Business Context and Reporting Period
Air Products and Chemicals, Inc. filed its Form 10-K for the fiscal year ended September 30, 2015. The company supplies industrial and specialty gases, related equipment, electronics materials, performance chemicals, LNG technology, and energy-from-waste solutions globally. Fiscal 2015 was the first full year under a seven-segment structure: Industrial Gases–Americas, EMEA, Asia, Global, Materials Technologies, Energy-from-Waste, and Corporate and other.
The filing also includes unaudited fourth-quarter results. Management announced a preliminary plan to spin off Materials Technologies as a separate public company, targeted for completion before September 2016, subject to approvals and other conditions.
Financial Results and Key Metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Sales | $9,894.9 million | $10,439.0 million | Down 5% |
| Operating income | $1,699.1 million | $1,328.2 million | Up 28% |
| GAAP operating margin | 17.2% | 12.7% | Up 450 basis points |
| Net income attributable to Air Products | $1,277.9 million | $991.7 million | Up 29% |
| Diluted EPS from continuing operations | $5.88 | $4.59 | Up 28% |
| Adjusted EBITDA | $2,974.9 million | $2,764.8 million | Up 8% |
| Adjusted EBITDA margin | 30.1% | 26.5% | Up 360 basis points |
| Cash provided by operating activities | $2,437.8 million | $2,186.4 million | Up 12% |
| GAAP capital expenditures | $1,653.6 million | $1,682.2 million | Down 2% |
| Total debt at year-end | $5,879.0 million | $6,118.5 million | Down 4% |
| Cash and cash items | $206.4 million | $336.6 million | Down 39% |
Fourth-quarter sales were $2,449.4 million, operating income was $472.2 million, net income was $350.0 million, and diluted EPS attributable to Air Products was $1.58. The quarterly dividend increased from $0.77 to $0.81 per share during fiscal 2015, resulting in declared annual dividends of $3.20 per share.
Year-end working capital was negative $737 million, primarily because $1,929.9 million of borrowings were short-term or due within 12 months. The company had $2,690 million of revolving credit capacity, no borrowings under that facility, and was in compliance with its debt covenants. The total-debt-to-total-capitalization ratio was 44.3%.
Material Changes Versus the Prior Comparable Period
- Reported sales declined primarily because of a 5% unfavorable currency impact and a 3% reduction from lower energy and raw-material cost pass-throughs. Underlying sales increased 3%, supported by 2% volume growth and 1% pricing growth.
- Profitability improved substantially due to higher volumes, pricing, lower costs, restructuring benefits, and lower energy costs. These benefits were partly offset by unfavorable currency effects and higher incentive compensation.
- Industrial Gases–Asia sales increased 7%, with operating income up 23%, driven by new plants and higher volumes, particularly in China.
- Materials Technologies sales increased 1%, while operating income increased 26% to $476.7 million, reflecting favorable pricing and mix, volume growth, and cost reductions.
- Industrial Gases–Americas operating income increased 6% despite a 9% sales decline, primarily because of pricing and lower energy pass-through effects.
- Industrial Gases–EMEA operating income declined 6% because of currency pressure, although its operating margin improved to 17.7% from 16.3%.
- The company recorded $207.7 million of restructuring and cost-reduction charges, including severance related to approximately 2,000 eliminated positions. It also recorded $21.2 million of pension settlement losses and $7.5 million of Materials Technologies separation costs.
- Fiscal 2014 included a $310.1 million goodwill and intangible-asset impairment charge that did not recur in 2015, which materially affected the year-over-year GAAP comparison.
- Equipment backlog increased to approximately $1.9 billion at September 30, 2015, from approximately $520 million, primarily due to the Saudi Arabia Jazan project. Management estimated that up to 85% of the backlog would not be recognized as fiscal 2016 revenue, depending on project execution schedules.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- For fiscal 2016, management expected modest overall economic growth, continued cash-flow and earnings improvement from new projects and 2015 cost reductions, and lower LNG results because of delays in customer investment decisions.
- Fiscal 2016 capital expenditures for new plant and equipment, excluding acquisitions, were expected to be $1.5 billion to $1.6 billion, funded principally with operating cash flow.
- Management expected to refinance maturing debt, maintain access to commercial paper markets, and remain within its financial covenants.
- Construction of the second Tees Valley, United Kingdom, energy-from-waste project was suspended in November 2015 pending resolution of design issues affecting the first project. The company had invested approximately $1 billion in the two projects and stated that future impairment charges remained reasonably possible, although no impairment was indicated at September 30, 2015.
- The company had approximately $7.6 billion of contractual obligations, including $4.4 billion of long-term debt maturities, $1.4 billion of unconditional purchase obligations, and $871 million of pension obligations. Approximately $540 million of 2016 purchase obligations related to additional plant and equipment.
- Environmental liabilities were accrued at $80.6 million, with estimated exposure ranging from $80 million to a reasonably possible upper exposure of $93 million across approximately 37 sites.
- A Brazilian competition-law fine of approximately $45 million remained pending on appeal. Management considered an adverse final judgment possible but not probable and recorded no provision.
- The company guaranteed its 25% share of a Saudi Arabian joint-venture equity bridge loan, with maximum exposure of approximately $100 million, and expected to provide bank guarantees of up to $326 million related to the Jazan equipment contract.
- Key risks include foreign-currency volatility, economic and end-market weakness, interest-rate increases, energy and raw-material costs, international political and regulatory risks, environmental liabilities, litigation, execution of major projects, potential asset impairments, and completion and tax treatment of the Materials Technologies spin-off.
Important Facts for Investors to Verify
- Confirm the eventual timing, structure, financing arrangements, tax treatment, and discontinued-operations accounting for the Materials Technologies spin-off.
- Monitor the Tees Valley energy-from-waste projects for further delays, incremental investment, contract issues, or impairment charges.
- Reconcile GAAP performance with management’s non-GAAP measures, particularly the $207.7 million restructuring charge, $21.2 million pension settlement loss, $7.5 million separation costs, and $33.6 million land-sale gain.
- Assess refinancing needs for the $1,929.9 million of debt due within 12 months and the company’s dependence on commercial paper markets.
- Track currency effects, especially the euro, and the ability to recover energy and raw-material costs through customer contracts.
- Review the pending Brazilian competition matter, environmental exposures, Saudi Arabia guarantees, pension funding requirements, and the company’s contractual obligations.
- Evaluate whether the substantial equipment backlog converts to revenue and cash flow on the expected schedule, given management’s estimate that most of it would not be recognized in fiscal 2016.