Air Products & Chemicals, Inc. — Fiscal 2017 First-Quarter Form 10-Q
Reporting period: Three months ended December 31, 2016, compared with the three months ended December 31, 2015. The interim financial statements are unaudited and presented under U.S. GAAP. Continuing-operations results exclude the former Materials Technologies businesses and Energy-from-Waste operations, which are reported as discontinued operations.
Business Context
- Air Products completed the spin-off of Electronic Materials Division to Versum Materials on October 1, 2016.
- On January 3, 2017, after quarter-end, the company completed the sale of Performance Materials to Evonik for $3.8 billion in cash, subject to customary adjustments.
- The company continues to focus on its Industrial Gases businesses, reported through Americas, EMEA, Asia, Global, and Corporate and other segments.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $1,882.5 million | $1,866.3 million | +1% |
| Operating income | $328.1 million | $372.5 million | -12% |
| Operating margin | 17.4% | 20.0% | -260 basis points |
| Income from continuing operations attributable to Air Products | $251.6 million | $280.9 million | -10% |
| Diluted EPS from continuing operations | $1.15 | $1.29 | -$0.14 |
| Net income attributable to Air Products | $299.8 million | $363.6 million | -18% |
| Diluted EPS | $1.37 | $1.67 | -$0.30 |
| Cash provided by operating activities | $574.3 million | $397.2 million | +$177.1 million |
- Discontinued operations contributed $48.2 million, or $0.22 diluted EPS, versus $82.7 million, or $0.38 diluted EPS, in the prior-year quarter.
- Adjusted operating income increased 6% to $408.3 million, and adjusted operating margin increased to 21.7% from 20.6%.
- Adjusted EBITDA increased 3% to $652.4 million; adjusted EBITDA margin was 34.7%, up from 33.9%.
- The reported effective tax rate declined to 23.3% from 25.1%, helped by $7.0 million of excess share-based compensation tax benefits and foreign tax law changes.
- Cash capital expenditures were $239.2 million; capital expenditures including capital-lease spending were $252.0 million. Fiscal 2017 capital expenditures were expected to be approximately $1.0 billion.
- Cash dividends declared increased to $0.86 per share from $0.81 per share. A second-quarter dividend of $0.95 per share was declared on January 26, 2017.
Liquidity, Debt and Balance Sheet
- Continuing-operations cash and cash items were $655.5 million at December 31, 2016, down from $1,293.2 million at September 30, 2016. Foreign cash represented $644.9 million of the balance and was generally intended to remain invested outside the United States.
- Total debt declined to $4,318.4 million from $5,210.9 million, primarily due to repayment of commercial paper and other short-term borrowings. Debt represented 37.3% of total debt plus total capitalization, compared with 41.9% at September 30, 2016.
- The company had no borrowings under its $2.69 billion revolving credit facility at December 31, 2016. The facility matures April 30, 2018 and supports the commercial paper program.
- The company reported compliance with all debt covenants. The principal facility includes a maximum total-debt-to-total-capitalization covenant of 70%.
- Financing activities used $974.5 million, consisting primarily of $772.2 million of commercial-paper and short-term-borrowing repayments and $186.9 million of dividends paid.
- Sales backlog declined to $920 million at December 31, 2016 from $1.057 billion at September 30, 2016.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected 2% higher volumes and 2% of energy and raw-material contractual pass-through, offset by a 3% unfavorable currency impact.
- Reported operating income was reduced by $30.2 million of business-separation costs, compared with $12.0 million in the prior-year quarter, and by $50.0 million of cost-reduction and asset-action charges that were not incurred in the prior-year quarter.
- The $50.0 million charge included a $45.7 million write-down of an air-separation unit associated primarily with the discontinued Energy-from-Waste projects and $7.7 million of severance related to approximately 50 positions.
- Excluding the separation and restructuring-related items, operating performance improved primarily because of productivity and operating-cost reductions.
- Industrial Gases–Americas operating income increased 6% to $223.8 million; EMEA declined 5% to $88.0 million; Asia increased 1% to $118.1 million; and Global improved to $8.2 million from a $19.3 million loss, principally due to the Jazan equipment project.
- Corporate and other operating loss widened to $29.8 million from $17.4 million because of lower liquefied natural gas project activity.
Outlook, Risks, Contingencies and Unusual Items
- Management expected delays in new LNG project orders because of continued weakness in energy markets. No formal consolidated earnings guidance was provided in the filing text.
- The company may incur additional Energy-from-Waste exit costs. The remaining accrual was $65.2 million at December 31, 2016, primarily related to land leases and other contract obligations.
- The sale of Performance Materials was expected to generate approximately $1 billion of income-tax payments associated with the taxable gain.
- Environmental liabilities totaled $80.1 million, with a reasonably possible exposure range of approximately $80 million to $94 million. Payments may extend for up to 30 years.
- A Brazilian competition-law fine of approximately $55 million, plus interest, remained pending on appeal. The company considered an adverse final judgment possible but not probable and had recorded no provision.
- Key forward-looking risks include global economic conditions, foreign-exchange and interest-rate volatility, energy prices, customer cancellations or project delays, execution of large projects, asset impairments, litigation, environmental and regulatory matters, and the ability to eliminate stranded costs following the divestitures.
- The company early adopted new share-based compensation guidance, recognizing $7.0 million of excess tax benefits in the income statement and an $8.8 million cumulative-effect increase to retained earnings.
Most Important Facts for Investors to Verify
- Verify the final cash proceeds, working-capital adjustments, tax payments, and accounting gain or loss from the January 2017 Performance Materials sale.
- Assess the sustainability of improved adjusted margins after excluding recurring or potentially recurring separation, restructuring, and asset-action charges.
- Monitor LNG order activity, the $920 million backlog, and execution and cash requirements for the Jazan project.
- Review the remaining Energy-from-Waste obligations and whether additional exit costs or impairments arise.
- Evaluate liquidity after the major commercial-paper repayment, planned capital expenditures of approximately $1.0 billion, dividends, and expected taxes on the divestiture.
- Consider the effect of currency movements, particularly in EMEA and Asia, and the company’s fixed-versus-variable debt exposure.
- Review the Brazilian antitrust appeal, environmental remediation estimates, and other commitments and contingencies for changes in probability or estimated exposure.