Air Products & Chemicals, Inc. — Fiscal 2018 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended 30 June 2018; filed 26 July 2018. Results are primarily presented on a continuing-operations basis. The company operates through Industrial Gases–Americas, EMEA, Asia, Global, and Corporate and other.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $2,259.0 million | $2,121.9 million | $6,631.3 million | $5,984.5 million |
| Operating income | $515.8 million | $258.7 million | $1,431.9 million | $982.6 million |
| Operating margin | 22.8% | 12.2% | 21.6% | 16.4% |
| Income from continuing operations attributable to Air Products | $430.7 million | $104.2 million | $1,002.7 million | $660.2 million |
| Diluted EPS from continuing operations | $1.95 | $0.47 | $4.54 | $3.00 |
| Adjusted EBITDA | $819.5 million | $723.0 million | $2,293.5 million | $2,029.8 million |
| Adjusted EBITDA margin | 36.3% | 34.1% | 34.6% | 33.9% |
Q3 sales increased 6%, driven by 3% volume growth, 1% pricing, 3% favorable currency, and a 1% reduction from lower energy and natural-gas pass-through. Nine-month sales increased 11%, reflecting 7% volume growth, 1% pricing, 4% favorable currency, and a 1% reduction from pass-through.
Net income attributable to Air Products was $473.9 million, or $2.15 diluted EPS, in Q3 2018, compared with $101.9 million, or $0.46, in Q3 2017. For the nine months, net income attributable to Air Products was $1,044.9 million, or $4.73 diluted EPS, versus $2,531.7 million, or $11.52, primarily because the prior-year period included a large gain on the sale of the Performance Materials Division.
Cash flow, liquidity, and debt
- Cash provided by operating activities was $1,863.3 million for the first nine months, compared with $1,613.4 million in the prior-year period.
- Cash used in investing activities was $1,038.9 million, including $1,158.1 million of plant and equipment additions and $320.2 million for acquisitions.
- Cash used in financing activities was $1,097.8 million, including $656.6 million of dividends and $418.2 million of long-term debt repayments.
- Cash and cash items were $2,986.5 million at 30 June 2018, compared with $3,273.6 million at 30 September 2017; foreign cash represented $1,136.0 million.
- Total debt was $3,871.2 million, or 26.4% of total capitalization, versus $3,962.8 million and 28.0% at 30 September 2017. Debt included $398.7 million of related-party debt from the Lu’An joint venture.
- No borrowings were outstanding under the $2.5 billion revolving credit agreement, and the company reported compliance with its debt covenants. The principal covenant limits total debt to total capitalization at no more than 70%.
Material changes versus the prior comparable period
- Underlying operating performance improved: Q3 adjusted operating income increased 11% and adjusted diluted EPS from continuing operations increased 18% to $1.95. For nine months, adjusted operating income increased 12% and adjusted diluted EPS increased 20% to $5.45.
- Reported operating income benefited from the absence of the prior-year $162.1 million goodwill and intangible-asset impairment charge, $42.7 million of prior-year cost-reduction and asset-action charges, and prior-year equity-method impairment charges.
- Industrial Gases–Asia Q3 sales increased 16% and operating income increased 24%; EMEA sales increased 24% and operating income increased 23%. Americas sales increased 2%, but operating income increased only 1% and the margin declined 30 basis points. Industrial Gases–Global sales declined 46% because of lower equipment activity on the Saudi Aramco Jazan project.
- The company completed the formation of a 60%-owned Lu’An syngas joint venture in China. The transaction included approximately $1.2 billion of acquired gasification and syngas clean-up assets, $399 million of related-party debt, and a $345 million liability for expected cash payments to or on behalf of Lu’An.
- The company recorded $42.2 million of income from discontinued operations for the nine months, including a Q3 tax benefit of $29.6 million and a $13.6 million pretax benefit related to prior divestiture matters. The prior-year nine-month period included $1,871.5 million of discontinued-operations income, including a $1,833 million after-tax gain on the Performance Materials Division sale.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $1.8 billion to $2.0 billion. Sales backlog was $298 million at 30 June 2018, down from $481 million at 30 September 2017.
- The filing does not provide a specific full-year earnings or revenue guidance figure. Management stated that it did not anticipate a significant change in the fiscal 2019 full-year non-GAAP tax rate attributable to the Tax Act.
- The Tax Act produced a provisional nine-month net expense of $239.0 million, including a $420.5 million tax provision for deemed repatriation and related items, partly offset by a $214.0 million deferred-tax remeasurement benefit. The accounting remains provisional within the permitted measurement period.
- Unconditional helium purchase obligations were approximately $6.5 billion, mostly due after fiscal 2022, and include take-if-tendered provisions.
- Environmental liabilities were accrued at $78.4 million, with estimated exposure ranging from $78 million to a reasonably possible upper exposure of $92 million. The company was involved in 34 sites without final settlements.
- A Brazilian competition-law matter carried a maximum possible loss of approximately $46 million plus interest, but management concluded an adverse final judgment was not probable and recorded no provision.
- Key operating risks include foreign-currency and interest-rate volatility, project execution and percentage-of-completion estimates, customer cancellations or postponements, energy and natural-gas prices, economic and political conditions, regulatory and environmental matters, litigation, acquisitions, and potential asset impairments.
Investor verification checklist
- Reconcile reported GAAP results with management’s adjusted measures, particularly the effect of prior-year impairments, restructuring charges, and the Tax Act.
- Assess whether the Lu’An joint venture reaches full production by the end of fiscal 2018 and monitor the related debt, $345 million payment obligation, and additional capital spending.
- Track capital expenditures against the $1.8 billion–$2.0 billion outlook and evaluate the decline in equipment backlog.
- Review the final accounting for the Tax Act, including the remaining $292.6 million deemed-repatriation obligation payable over eight years.
- Monitor helium take-or-pay exposure, environmental remediation estimates, the Brazilian competition matter, and other contingencies.
- Separate continuing-operations trends from discontinued-operations items when comparing 2018 with 2017.