

Air Products currently holds a Zacks Rank #2 (Buy).

Other companies in the chemical industry worth considering are Praxair Inc. (PX - Analyst Report), E. I. du Pont de Nemours and Company (DD - Analyst Report) and FMC Corp. (FMC - Analyst Report). All of them hold a Zacks Rank #2 (Buy).
 

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