Air Products & Chemicals, Inc. — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended 30 September 2018. The filing reports continuing operations separately from discontinued operations; quarterly information is unaudited. Air Products is a global industrial-gases and related-equipment provider operating in 50 countries, with approximately 16,300 employees. Its reporting segments were Industrial Gases–Americas, Industrial Gases–EMEA, Industrial Gases–Asia, Industrial Gases–Global, and Corporate and other.
Financial performance and position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Sales | $8,930.2 million | $8,187.6 million | +9% |
| Operating income | $1,965.6 million | $1,440.0 million | +37% |
| Operating margin | 22.0% | 17.6% | +440 basis points |
| Income from continuing operations attributable to Air Products | $1,455.6 million | $1,134.4 million | +28% |
| Diluted EPS from continuing operations | $6.59 | $5.16 | +28% |
| Adjusted diluted EPS | $7.45 | $6.31 | +18% |
| Adjusted EBITDA | $3,115.5 million | $2,799.2 million | +11% |
| Adjusted EBITDA margin | 34.9% | 34.2% | +70 basis points |
| Cash from operating activities | $2,554.7 million | $2,534.1 million | +$20.6 million |
| Capital expenditures, GAAP | $1,913.8 million | $1,056.0 million | +$857.8 million |
| Cash and cash items | $2,791.3 million | $3,273.6 million | -$482.3 million |
| Total debt | $3,812.6 million | $3,962.8 million | -$150.2 million |
Net income attributable to Air Products was $1,497.8 million, or $6.78 diluted EPS, compared with $3,000.4 million, or $13.65, in fiscal 2017. The prior-year result included a $1,828 million after-tax gain from the sale of the Performance Materials Division; therefore, total-company net income is not directly comparable with 2018 continuing-operations results.
Working capital was $2,743.9 million. Total debt represented 25.4% of total capitalization, down from 28.0% in 2017. The company had no borrowings under its $2.3 billion revolving credit facility at year-end and was in compliance with debt covenants. The principal covenant permits total debt to total capitalization of no more than 70%.
Financing cash uses included $897.8 million of shareholder dividends and $418.7 million of long-term debt repayments. The quarterly dividend increased from $0.95 to $1.10 per share during the year; dividends declared totaled $4.25 per share. No share repurchases were made, and $485.3 million remained under the repurchase authorization.
Material changes versus the prior comparable period
- Sales growth was driven by 6% volume growth, 1% pricing, and a 2% favorable currency effect. Higher volumes occurred across the regional industrial-gases segments, supported by new project onstreams.
- Industrial Gases–Asia sales increased 25% to $2,458.0 million and operating income increased 30% to $689.9 million, benefiting from the Lu’An project, higher merchant volumes, pricing, and favorable currency.
- Industrial Gases–EMEA sales increased 23% to $2,193.3 million and operating income increased 13% to $445.8 million, primarily from higher volumes and favorable currency, although margins declined to 20.3% from 22.2%.
- Industrial Gases–Americas sales increased 3%, but operating income declined 2% to $927.9 million because higher maintenance and supply-chain costs offset volume growth.
- Industrial Gases–Global sales declined 40% to $436.1 million as equipment activity on the Jazan project decreased near completion.
- Adjusted operating income increased 9% to $1,941.5 million, while the adjusted operating margin remained 21.7%; higher volumes and pricing were largely offset by higher costs.
- Fiscal 2018 included no new goodwill or intangible-asset impairment charges, compared with a $162.1 million charge in 2017, and no cost-reduction and asset-action charge, compared with $151.4 million in 2017.
- Equity-affiliates’ income increased to $174.8 million from $80.1 million, partly because 2017 included a $79.5 million impairment of the AHG investment. Fiscal 2018 included a $28.5 million Tax Act-related expense in equity-affiliates’ income.
- GAAP income taxes included a provisional $180.6 million discrete net expense from the U.S. Tax Cuts and Jobs Act. The GAAP effective tax rate increased to 26.0% from 18.4%, while the adjusted rate declined to 18.6% from 23.2%.
