Air Products and Chemicals’ (APD) third quarter 2010 net earnings more than doubled to $253.2 million or $1.17 a share, versus last year’s $114.6 million or 53 cents. Excluding non-recurring charges, the specialty chemical producer earned $277 million or $1.28 per share, in line with the Zacks Consensus Estimate. Results, however, overtook the company’s own guidance of $1.25 to $1.29 per share. Solid earnings growth came from higher revenues.
Third quarter revenues leaped 14% year over year to about $2.2 million on higher volumes across all business segments due to new contract wins. However, revenues fell short of the Zacks Consensus Estimate of $2.3 billion. Cost of sales increased 13% year over year to $1.6 billion. Operating income increased 22% to $374 million, leading to operating margins of 17% in the second quarter.
Segment Performance
Merchant Gas sales improved 4% to $915 million on strong volumes in the Asian markets and an improving U.S. and European liquid bulk business. Higher revenues translated into operating income of $176 million, which reflected a 5% increase from the prior year.
In the Tonnage Gas segment, revenues soared 28% to $725 million. Rebounding chemical and steel production and new plants going on stream led to a robust revenue growth. This coupled with higher energy and raw material cost pass-through, by way of increase in selling prices, helped a 37% increase in operating income to $120 million. Operating margins came in at 16.6%.
Electronics and Performance Materials sales of $497 million were up 21% on higher volumes. Electronic sales improved 18% year over year and 11% sequentially. Volumes in the performance material business improved 26% year over year and 10% sequentially. Higher revenues and lower costs culminated to an operating income of $57 million, up 60% year over year.
Equipment and Energy sales of $116 million were down 3% on lower volumes. Operating income of $21 million increased 61% from the prior year on higher LNG activity.
Balance Sheet
Air Products ended the quarter with cash and cash equivalent of $405 million. Debt totaled $3.71 billion as June 30, 2010.
Guidance
Air Products expects fiscal 2010 earnings to grow over 20% as the global economy, led by Asia, experiences gradual recovery, coupled with the leverage in its existing capacity, new projects being commissioned and improving productivity. As a result, Air Products lifted its guidance for fiscal 2010 again to $4.94-$5.00 per share from its previous guidance of $4.90 to $5.00.
Air Products expects fourth quarter EPS from continuing operations to be between $1.27 and $1.33. Air Products has consistently boosted margins and is on track to meet the 17% goal in 2011.
Zacks Recommendation
Air Products and Chemicals, an industrial gas producer, is benefiting from long-term take-or-pay contract, a consolidated industry structure, a diverse customer base and sustained pricing power. Air Products’ aggressive cost cutting and productivity initiatives, combined with portfolio realignment efforts, have helped mitigate fixed cost headwinds, which is very encouraging.
Currently, Air Products is chasing rival Airgas Inc. (ARG). Earlier this month, Air Products raised its offer price for Airgas to $63.50 per share, up 6% from its previous bid in February. This increases the total transaction value to $7.3 billion from the initial offer of $7 billion. Although the merger will help Air Products to venture into the North American packaged gas business, we are worried that Air Products may have to pay in excess for the acquisition.
Air Products is bogged down with high leverage. The company expects to continue incurring debt in an effort to fund new projects and refinance maturing debt. The proposed Airgas acquisition would add about $1.9 billon to Air Products debt.
Based on the above factors, we have a long-term (6 months and higher) Neutral recommendation on Air Products, which is supported by a Zacks #3 Rank (Hold).
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