Air Products & Chemicals, Inc. — Fiscal 2020 Second-Quarter Form 10-Q Summary
Business context and reporting period
Air Products & Chemicals, Inc. filed an unaudited Form 10-Q for the quarter and six months ended 31 March 2020. The company operates primarily through Industrial Gases segments in the Americas, EMEA, Asia, and Global, with additional equipment, LNG, and corporate activities. The quarter was materially affected by the emerging COVID-19 pandemic, although management stated that consolidated operations and results were not materially affected through 31 March 2020.
Financial performance and position
| Metric | Three months ended 31 March 2020 | Year-over-year change | Six months ended 31 March 2020 | Year-over-year change |
|---|---|---|---|---|
| Sales | $2,216.3 million | Up 1% | $4,471.0 million | Up 1% |
| Operating income | $577.2 million | Up 12% | $1,138.2 million | Up 17% |
| Operating margin | 26.0% | Up 240 bp | 25.5% | Up 350 bp |
| Net income | $490.4 million | Up 13% | $979.3 million | Up 24% |
| Net income attributable to Air Products | $477.8 million | Up 13% | $953.4 million | Up 24% |
| Diluted EPS from continuing operations | $2.21 | Up $0.31 | $4.36 | Up $0.88 |
| Adjusted EBITDA | $892.5 million | Up 8% | $1,800.9 million | Up 11% |
| Adjusted EBITDA margin | 40.3% | Up 260 bp | 40.3% | Up 360 bp |
Cash provided by operating activities was $1,238.5 million for the first six months, compared with $1,285.8 million in the prior-year period. Capital expenditures were $953.3 million, including $930.6 million of additions to plant and equipment and $22.7 million of investments in unconsolidated affiliates. Cash used for financing activities was $537.8 million, including $511.7 million of shareholder dividends.
At 31 March 2020, cash and cash items were $2,220.1 million, including $1,206.2 million held outside the United States. Total debt was $3,312.6 million, or 22.0% of total capitalization, compared with $3,326.0 million and 22.6% at 30 September 2019. The company had no borrowings under its $2,300.0 million revolving credit agreement, which matures on 31 March 2022, and was in compliance with its debt covenants. Management stated that it did not expect to use the credit facility for additional liquidity.
Material changes versus the prior comparable period
- Sales growth reflected higher volumes and pricing, offset by lower energy and natural-gas pass-through, unfavorable foreign currency, and the pandemic-related decline in Asia merchant volumes.
- Operating performance benefited from pricing, volume growth, lower energy and natural-gas pass-through, and the absence of a $29.0 million prior-year facility-closure charge.
- Second-quarter results included a $33.8 million pretax gain from the sale of the company’s former headquarters property, contributing $25.6 million after tax, or $0.12 per diluted share.
- Equity affiliates’ income included a $33.8 million benefit from the India Finance Act 2020, which released accumulated dividend-distribution taxes at an Indian affiliate. The related net income benefit was $13.5 million after a $20.3 million tax provision for potential future withholding taxes.
- Interest expense declined to $19.3 million from $35.4 million in the quarter and to $38.0 million from $72.7 million for the six months. The comparison was affected by lower debt-related costs and a change in presentation of certain hedging items.
- The company recorded a $19.0 million pretax, $14.3 million after-tax loss from discontinued operations related to increased environmental obligations at the former Pace facility.
- Accumulated other comprehensive loss increased to $2,478.2 million from $2,375.6 million, primarily because of foreign-currency translation losses.
Guidance, outlook, risks, and unusual items
Management withdrew previously disclosed fiscal 2020 capital-expenditure guidance because of uncertainty regarding the duration of the COVID-19 crisis, economic recovery, and project timing. The company is monitoring whether construction projects and planned onstream dates will be delayed. It also stated that financial closing of the Jazan gas and power project had been delayed, which would defer related earnings.
Management estimated that COVID-19 reduced second-quarter volumes by approximately 1% overall, primarily in Asia merchant gases, and by approximately 4% in the Asia segment. Asia merchant volumes declined approximately 25% for about six weeks after the Lunar New Year before recovering to normal levels in late March. The company expects more significant merchant-volume declines in the Americas and EMEA during the third quarter and potentially longer, particularly among smaller packaged-gas customers. Planned North American maintenance activities may also be delayed.
The company stated that the full financial impact of COVID-19 could not be reasonably estimated. Principal risks include weaker industrial-gas demand, project delays or cancellations, facility or supply-chain disruption, higher financing costs, reduced access to capital, foreign-exchange volatility, cybersecurity incidents, environmental obligations, litigation, and impairment risk.
Environmental accruals totaled $87.2 million at 31 March 2020, with estimated exposure ranging from $87 million to a reasonably possible upper exposure of $100 million. The Pace facility accounted for $42.7 million of the accrual and is expected to require remediation activities for approximately 30 years. A Brazilian antitrust fine of approximately $34 million, plus interest, remained pending on appeal; no provision was recorded because an adverse final judgment was not considered probable.
On 17 April 2020, after the reporting date, the company acquired five operating hydrogen-production plants from PBF Energy for $530 million and began long-term hydrogen supply to PBF refineries.
Most important facts for investors to verify
- Whether COVID-19 volume declines in the Americas and EMEA exceeded management’s expectations after 31 March 2020.
- Whether the company’s withdrawal of capital-expenditure guidance leads to lower spending, delayed projects, or delayed earnings from projects such as Jazan.
- The sustainability of reported margins after excluding the headquarters-property gain, India Finance Act benefit, and other unusual items.
- The cash-flow and leverage effects of the $530 million PBF hydrogen-plant acquisition and ongoing capital spending.
- Progress and potential cost changes related to Pace and other environmental remediation obligations.
- Whether foreign-exchange losses, merchant-gas demand, maintenance delays, or project execution materially affect subsequent quarterly results.