Jan 29, 2016
Air Products and Chemicals Inc.
(APD – NYSE)
$126.71
Note to Readers: More details to come; changes are highlighted. Except where noted, and highlighted, no
other section of this report has been updated.
Reason for Report: Flash Update: 1Q16 Earnings Update.
Previous Edition: Dec 9, 2015; 4Q15 and FY15 Earnings Update.
Flash Update
On Jan 29, 2016, Air Products reported its 1Q16 results. The company surpassed earnings
expectations in 1Q16 (ended Dec 31, 2015) and saw higher profits too, backed by its cost-management
initiatives and improved pricing. However, its sales fell y/y and lagged expectations.
The company logged 1Q16 adjusted earnings of $1.78 per share, up 15% from $1.55 per share
recorded in the year-ago quarter. Earnings also beat the Zacks Consensus Estimate of $1.70. Adjusted
earnings exclude charges associated with business separation and project suspension costs.
Net income, as reported, was up 12% y/y to $363.6 million or $1.67 per share. The bottom line was
supported by lower costs. Cost of sales for the reported quarter declined roughly 13% y/y to around
$1.6 billion. Selling & administrative, and R&D expenses also fell y/y.
Revenues declined roughly 8% y/y to $2,355.8 million in 1Q16 and missed the Zacks Consensus
Estimate of $2,415 million. The top line was hurt by currency headwinds and lower energy passthrough of 5%, which more than offset volumes and price rise of 1% each.
Revenues from the Industrial Gases – America segment went down 17% y/y to $836 million in 1Q16,
hurt by lower energy pass-through and unfavorable currency impact. Lower demand in Latin America
and weaker North American steel and oilfield services markets reduced volumes by 3%. Prices rose by
2%.
Sales from the Industrial Gases – Europe, Middle East, and Africa (“EMEA”) segment fell 12% y/y to
$438 million due to unfavorable currency impact. Underlying sales remained flat as lower volumes of
1% were counter-balanced by higher pricing of 1%.
Sales from the Industrial Gases – Asia segment rose 4% y/y to $413 million on the back of an 11%
increase in volumes, mainly from new plants and strong businesses. Unfavorable currency translation
hurt sales by 6%.
Revenues from the Materials Technologies segment dropped 6% y/y to $490 million as higher pricing
was more than offset by lower volumes and unfavorable currency impact. Underlying sales of
Electronics Materials fell 4% on lower volumes and unfavorable currency. Performance Materials’ sales
declined 9% y/y due to lower volumes, reduced pricing and currency impact.
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Air Products expects earnings from continuing operations for 2Q16 to be in the range of $1.78–$1.83
per share, up 15%−18% from the prior-year quarter. The company, however, reiterated its earnings
guidance for FY16 in the band of $7.25–$7.50 per share.
Air Products also sees capital expenditures of around $1.3 billion for FY16.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON APD.
Portfolio Manager Executive Summary
Air Products and Chemicals Inc. (APD) is the second largest industrial gas supplier in North America
and the fourth largest in the world. The company serves customers in industrial, energy, technology
and healthcare markets worldwide with a unique portfolio of atmospheric gases, process and specialty
gases, performance materials, and equipment and services.
Out of the 11 firms covering the stock, 6 firms (54.55%) provided neutral ratings and 5 firms (45.45%)
assigned positive ratings, while none of the firms rated the stock negative. All the 11 firms provided
target prices.
Neutral or equivalent stance (54.55%; 6/11 firms) – The firms feel that FY15 was an impressive year
for Air Products as the company posted about 14% earnings per share (EPS) growth despite a tough
external environment with industrial demand turning negative in Brazil and N. America. The firms see
the spinoff of the Materials Technologies unit as a solid strategic move that should unlock incremental
value for both companies. Although the firms believe that Air Products possesses attractive earnings
growth potential along with the possibility of margin expansion due to cost-savings and restructuring
measures, they are concerned about the impact of the global macro backdrop and negative currency
translations on the company. Air Products revealed that it has completed the first $300 million cost
savings target (well ahead of the initial plan) and has set the goal for a second $300 million in savings
over the next four years, with a $75 million cost reduction expected in FY16. This self-help initiative is
the key to EPS growth given weakness in the energy and North American steel industries; soft
conditions in Latin America and a slow rebound in China.
