Air Products & Chemicals, Inc. — Fiscal 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended 30 September 2017. Air Products is a global industrial gases and related equipment supplier serving energy, refining, chemicals, metals, electronics, manufacturing, healthcare, and food customers in approximately 50 countries. Continuing operations comprised Industrial Gases–Americas, EMEA, Asia, Global, and Corporate and other.
The fiscal 2017 fourth quarter ended 30 September 2017. Results exclude the former Electronic Materials, Performance Materials, and Energy-from-Waste businesses from continuing operations. Electronic Materials was spun off as Versum Materials on 1 October 2016, and Performance Materials was sold to Evonik on 3 January 2017.
Financial performance and key metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Sales | $8,187.6 million | $7,503.7 million | Up 9% |
| Operating income | $1,427.6 million | $1,529.7 million | Down 7% |
| Operating margin | 17.4% | 20.4% | Down 300 basis points |
| Income from continuing operations attributable to Air Products | $1,134.4 million | $1,099.5 million | Up 3% |
| Diluted EPS from continuing operations | $5.16 | $5.04 | Up 2% |
| Adjusted operating income | $1,769.6 million | $1,619.9 million | Up 9% |
| Adjusted EBITDA | $2,795.0 million | $2,621.5 million | Up 7% |
| Adjusted EBITDA margin | 34.1% | 34.9% | Down 80 basis points |
| Cash from operating activities | $2,534.1 million | $2,258.8 million | Up $275.3 million |
Fiscal 2017 sales growth reflected 6% volume growth, 1% pricing growth, and 3% higher energy and natural-gas pass-through, partly offset by a 1% unfavorable currency effect. No single customer represented more than 10% of consolidated revenue.
Net income attributable to Air Products was $3,000.4 million, or $13.65 diluted EPS, compared with $631.1 million, or $2.89, in fiscal 2016. The increase was primarily driven by the $1,827.6 million after-tax gain on the sale of Performance Materials; total-company net income is therefore not representative of recurring continuing operations.
- Gross margin was 29.7%, down from 31.0%, principally because of higher energy and natural-gas pass-through and unfavorable volume mix.
- Research and development expense was $57.8 million, down 19% from 2016.
- Capital expenditures on a GAAP basis were $1,056.0 million, compared with $907.7 million in 2016.
- Cash and cash items totaled $3,273.6 million, including $1,530.2 million held outside the United States.
- Total debt was $3,962.8 million, down from $5,210.9 million; debt-to-total-capitalization declined to 28.0% from 41.9%.
- Working capital was $3,387.7 million at year-end.
- Quarterly dividends increased from $0.86 to $0.95 per share, producing $3.71 of dividends declared per share for the year.
Fiscal 2017 fourth-quarter results
| Metric | Q4 fiscal 2017 | Q4 fiscal 2016 |
|---|---|---|
| Sales | $2,203.1 million | $1,945.5 million |
| Operating income | $455.7 million | $391.0 million |
| Income from continuing operations attributable to Air Products | $474.2 million | $289.4 million |
| Diluted EPS from continuing operations | $2.15 | $1.32 |
| Net income attributable to Air Products | $468.7 million | $394.0 million |
Fourth-quarter operating income included a $12.2 million gain on a land sale. Fourth-quarter continuing-operations results benefited from the absence of the fiscal 2016 business separation costs and from operating progress in the Industrial Gases–Global segment.
Material changes versus the prior comparable period
- Industrial Gases–Americas sales rose 9% and operating income rose 6%; Industrial Gases–EMEA sales rose 4% and operating income rose 1%; Industrial Gases–Asia sales rose 14% and operating income rose 18%.
- Industrial Gases–Global sales rose 45% to $722.9 million, primarily from the Jazan, Saudi Arabia, equipment project. Approximately $540 million of Jazan-related sales were recognized in 2017 versus approximately $300 million in 2016.
- Corporate and other sales declined to $82.6 million from $236.0 million because of weaker LNG equipment activity, and its operating loss increased to $170.6 million.
- Fiscal 2017 operating income included a $162.1 million noncash goodwill and intangible-asset impairment charge, $151.4 million of restructuring and cost-reduction charges, and a $79.5 million impairment of the AHG equity investment.
- Approximately 625 positions were eliminated or planned for elimination in fiscal 2017, compared with approximately 610 positions in fiscal 2016.
- Equipment backlog declined to approximately $481 million from $1.057 billion, primarily as the Jazan project progressed; approximately 80% of the remaining backlog was expected to be recognized in fiscal 2018, subject to project schedules.
Guidance, outlook, risks, contingencies, and unusual items
Management expected fiscal 2018 performance to benefit from base-business growth, new project onstreams, and productivity improvements. It expected lower transition-services income to be offset by related cost reductions. Fiscal 2018 capital expenditures for new plant and equipment were expected to be approximately $1.0 billion to $1.2 billion, excluding potential acquisitions and the planned Air Products Lu’An joint venture investment.
- Air Products entered an agreement to form a $1.3 billion joint venture in China with Lu’An. Air Products had invested $300 million in four air separation units and expected to contribute an additional $500 million; closing remained subject to operational start-up and regulatory approvals.
- The company expected LNG equipment orders to remain weak because of continued LNG market oversupply.
- Helium supply was disrupted for several weeks by the Qatar embargo. The company reported no material initial impact because of diversified sourcing, but demand exceeded supply and further supply challenges could recur.
- Key risks include global economic weakness, customer defaults or project delays, foreign-exchange volatility, energy and raw-material costs, operational incidents, regulatory and environmental requirements, cybersecurity, competition, and impairment of assets or goodwill.
- Environmental liabilities were accrued at $83.6 million, with reasonably possible exposure estimated at $83 million to $97 million across approximately 32 sites.
- The pending Brazilian competition matter involved a potential fine of approximately $57 million plus interest. Management considered an adverse final judgment possible but not probable and recorded no provision.
- Contractual obligations totaled approximately $11.950 billion, including $6.533 billion of unconditional purchase obligations, largely helium supply commitments with take-or-pay provisions.
- Following year-end, the company repaid a $400 million 1.2% senior note that matured on 15 October 2017.
Most important facts for an investor to verify
- Reconcile GAAP continuing-operations earnings with adjusted results and assess the recurring impact of the $162.1 million impairment, $151.4 million restructuring charge, $79.5 million equity-investment impairment, and tax election benefit.
- Evaluate the sustainability of Jazan-related revenue and profit, including remaining backlog, percentage-of-completion estimates, guarantees, and the company’s $100 million expected equity contribution.
- Monitor Corporate and other losses and the timing of LNG equipment recovery.
- Assess helium supply availability, take-or-pay commitments, and the ability to pass energy, natural-gas, and raw-material costs through to customers.
- Review Latin America reporting-unit assumptions because its remaining goodwill had effectively no excess fair value over carrying value at year-end.
- Confirm the final status of the Brazilian competition appeal, environmental remediation exposures, tax examinations, and potential future Energy-from-Waste exit costs.
- Consider the effect of the Versum and Evonik transition-services agreements ending in 2018 on both revenue and stranded costs.