Air Products & Chemicals, Inc. — Fiscal 2020 Third-Quarter Form 10-Q
Business context and reporting period
Air Products supplies industrial gases through on-site and merchant channels and sells industrial gas equipment and related project solutions. Reported segments are Industrial Gases–Americas, EMEA, Asia, Global, and Corporate and other. The filing covers the quarter and nine months ended 30 June 2020; fiscal year-end is 30 September. Results were significantly affected by the COVID-19 pandemic, particularly merchant volumes.
Key financial metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Sales | $2,065.2 million | $2,224.0 million | $6,536.2 million | $6,635.7 million |
| Operating income | $539.2 million | $569.7 million | $1,677.4 million | $1,541.2 million |
| Operating margin | 26.1% | 25.6% | 25.7% | 23.2% |
| Net income | $457.1 million | $500.2 million | $1,436.4 million | $1,290.7 million |
| Net income attributable to Air Products | $446.5 million | $488.0 million | $1,399.9 million | $1,256.8 million |
| Diluted EPS | $2.01 | $2.20 | $6.30 | $5.68 |
| Diluted EPS from continuing operations | $2.01 | $2.20 | $6.36 | $5.68 |
| Adjusted EBITDA | $881.0 million | $891.6 million | $2,681.9 million | $2,511.3 million |
| Adjusted EBITDA margin | 42.7% | 40.1% | 41.0% | 37.8% |
Third-quarter sales declined 7%, operating income declined 5%, and diluted EPS declined 9%. Nine-month sales declined 1%, while operating income increased 9%, net income increased 11%, and continuing-operations diluted EPS increased 12%.
For the nine months, cash provided by operating activities was $2,013.2 million, compared with $2,003.4 million in the prior-year period. Capital expenditures, as defined by the company, were $2,069.6 million versus $1,630.3 million. Cash used in investing activities was $4,330.9 million, while financing activities provided $4,005.5 million.
At 30 June 2020, cash and cash items were $3,921.4 million and short-term investments were $2,515.7 million. Total debt was $8,197.7 million, including $824.6 million of current maturities and $362.0 million of related-party debt. Total debt represented 40.5% of total capitalization, versus 22.6% at 30 September 2019. The company had no borrowings under its $2.3 billion revolving credit agreement and was in compliance with its covenants.
Material changes versus the prior comparable period
- COVID-19 reduced third-quarter sales by an estimated 9% and third-quarter EPS by approximately $0.35–$0.40. Merchant volumes were the principal area of weakness; on-site business remained relatively stable.
- Pricing, lower energy and natural-gas pass-through costs, and lower operating costs supported margins. Third-quarter adjusted EBITDA margin increased 260 basis points despite weaker volumes.
- Nine-month results benefited from favorable pricing, a $33.8 million headquarters-relocation gain, the absence of a $29.0 million prior-year facility-closure charge, and the absence of $25.5 million of prior-year cost-reduction charges.
- Prior-year results included a $29.1 million gain on the exchange of Chinese equity-affiliate investments; this did not recur.
- The India Finance Act generated a $13.5 million net benefit, including a $33.8 million increase in equity-affiliate income partially offset by $20.3 million of estimated withholding taxes.
- The company issued $3.8 billion of U.S.-dollar notes and €1.0 billion of euro notes during the quarter, principally to fund growth projects and repay debt maturities through 2021. The issuance materially increased debt and future interest expense.
- Air Products acquired five hydrogen production plants from PBF Energy for $580 million and began a long-term hydrogen supply arrangement. Three additional acquisitions totaling approximately $190 million were completed on 1 July 2020.
- A new lease standard was adopted on 1 October 2019, adding $375.3 million of lease liabilities and $332.3 million of right-of-use assets at adoption; management reported no material effect on earnings or liquidity.
Guidance, outlook, risks, contingencies, and unusual items
- The company withdrew fiscal 2020 capital-expenditure guidance because of uncertainty surrounding COVID-19. Previously disclosed guidance should no longer be relied upon.
- Management expects COVID-19 effects and weak merchant volumes to continue into the fourth quarter and potentially longer, but stated that the future financial impact cannot be reasonably estimated.
- Management stated that operating cash flow and available financing were generally sufficient for liquidity needs and that COVID-19 was not expected to impair the company’s ability to meet future liquidity requirements. No credit-facility borrowings were expected at the reporting date.
- Unconditional purchase obligations totaled approximately $10.2 billion, including approximately $8.6 billion related to helium and rare gases, with most obligations occurring after fiscal 2024.
- Environmental liabilities totaled $86.2 million, with reasonably possible exposure estimated at $86 million to $99 million. The Pace facility liability increased by $19 million, resulting in a $19 million pretax discontinued-operations charge in the second quarter.
- A Brazilian antitrust fine of approximately $33 million, plus interest, remains pending on appeal. Management concluded an adverse final judgment was possible but not probable and recorded no provision.
- The company had approximately $22 billion of remaining performance obligations as of 30 June 2020; approximately half was expected to be recognized over the next five years, subject to contract termination, renewal, inflation, currency, and other factors.
- At 30 June 2020, the debt portfolio was 90% fixed-rate and 10% variable-rate. The filing identifies heightened sensitivity to interest rates following the new debt issuance.
Most important facts for investors to verify
- Whether merchant volumes recover after COVID-19 restrictions and whether pricing can continue to offset volume and currency pressure.
- The timing and returns of major growth projects, including hydrogen, gasification, LNG, and equipment projects, and any construction delays or cancellations.
- Debt-service requirements, refinancing needs through 2021, incremental interest expense, and compliance with the 70% maximum debt-to-capitalization covenant.
- Actual fiscal 2020 capital spending and the effect of the withdrawn capital-expenditure guidance on project timing and liquidity.
- Exposure to helium purchase commitments, environmental remediation costs, the Pace facility, and the pending Brazilian antitrust matter.
- The continuing effects of COVID-19 on equity affiliates, customer demand, supply chains, employee safety, and access to capital markets.
- The distinction between GAAP results and management’s adjusted measures, particularly the impact of nonrecurring gains, prior-year charges, tax items, and the discontinued-operations loss.