Positive or equivalent stance (45.45%; 5/11 firms) – These firms are optimistic about Air Products
based on its accelerating operational improvements, expanding profit margins, a transforming corporate
culture, a $3.2 billion project backlog, excellent long-term prospects in hydrogen and oxygen, and low
EPS volatility from long-term take-or-pay contract structures in the on-site business.
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Jan 29, 2016
Overview
Key investment considerations as identified by the analysts are as follows:
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

Key Positive Arguments
Well positioned: The company has been a
leader in accessing high-growth end markets
with important market positions in electronics,
hydrogen and liquefied natural gas (LNG)
heat exchangers, and in select areas in its
chemical businesses.
Strong and stable financials: The duration
of typical gas contracts makes most of the
revenues from gas, fairly stable. The company
has made significant progress in reducing
variability/raw material sensitivity in its
chemical businesses.
Attractive industry: The company is
optimistic about the overall intermediate-term
prospects of the industrial gas companies,
given the solid end-market drivers, continued
industry consolidation
and
focus
on
profitability.




Key Negative Arguments
High energy and raw material costs: Air
Products is exposed to natural gas and energy
costs, which are expected to remain high in the
near term and in turn, limit the potential for rapid
margin expansion.
New projects: The company relies on new
projects to maintain growth, particularly in the
tonnage gases segment. Increasing competition
for these projects can make the economy less
attractive.
Sensitive: Air Products is sensitive to underlying
GDP growth/industrial production, and to the
cyclicality of the electronics/semiconductor
market.
Volatile Electronics franchise: The electronics
franchise operates in a volatile, high-growth
industry. The company’s primary exposure is to
semiconductors and LCDs, which are high-growth
businesses with tough pricing environments.
Pennsylvania-based Air Products and Chemicals Inc., founded in 1940, has established itself in a
leading position in key growth markets, such as semiconductor materials, refinery hydrogen, home
healthcare services, natural gas liquefaction, and advanced coatings and adhesives. Air Products has
operations in over 50 countries with 21,600 employees around the globe. It serves customers from food
and beverage, health and personal care to energy, electronics, chemicals, metals, transportation,
semiconductors and manufacturing markets worldwide. The company has a unique portfolio of
products, services and solutions that include atmospheric, process and specialty gases, performance
materials, equipment and technology.
Air Products has restructured its business into seven reporting segments, which came into effect from
Oct 1, 2014. The new reporting segments are: Industrial Gases – Americas, Industrial Gases –
Europe, Middle East, and Africa (EMEA), Industrial Gases – Asia, Industrial Gases – Global, Materials
Technologies, Energy-from-Waste and Corporate and other. Earlier, the company had four segments –
Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.
Further information on the company is available at: http://www.airproducts.com.
Note: The company’s fiscal year ends on Oct 25; all fiscal references differ from the calendar year. 1
1, 2
Dec 9, 2015
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Long-Term Growth
Despite the unprecedented volatility in the global economy, management remains committed to its
long-term goals of improving margins and returns, and capturing substantial growth opportunities in the
markets, going forward.
Key secular themes in the industrial gas and supply business include rising energy demand and prices,
increasing environmental regulation and growth of emerging economies. The firms expect Air Products
to capitalize on these dynamics while driving greater operating efficiency. In the energy market, the
company seeks to benefit from hydrogen for oil refining, oxygen for coal gasification and capital
expenditures for LNG heat exchangers. Increasing environmental consciousness has given Air
Products the opportunity to provide clean coal, clean fuel, carbon sequestration, and electronic gases
for thin-film solar. The company is also widening its investment in emerging markets. For example, twofourths of capital expenditures over the next five years will be targeted at faster-growing economies
such as China and India.
