Air Products & Chemicals, Inc. — Fiscal Q3 2021 Form 10-Q
Business context and reporting period
Air Products reported its quarterly results for the three and nine months ended 30 June 2021. The company operates primarily through Industrial Gases segments in the Americas, EMEA, and Asia, with additional global equipment and corporate businesses. Results were prepared under U.S. GAAP and are unaudited.
Management reported that COVID-19 had a less significant impact than in the comparable 2020 periods, although recovery remained uneven by product line and geography. The on-site business remained stable, while merchant volumes generally improved.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Sales | $2,604.7 million | $2,065.2 million | $7,481.9 million | $6,536.2 million |
| Operating income | $577.1 million | $539.2 million | $1,664.7 million | $1,677.4 million |
| Operating margin | 22.2% | 26.1% | 22.2% | 25.7% |
| Net income | $532.3 million | $457.1 million | $1,496.1 million | $1,436.4 million |
| Net income margin | 20.4% | 22.1% | 20.0% | 22.0% |
| Diluted EPS from continuing operations | $2.36 | $2.01 | $6.61 | $6.36 |
| Adjusted EBITDA | $976.0 million | $881.0 million | $2,842.1 million | $2,681.9 million |
| Adjusted EBITDA margin | 37.5% | 42.7% | 38.0% | 41.0% |
Q3 sales increased 26%, driven by volume growth of 12%, energy and natural-gas cost pass-through of 6%, favorable currency of 6%, and pricing of 2%. First-nine-month sales increased 14%, reflecting volume growth of 4%, cost pass-through of 4%, currency of 4%, and pricing of 2%.
Cash provided by operating activities was $2,508.9 million for the first nine months, compared with $2,013.2 million in 2020. Capital expenditures, as defined by the company, were $1,933.5 million versus $2,069.6 million. Cash used in investing activities was $2,318.0 million, and cash used in financing activities was $1,203.1 million.
Cash and cash items were $4,291.6 million at 30 June 2021, supplemented by $1,524.9 million of short-term investments. Total debt was $7,666.1 million, including $357.7 million of related-party debt, compared with $7,907.8 million at 30 September 2020. The company had no borrowings under its new $2.5 billion revolving credit facility and was in compliance with its debt covenants. Debt represented 36.2% of total capitalization.
Material changes versus the prior comparable period
- Q3 operating income increased 7%, but operating margin declined 390 basis points because of higher maintenance and growth-related costs and the margin-dilutive effect of energy and natural-gas pass-through revenue.
- Q3 adjusted EBITDA increased 11%, while adjusted EBITDA margin declined 520 basis points. Higher costs included planned maintenance, power and other inflation, and additional engineering and project-development resources.
- For the first nine months, operating income declined 1% despite 14% sales growth. Industrial Gases–EMEA operating income increased 20%, while Industrial Gases–Asia declined 4%; Americas operating income was approximately flat.
- Industrial Gases–Global recorded a nine-month operating loss of $64.3 million, compared with a $29.6 million loss in 2020, reflecting higher project costs and unfavorable cost-estimate changes.
- Lu’An gasification project contributions were reduced following a short-term reduction in charges, partially offsetting volume growth elsewhere in Asia.
- Interest expense rose to $108.4 million from $70.1 million for the first nine months, primarily because of debt issued in 2020.
- The quarterly common dividend increased to $1.50 per share from $1.34, a 12% increase. No share repurchases occurred during the first nine months.
Guidance, outlook, commentary, risks, and unusual items
- Management expects fiscal-year 2021 capital expenditures of approximately $2.5 billion, excluding any future investment in the Jazan gas and power project.
- Remaining performance obligations were approximately $24 billion at 30 June 2021; management expects approximately half to be recognized over the next five years and the remainder thereafter. Actual revenue may vary with inflation, currency movements, contract amendments, terminations, and renewals.
- COVID-19 remains a material uncertainty because of potential outbreaks, lockdowns, travel restrictions, uneven vaccine deployment, and inconsistent recovery in merchant and packaged-gas demand.
- Winter Storm Uri caused operational disruption and unusually high energy and natural-gas prices in the U.S. Gulf Coast. The company is involved in litigation concerning energy-management services, and potential losses or gains cannot yet be estimated.
- The company recorded a $23.2 million facility-closure charge, primarily a noncash asset write-down related to a contract termination; a $36.8 million gain on an exchange with a former joint-venture partner; and an $8.2 million discontinued-operations tax benefit.
- Q3 continuing-operations results included a $21.5 million tax benefit from the release of uncertain-tax-position reserves. Management stated that an additional approximately $50 million net tax benefit from discontinued operations could be recognized in the fourth quarter.
- Environmental liabilities totaled $78.6 million, with estimated exposure ranging from $78 million to a reasonably possible upper exposure of $92 million. Certain remediation obligations may continue for decades.
- The company disclosed a potential Brazilian competition-law fine of approximately $36 million plus interest, although management believes an adverse final judgment is not probable and has recorded no provision.
- Foreign-exchange, interest-rate, supply-chain, project execution, cybersecurity, regulatory, environmental, legal, and asset-impairment risks remain material. Management stated that there was no COVID-19-triggered impairment event requiring interim testing as of 30 June 2021.
Important facts for investors to verify
- Whether merchant and packaged-gas volumes continue to recover and whether hydrogen demand normalizes.
- The sustainability of pricing actions after energy, power, and other input-cost inflation.
- Execution, cost estimates, and profitability of large equipment, gasification, LNG, and other projects, particularly in Industrial Gases–Global.
- The financial outcome and timing of litigation related to Winter Storm Uri and the Brazilian competition matter.
- Whether additional tax benefits are realized in the fourth quarter and how recurring tax rates compare with reported rates.
- Progress toward the approximately $2.5 billion capital-expenditure plan and its effect on free cash flow and leverage.
- Environmental remediation costs, including the Pace, Piedmont, and Pasadena sites, and any changes to recorded liabilities.
- Potential effects of continued COVID-19 disruption, foreign-currency movements, interest rates, and commodity-linked pass-through costs on margins.