Air Products & Chemicals, Inc. — Fiscal Q1 2021 Form 10-Q
Business context and reporting period
Air Products is a global industrial gases and related equipment company, reporting Industrial Gases—Americas, EMEA, Asia, Global, and Corporate and other segments. The filing covers the three months ended 31 December 2020, compared with the three months ended 31 December 2019. Results were affected by COVID-19, foreign-currency movements, pricing actions, energy and natural-gas pass-through, planned maintenance, and reduced activity at the Lu’An onsite customer in Asia.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Sales | $2,375.2 million | $2,254.7 million | +5% |
| Operating income | $539.1 million | $561.0 million | -4% |
| Operating margin | 22.7% | 24.9% | -220 basis points |
| Net income | $486.7 million | $488.9 million | Essentially flat |
| Net income attributable to Air Products | $482.0 million | $475.6 million | +1% |
| Diluted EPS from continuing operations | $2.12 | $2.14 | -1% |
| Diluted EPS attributable to Air Products | $2.17 | $2.14 | +$0.03 |
| Adjusted EBITDA | $932.1 million | $908.4 million | +3% |
| Adjusted EBITDA margin | 39.2% | 40.3% | -110 basis points |
| Effective tax rate | 19.3% | 19.8% | -50 basis points |
| Cash flow from operations | $774.7 million | $667.0 million | +$107.7 million |
| Capital expenditures | $684.2 million | $454.8 million | +50% |
Sales growth reflected favorable currency of 3%, pricing of 2%, and higher energy and natural-gas pass-through of 1%, partly offset by a 1% volume decline. Management estimated that COVID-19 reduced first-quarter EPS by approximately $0.10–$0.15 and sales by approximately 4%.
Cash and cash items were $5,788.0 million at 31 December 2020, compared with $5,253.0 million at 30 September 2020. Total debt was $8,006.9 million, including $355.5 million of related-party debt, versus $7,907.8 million at fiscal year-end. Debt represented 38.0% of total capitalization, below the 70% covenant limit. The company had a $2.3 billion revolving credit agreement maturing 31 March 2022 and stated that it had not used, and did not expect to need, the facility.
Material changes versus the prior comparable period
- Industrial Gases—EMEA was the strongest regional contributor: sales increased 13% to $563.0 million and operating income increased 17% to $141.5 million.
- Industrial Gases—Americas sales were flat at $933.0 million, while operating income declined 12% to $225.8 million because of lower COVID-19-affected volumes and higher planned maintenance costs.
- Industrial Gases—Asia sales increased 4% to $717.5 million, but operating income declined 6% to $214.8 million. Lu’An had not restarted after maintenance, and the company agreed to temporarily reduce rates until market conditions improve; management expected a restart during fiscal 2021.
- Industrial Gases—Global sales increased 13% to $104.5 million, but the segment moved to a $4.6 million operating loss, primarily because of higher product-development spending.
- Corporate and other sales increased 66% to $57.2 million, while the operating loss improved to $38.4 million, primarily due to higher LNG equipment activity.
- Interest expense increased to $36.7 million from $18.7 million, primarily because of additional U.S.-dollar and euro-denominated notes issued in fiscal 2020.
- Equity affiliates’ income increased 19% to $69.3 million, driven by higher income from affiliates in India, Italy, Mexico, and Saudi Arabia.
- Capital expenditures increased to $684.2 million, primarily due to gasification projects. The company did not provide fiscal 2021 capital-expenditure guidance because of COVID-19-related uncertainty.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that it could not reasonably estimate the future impact of COVID-19 and was monitoring possible project delays, changes in onstream timing, demand weakness, and capital-spending impacts.
- The company maintained business continuity and reliable supply of critical products, but COVID-19 continued to pressure demand and operating costs.
- Remaining performance obligations were approximately $23 billion at 31 December 2020; approximately half was expected to be recognized over the next five years and the remainder thereafter, subject to contract renewals, terminations, inflation, currency movements, and other factors.
- A $10.3 million after-tax discontinued-operations benefit was recorded from settlement of a state tax appeal related to the 2017 sale of the former Performance Materials Division. This benefit increased total diluted EPS by $0.05 but was not part of continuing operations.
- Environmental liabilities were accrued at $83.0 million, with estimated exposure ranging from $82 million to a reasonably possible upper exposure of $96 million. Remediation obligations at certain sites may extend for decades.
- A Brazilian competition-law matter had a potential maximum loss of approximately $35 million plus interest, but management concluded that an adverse final judgment was not probable and recorded no provision.
- The company expected fiscal 2021 pension contributions of approximately $45 million to $55 million and possible pension settlement losses of approximately $0 million to $5 million.
- Other principal risks include global economic conditions, customer and project delays, foreign exchange and interest rates, raw-material costs, regulatory and environmental requirements, cybersecurity, litigation, catastrophic events, and impairment risk.
Facts investors should verify
- Whether Lu’An restarted as expected and whether the temporary rate reduction affects Asia earnings beyond the reported quarter.
- Whether COVID-19-related volume pressure, particularly in the Americas and packaged gases, persists or reverses.
- The timing, funding, and returns of gasification and other capital projects given the 50% year-over-year increase in capital expenditures.
- Progress toward the $23 billion remaining performance-obligation estimate and the sensitivity of that backlog to project delays, cancellations, and contract renewals.
- Debt maturities, refinancing plans, and the status of the revolving credit agreement before its 31 March 2022 maturity.
- Developments in the Brazilian competition matter and environmental remediation exposures, including the Pace, Piedmont, and Pasadena sites.
- The sustainability of reported margins, particularly after COVID-19 effects, planned maintenance, currency benefits, and pricing actions normalize.
- The company’s newly increased quarterly dividend of $1.50 per share, approved on 28 January 2021, and its effect on future cash allocation.