The company has entered into a number of contracts, which are likely to reap long-term profitability and
add to its earnings. Air Products has been a leader in accessing high-growth end markets, occupying
the top market positions in electronics, hydrogen and LNG heat exchangers, and strong positions in
select areas in its chemical businesses. It has displayed a consistent focus in pursuing new growth
areas, with many core areas of activity (electronics, hydrogen).
The company expects to deliver enhanced revenue growth and sustained margins. Air Products has a
record of setting and meeting its long-term goals with a strong presence in the energy, environmental
and emerging markets, worldwide. Thus, by implementing these strategic actions, the company intends
to continue to reduce costs, improve returns and gain a greater competitive advantage over its peers.
Dec 9, 2015
Target Price/Valuation
The Zacks Digest average price target is $153.91 (↓ $1.36 from the previous report, up 15% from the
current price.)
Rating Distribution
Positive
Neutral
45.45% ↑
Negative
Avg. target Price
Digest High
Digest Low
0.00% ↓
54.55% ↓
$153.91
$175.00
$132.00
No. of Analysts with Target Price/Total
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Risks to the target price include a slowdown in global economy, increasing competition in refinery
hydrogen, softness in the electronics gas market, weakness in Performance Materials owing to slowing
North American coatings, autos and housing end markets, and a weak economic scenario in Europe,
slump in the industrial production-related markets, deterioration in capital discipline, rapidly rising
energy costs and raw material prices. A strengthening U.S. dollar is also expected to adversely affect
EPS.
Recent Events
On Oct 29, 2015, Air Products reported its 4Q15 and FY15 results.
The company logged adjusted earnings of $1.82 per share in 4Q15, up from $1.66 per share recorded
in the year-ago quarter.
Net income from continuing operations, as reported, jumped more than three-fold y/y to $345 million or
$1.58 per share in 4Q15.
In FY15, adjusted earnings were $6.57 per share.
Revenues slipped roughly 9% y/y to $2,449 million in 4Q15.
In FY15, revenues fell 5% y/y to around $9,895 million.
Air Products expects earnings from continuing operations for 1Q16 to be in the range of $1.65 to $1.75
per share. For FY16, the company anticipates earnings from continuing operations in the band of $7.25
to $7.50 per share, a 10%-14% y/y rise.
Revenue
According to the company, revenues slipped roughly 9% y/y to $2,449 million in 4Q15. The top line was
hit by currency headwinds and lower energy pass-through. Currency translation had a 7% unfavorable
impact on 4Q15 sales.
For FY15, revenues fell 5% y/y to around $9,895 million. Underlying sales increased by 3% on 2%
higher volumes, driven by Industrial Gases – Asia and Materials Technologies, and 1% higher pricing.
Segment Revenue
Air Products realigned its reporting segments under a new structure from Oct 1, 2014. The new
reporting segments are: Industrial Gases – Americas, Industrial Gases – EMEA, Industrial Gases –
Asia, Industrial Gases – Global, Materials Technologies, Energy-from-Waste, Corporate and other.
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Industrial Gases – Americas
Revenues from the Industrial Gases - America segment went down 13% y/y to $902 million in 4Q15,
hurt by lower energy pass-through and unfavorable currency impact. However, underlying sales
remained flat y/y as higher pricing was offset by lower volumes.
In FY15, the segment recorded sales of $3,693.9 million, down 9.4% y/y.
Industrial Gases – EMEA
Sales from the Industrial Gases - Europe, Middle East, and Africa (“EMEA”) segment fell 12% y/y to
$460 million in 4Q15 due to unfavorable currency impact. Underlying sales were up 2%.
In FY15, the segment reported sales of $1,864.9 million, down 13.3% y/y.
Industrial Gases – Asia
Sales from the Industrial Gases - Asia segment rose 7% y/y to $428 million in 4Q15 on the back of a
15% increase in volumes, mainly from new plants. Unfavorable currency translation hurt sales by 7%.
In FY15, the segment’s sales were $1,637.5 million, up 7.2% y/y.
