Air Products 4Q Mixed, Profit Dives

Industrial gas giant Air Products and Chemicals Inc. ( APD - Analyst Report ) logged fourth-quarter fiscal 2012 (ended September 30) adjusted earnings from continued operations of $1.42 a share, missing the Zacks Consensus Estimate by a couple of cents.

The adjusted earnings exclude one-time items including impairment charges of $127 million (post-tax) associated with the restructuring of the company’s photovoltaic business. Air Products, which supplies the photovoltaic market with gases including silane, is seeing weak demand in this market. The charges also include the cost associated with the company’s move to exit the polyurethane intermediates business.

Consolidated net income, as reported, plunged 57% year over year to $138.7 million (or 65 cents a share), pummeled by the hefty charges. The company reported a profit of $324.8 million (or $1.51 a share) a year ago.

Revenues rose 4% year over year to $2,606 million, beating the Zacks Consensus Estimate of $2,574 million. Sales were aided by higher volumes in the Tonnage Gases, Equipment and Energy and Electronics and Performance Materials divisions and acquisitions, partly offset by unfavorable currency impact. The company witnessed sluggish manufacturing activity in the quarter.

For fiscal 2012, adjusted earnings of $5.40 a share missed the Zacks Consensus Estimate of $5.42 and exceeded the year-ago adjusted earnings of $5.36 a share. Sales for the year edged down 1% year over year to $9,612 million, but beat the Zacks Consensus Estimate of $9,577 million.

Separately, Air Products announced the retirement of its senior vice president and chief financial officer Paul E. Huck effective February 28, 2013. Its Board has chosen the incumbent vice president, Scott Crocco, as his successor.

Segmental Highlights

Revenues from the core Merchant Gases segment sales climbed 8% year over year to $1,017 million in the fourth quarter on the back of Indura acquisition, partly marred by currency headwinds. Sales from the Tonnage Gases division fell 4% to $846 million as lower energy pass-through and negative currency impact more than offset higher volume.

Revenues from the Electronics and Performance Materials segment rose 5% year over year at $617 million, supported by the acquisition of DA NanoMaterials. The Equipment and Energy division saw solid growth in the quarter with sales surging 32% to $126 million, boosted by an increase in large air separation unit revenues.

Financial Position

Air Products exited fiscal 2012 with cash and cash equivalents of $454.4 million, up roughly 8% year over year. Long-term debt increased 16% year over year to $4,658.5 million.

Outlook

For fiscal 2013, Air Products plans to take a number of steps including execution of its new Tonnage investments and sustained improvement in its Electronics and Performance Materials unit to attain better productivity. The company expects that its recent strategic moves will position it for future growth and profitability despite the weak macroeconomic backdrop.

The company anticipates earnings for fiscal 2013 to be in the range of $5.65 and $5.85 per share. For first-quarter fiscal 2013, earnings are expected in the band of $1.26 to $1.31 per share. Air Products expects capital expenditure of between $2 billion and $2.2 billion for fiscal 2013.

Our Recommendation

Air Products’ healthy project backlog strongly positions it to achieve its long-term growth target. Given its leading position in the gases business, the company is well positioned to capitalize on the cyclical recovery in its core industrial end markets.

New business wins in the Merchant Gases segment should drive results moving ahead. We are also encouraged by the increasing opportunities in liquefied natural gas (LNG) market. However, Air Products remains exposed to raw material inflation.

Air Products, which competes with Praxair Inc. ( PX - Analyst Report ) , currently holds a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.