Air Products & Chemicals, Inc. — Fiscal 2019 Form 10-K
Reporting period: Fiscal year ended 30 September 2019. The filing also provides unaudited fourth-quarter results for the quarter ended 30 September 2019. Air Products is a global industrial-gases and equipment company operating in 51 countries outside the United States. Its principal businesses supply atmospheric and process gases, gasification and LNG technologies, and related equipment.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $8,918.9 million | $8,930.2 million | Flat |
| Operating income | $2,144.4 million | $1,965.6 million | +9% |
| Operating margin | 24.0% | 22.0% | +200 bp |
| Net income | $1,809.4 million | $1,532.9 million | +18% |
| Net income margin | 20.3% | 17.2% | +310 bp |
| Net income attributable to Air Products | $1,760.0 million | $1,497.8 million | +18% |
| Diluted EPS from continuing operations | $7.94 | $6.59 | +$1.35 |
| Adjusted diluted EPS | $8.21 | $7.45 | +10% |
| Adjusted EBITDA | $3,468.0 million | $3,115.5 million | +11% |
| Adjusted EBITDA margin | 38.9% | 34.9% | +400 bp |
- Revenue drivers: Pricing increased 3% and volumes increased 2%, offset by 3% unfavorable currency and a 2% negative impact from the India hydrogen-contract modification to a tolling arrangement.
- Cash flow: Operating cash flow was $2,969.9 million, compared with $2,547.2 million in FY2018. Capital expenditures were $2,128.6 million, including $1,989.7 million of plant and equipment additions.
- Liquidity: Cash and cash items were $2,248.7 million. The company had no borrowings under its $2.3 billion revolving credit facility and stated that operating cash flow and financing access should meet foreseeable liquidity needs.
- Debt: Total debt declined to $3,326.0 million from $3,812.6 million. Debt was 22.6% of total capitalization versus 25.4% in FY2018. A $327.0 million eurobond maturing in August 2020 was classified as long term because refinancing capacity was available.
- Shareholder returns: Dividends declared increased to $4.58 per share from $4.25. Cash dividends paid were $994.0 million. No share repurchases occurred; $485.3 million remained under the authorization.
- Fourth quarter: Sales were $2,283.2 million, operating income was $603.2 million, net income was $518.7 million, and diluted EPS was $2.27.
Material changes versus the prior comparable period
- Industrial Gases–Asia sales increased 8% and operating income increased 25%, primarily from the Lu’An gasification project and base-business growth.
- Industrial Gases–Americas sales increased 3% and operating income increased 8%, supported by pricing and volume.
- Industrial Gases–EMEA sales declined 9%, mainly because of the India contract modification and currency; operating income nevertheless increased 6% and margin improved to 23.6%.
- Industrial Gases–Global sales declined 40% and operating income fell to a loss of $11.7 million as Jazan air-separation-equipment activity neared completion.
- Corporate and other operating loss improved 13% to $152.8 million, primarily due to higher turbo-machinery activity and lower corporate costs.
- Reported results included a $29.0 million facility-closure charge, a $25.5 million cost-reduction charge, and a $29.1 million pretax gain from exchanging two Chinese equity-affiliate investments. Adjusted EPS excluded these items and certain tax and pension effects.
- The effective tax rate declined to 21.0% from 26.0%, principally reflecting the U.S. Tax Cuts and Jobs Act. FY2019 still included a $43.8 million discrete tax expense related to the Act.
Outlook, commentary, risks, and unusual items
Management expected FY2020 earnings growth from continued base-business improvement, new projects, and capital deployment, including expected earnings from the Jazan gas-and-power project in Saudi Arabia. Planned FY2020 capital expenditures were approximately $4.0 billion to $4.5 billion, principally for the Jazan investment and new or expanding plants. Management expected to fund this investment primarily with cash on hand and operating cash flow.
- Project execution: Large gasification, syngas, and equipment projects carry risks of delays, cost overruns, customer changes, contract termination, financing constraints, and technology-performance issues.
- International exposure: More than 60% of sales were generated outside the United States. Currency movements, tariffs, sanctions, political instability, regulatory changes, and Brexit-related disruption could affect results.
- Energy and raw materials: Electricity, natural gas, hydrocarbons, and helium are important inputs. Contractual pass-throughs and pricing formulas mitigate but may not fully offset cost increases or supply interruptions.
- Environmental and climate regulation: Environmental compliance, remediation, greenhouse-gas regulation, and higher power costs could increase expenses or reduce demand for certain products.
- Contingencies: Environmental accruals were $68.9 million, with estimated exposure of $68 million to $82 million. A Brazilian antitrust fine of approximately $43 million remained under appeal; no provision was recorded because an adverse outcome was not considered probable.
- Guarantees and commitments: The company disclosed approximately $8.31 billion of unconditional purchase obligations, including approximately $7.1 billion for helium, and an estimated $100 million future equity contribution related to a Saudi Arabian joint venture. The Jazan gas-and-power project was expected to require a substantially larger equity investment, excluded from contractual obligations pending closing.
- Pensions: The net unfunded pension liability increased to $640.8 million, primarily because of lower discount rates. FY2020 pension expense was expected at approximately $5 million to $20 million, with cash contributions estimated at $30 million to $40 million.
- Accounting changes: The company adopted the new revenue standard in FY2019 with no material impact on the financial statements. FY2020 adoption of the lease standard was expected to add approximately $380 million of lease liabilities and $340 million of right-of-use assets, without a material effect on earnings or liquidity.
Most important facts for investors to verify
- Whether the expected Jazan gas-and-power project closing, investment amount, ownership structure, and earnings contribution occurred as projected.
- Execution, profitability, and cash requirements for the Lu’An, Jiutai, Debang, and other large gasification projects.
- The sustainability of FY2019 margin expansion after excluding the India contract modification, tax effects, facility closure, cost reductions, and equity-affiliate gain.
- Refinancing of the $327.0 million eurobond due in August 2020 and the company’s leverage after planned FY2020 capital spending.
- Resolution and potential financial impact of the Brazilian CADE antitrust matter, environmental obligations, guarantees, and other legal contingencies.
- Changes in foreign currency, energy, helium, and natural-gas costs, including the extent to which contractual pass-through mechanisms protect margins.
- Actual FY2020 capital expenditures, operating cash flow, dividend coverage, pension contributions, and lease-accounting balance-sheet effects.