Materials Technologies
Revenues from the Materials Technologies segment slipped 13% y/y to $490 million in 4Q15 as higher
pricing was more than offset by lower volumes and unfavorable currency impact. Underlying sales of
Electronics Materials fell 9% on lower delivery systems. Performance Materials’ sales dropped 8% y/y
due to lower volumes.
In FY15, the segment reported sales of $2,087.1 million, up 1.1% y/y.
Margins
Operating income of $515 million in 4Q15 increased 9% y/y, and operating margin of 21% improved
340 basis points (bps), driven by higher pricing and good cost performance. Adjusted EBITDA of $785
million increased 2% y/y, and EBITDA margin of 32.1% improved 350 bps, reflecting strong operating
leverage.
In FY15, operating income of $1.9 billion increased 14%, and operating margin of 19% improved 310
bps. Adjusted EBITDA of $3.0 billion improved 8% and EBITDA margin of 30.1% improved 360 bps.
Segment Operating Income (as reported by the company)
Industrial Gases – Americas
The segment’s operating income of $209 million decreased 5% and adjusted EBITDA of $330 million
decreased 3% y/y in 4Q15, as unfavorable currency and lower energy pass-through more than offset
the benefits of restructuring actions. Record operating margin of 23.1% improved 190 basis points
(bps), and record EBITDA margin of 36.6% improved 370 bps over prior year.
Operating income for FY15 was $808.4 million, compared with $762.6 million in FY14.
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Industrial Gases – EMEA
Operating income of $91 million in 4Q15 decreased 2% y/y, as strong pricing and cost performance
were neutralized by unfavorable currency impact. On a constant currency basis, operating income was
up 11%. Record operating margin of 19.7% increased 190 bps, and record EBITDA margin of 32.9%
increased 220 bps y/y, supported by the benefits of restructuring actions. Adjusted EBITDA of $151
million decreased 5% y/y.
Operating income in FY15 was $330.7 million, compared with $351.2 million in FY14.
Industrial Gases – Asia
Operating income of $104 million in 4Q15 increased 44% y/y, and operating margin of 24.4% improved
620 bps y/y on higher volumes from the new plants and strong cost performance. Adjusted EBITDA of
$165 million increased 17%, and EBITDA margin of 38.5% increased 330 bps.
Operating income in FY15 was $380.5 million, compared with $310.4 million in FY14.
Materials Technologies
Operating income was $116 million in 4Q15, and operating margin of 23.8% was up 160 bps. Adjusted
EBITDA was $140 million, and EBITDA margin of 28.5% was up 130 bps. For the fiscal year, Materials
Technologies adjusted EBITDA of $572 million was up 19% and EBITDA margin of 27.4% was up 410
bps.
Operating income in FY15 was $476.7 million, compared with $379 million in FY14.
Earnings Per Share
The company logged adjusted earnings of $1.82 per share in 4Q15, up from $1.66 per share recorded
in the year-ago quarter. Adjusted earnings exclude one-time items, including charges associated with
business restructuring and cost-saving actions.
Net income from continuing operations, as reported, climbed more than three-fold y/y to $345 million or
$1.58 per share in 4Q15. The bottom line was supported by lower costs. Cost of sales for the reported
quarter fell roughly 12% y/y to around $1.7 billion. Selling & administrative and R&D expenses also fell
y/y.
In FY15, adjusted earnings were $6.57 per share.
Outlook
Air Products expects earnings from continuing operations for 1Q16 to be in the range of $1.65 to $1.75
per share, up 6%-13% from the prior-year quarter. For FY16, the company anticipates earnings from
continuing operations in the band of $7.25 to $7.50 per share, a 10%-14% y/y rise.
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Jan 29, 2016
Analyst
Poulomi Chakraborty
Copy Editor
Content Editor
Lead Analyst
QCA
No. of brokers reported/total
brokers
Reason for Update
Sayani Roy
Anindya Barman
Anindya Barman
Anindya Barman
Zacks Investment Research
Flash
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