- Capital expenditures rose sharply, principally because of major projects, the Lu’An gasification and syngas asset acquisition, and other business-combination activity.
Fourth-quarter information
For the fourth quarter of fiscal 2018, sales were $2,298.9 million, operating income was $533.7 million, and net income attributable to Air Products was $452.9 million, or $2.05 diluted EPS from continuing operations. The quarter included a $43.7 million pretax pension settlement loss, primarily associated with transferring certain U.S. pension obligations to an insurer. Fiscal-year results also benefited by $24.1 million pretax from changing U.S. inventory accounting from LIFO to FIFO.
Outlook, unusual items, and risks
- Management expected fiscal 2019 earnings growth from base-business improvements and new large projects, with the full-year contribution from Lu’An identified as a significant contributor. Equipment sales related to Jazan were expected to decline as the project neared completion.
- Fiscal 2019 capital expenditures for new plant and equipment were expected to be approximately $2.3 billion to $2.5 billion, funded principally by cash on hand and operating cash flow.
- Equipment backlog was approximately $204 million at 30 September 2018, down from approximately $481 million in 2017; management expected roughly 50% of the total sales backlog to be recognized in fiscal 2019, subject to project execution.
- The company formed a 60%-owned Lu’An joint venture and acquired gasification and syngas purification assets. The joint venture had $384 million of related-party debt owed to Lu’An and approximately $330 million of remaining expected cash payments to Lu’An.
- The proposed Jazan gasification/power joint venture was expected to require an Air Products investment that was not included in contractual obligations because closing was expected in fiscal 2020. The filing states that the joint venture would purchase assets for approximately $8 billion and operate under a 25-year fixed-fee contract.
- Unconditional purchase obligations totaled $7.66 billion, including approximately $6.8 billion for helium purchases, principally after fiscal 2023. Approximately $455 million of additional plant and equipment commitments were included in 2019 obligations.
- Environmental liabilities were accrued at $76.8 million, with estimated exposure ranging from $76 million to a reasonably possible upper exposure of $90 million. The company was involved with 32 sites where final environmental settlements had not been reached.
- A Brazilian antitrust fine of approximately $44 million remained pending on appeal. No provision was recorded because management concluded an adverse final judgment was possible but not probable.
- Key risks include global and regional economic weakness, project delays or cancellations, international political and currency exposure, tariffs and sanctions, energy and raw-material costs, helium supply constraints, environmental and climate regulation, cybersecurity incidents, litigation, tax-law changes, and potential impairment of assets or goodwill.
- The fair value of the Latin America reporting unit exceeded carrying value by only 8% at year-end. A decline of approximately 230 basis points in revenue growth or 210 basis points in EBITDA margin, with other assumptions unchanged, could have resulted in impairment of remaining goodwill.
- The company had not completed its accounting for certain Tax Act effects and expected to finalize the provisional amounts within fiscal 2019. The U.K. GMP pension-equalization ruling was also under assessment and could increase benefit obligations or funding requirements.
Most important facts for investors to verify
- Whether Lu’An and other large projects deliver the projected fiscal 2019 earnings and cash-flow contribution without cost overruns or delays.
- The timing and economics of the proposed Jazan gasification/power joint venture, including Air Products’ eventual investment and financing obligations.
- Whether equipment backlog and Jazan completion create a meaningful decline in equipment revenue before new projects replace it.
- The final accounting for the Tax Act, including the provisional $180.6 million net tax expense and approximately $184 million of accrued deemed-repatriation tax.
- The sustainability of adjusted margins given higher maintenance, supply-chain, project-support, energy, and raw-material costs.
- Potential impairment in the Latin America reporting unit and sensitivity to revenue growth, margins, foreign exchange, and regional economic conditions.
- Exposure under environmental liabilities, guarantees, purchase commitments, pension obligations, the Brazilian antitrust matter, and other tax contingencies.
- The company’s ability to fund expected capital expenditures of $2.3 billion to $2.5 billion while maintaining dividends and debt metrics.