Air Products & Chemicals, Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Three and six months ended 31 March 2021; fiscal year ends 30 September. Results are unaudited and generally presented on a continuing-operations basis unless noted. The business consists primarily of industrial gases across the Americas, EMEA, and Asia, plus global equipment and corporate activities.
Financial performance and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Change |
|---|---|---|---|
| Sales | $2,502.0 million | $2,216.3 million | +13% |
| Operating income | $548.5 million | $577.2 million | -5% |
| Operating margin | 21.9% | 26.0% | -410 basis points |
| Net income | $477.1 million | $490.4 million | -3% |
| Net income margin | 19.1% | 22.1% | -300 basis points |
| Net income attributable to Air Products | $473.1 million | $477.8 million | -1% |
| Diluted EPS attributable to Air Products | $2.13 | $2.15 | -$0.02 |
| Adjusted EBITDA | $934.0 million | $892.5 million | +5% |
| Adjusted EBITDA margin | 37.3% | 40.3% | -300 basis points |
Six-month results: Sales increased 9% to $4,877.2 million, while operating income declined 4% to $1,087.6 million and net income declined 2% to $963.8 million. Diluted EPS attributable to Air Products was $4.29, unchanged from the prior year; diluted EPS from continuing operations declined to $4.25 from $4.36. Adjusted EBITDA increased 4% to $1,866.1 million, while adjusted EBITDA margin declined to 38.3% from 40.3%.
- Sales growth reflected 7% energy and natural-gas cost pass-through, 4% favorable currency, and 2% pricing in the quarter; volumes were flat. For the six-month period, volumes declined 1%.
- Cash provided by operating activities was $1,580.3 million versus $1,238.5 million in the prior-year period.
- Capital expenditures were $1,297.6 million versus $953.3 million, including $1,227.8 million of additions to plant and equipment and $69.8 million of investments in unconsolidated affiliates.
- Cash and cash items were $5,786.3 million at 31 March 2021, compared with $5,253.0 million at 30 September 2020. Short-term investments were $409.2 million.
- Total debt was $8,004.4 million, or 37.9% of total capitalization, versus $7,907.8 million and 38.9%, respectively, at 30 September 2020. This includes $352.5 million of related-party debt.
- The company entered into a new five-year $2.5 billion revolving credit agreement on 31 March 2021. No borrowings were outstanding under the facility, and the company reported compliance with its debt covenants. Foreign subsidiary credit facilities totaled $291.5 million, of which $92.1 million was borrowed.
Material changes versus the prior comparable period
- Margins weakened despite revenue growth: Higher pass-through revenue, unfavorable volume mix, higher operating costs, and a $23.2 million facility-closure charge reduced operating margin. Pricing actions and favorable currency partly offset these pressures.
- COVID-19 remained a headwind: Management estimated an approximately 3% negative impact on second-quarter and year-to-date sales, with lower merchant demand and continuing regional outbreaks and restrictions.
- Winter Storm Uri: February 2021 storm-related power and natural-gas price spikes increased pass-through sales and costs, reduced volumes, and pressured margins, particularly in the Americas.
- Lu’An project disruption: The Lu’An facility in Asia had not restarted after maintenance as of 31 March 2021. The company was commissioning the plant and expected operations to resume during fiscal 2021; reduced Lu’An contributions materially affected Asia volumes and margins.
- Unusual items: Fiscal 2021 included a $36.8 million pre-tax gain from separating the Tyczka Industrie-Gases joint venture and a $23.2 million primarily noncash facility-closure charge. Fiscal 2020 included a $33.8 million headquarters-relocation gain and a $33.8 million India Finance Act benefit in equity-affiliate income.
- Acquisition and partnership change: The Tyczka transaction resulted in recognition of $16.7 million of customer-related intangible assets and $14.5 million of goodwill. The purchase-price allocation remained preliminary.
- Dividend: The quarterly dividend increased 12% to $1.50 per share, marking the 39th consecutive annual increase. No share repurchases occurred during the first six months; $485.3 million remained under the repurchase authorization.
Guidance, outlook, risks, and contingencies
- Management expected fiscal 2021 capital expenditures of approximately $2.5 billion, excluding any future investment in the Jazan gas and power project.
- Management stated that cash balances and operating cash flow were generally sufficient for liquidity needs and that COVID-19 was not expected to impair the company’s ability to meet future liquidity requirements.
- Remaining performance obligations were approximately $24 billion at 31 March 2021; approximately half was expected to be recognized over the next five years and the balance thereafter. Actual amounts may change with pricing, currency movements, contract amendments, cancellations, or renewals.
- COVID-19 duration and severity, vaccine rollout, economic conditions, customer demand, project execution, supply-chain costs, energy prices, foreign exchange, interest rates, cybersecurity, climate and environmental regulation, and legal proceedings remain material risks.
- Winter Storm Uri generated litigation concerning Texas energy-management services and could lead to additional costs or gains; the filing states that the potential amount could not yet be estimated.
- Environmental accruals totaled $80.8 million, with estimated exposure ranging from $80 million to a reasonably possible upper exposure of $94 million. Remediation obligations may extend for decades.
- A Brazilian antitrust matter involved a potential fine of approximately $32 million plus interest. The company stated that an adverse final judgment was possible but not probable, and no provision was recorded.
- Operating lease commitments for leases not yet commenced totaled approximately $250 million. Fiscal 2021 pension contributions were expected to be approximately $45 million to $55 million.
Most important facts for investors to verify
- Whether Lu’An resumed operations as expected and whether Asia volumes and margins recovered.
- Whether COVID-19 effects, merchant-demand weakness, and Winter Storm Uri-related costs continued beyond the quarter.
- Underlying margin performance excluding energy and natural-gas pass-through and the disclosed unusual items.
- Execution of the approximately $2.5 billion fiscal-year capital-expenditure plan and its effect on free cash flow and leverage.
- Progress and economics of major gasification, on-site, equipment, and Jazan-related projects.
- Developments in the Texas energy dispute, Brazilian antitrust matter, and environmental remediation obligations.
- Cash-flow coverage of the increased dividend and the company’s ability to maintain liquidity while funding growth investments.