Air Products & Chemicals, Inc. — Fiscal Q1 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparative period was the three months ended December 31, 2018. The filing was submitted January 24, 2020. Air Products operates primarily through Industrial Gases segments in the Americas, EMEA, and Asia, with global equipment and other businesses.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $2,254.7 million | $2,224.0 million | Up 1% |
| Operating income | $561.0 million | $455.0 million | Up 23% |
| Operating margin | 24.9% | 20.5% | Up 440 basis points |
| Net income | $488.9 million | $357.0 million | Up 37% |
| Net income attributable to Air Products | $475.6 million | $347.5 million | Up 37% |
| Diluted EPS | $2.14 | $1.57 | Up $0.57 |
| Adjusted EBITDA | $908.4 million | $794.9 million | Up 14% |
| Adjusted EBITDA margin | 40.3% | 35.7% | Up 460 basis points |
| Cash provided by operating activities | $667.0 million | $655.2 million | Up $11.8 million |
Cash and cash items totaled $2,406.1 million at December 31, 2019, including $1,240.1 million held by foreign operations. Capital expenditures were $454.8 million, including $447.7 million for plant and equipment and $7.1 million of investments in or advances to unconsolidated affiliates. Cash used in investing activities was $260.7 million, and cash used in financing activities was $270.3 million, including $255.7 million of shareholder dividends.
Total debt was $3,341.2 million, or 21.9% of total capitalization, compared with $3,326.0 million and 22.6% at September 30, 2019. Debt included $367.4 million of related-party debt associated with the Lu’An joint venture. The company had no borrowings under its $2.3 billion revolving credit agreement, which matures March 31, 2022, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected 6% higher volumes and 3% favorable pricing, largely offset by a 5% reduction in energy and natural-gas cost pass-through, a 2% impact from an India hydrogen contract modification, and a 1% unfavorable currency effect.
- Operating income benefited from favorable pricing, higher volumes, lower energy pass-through, and the absence of a $29.0 million facility-closure charge recorded in the prior-year quarter.
- Net income and EPS also benefited from the absence of prior-year Tax Cuts and Jobs Act items. The prior-year income tax provision included a $40.6 million discrete net expense related to the Tax Act.
- Industrial Gases–Asia sales increased 11% and operating income increased 13%. Americas and EMEA sales each declined 5%, but operating income increased 17% and 14%, respectively, primarily due to pricing and lower energy pass-through.
- Interest expense declined to $18.7 million from $37.3 million, reflecting lower average debt, lower Lu’An financing costs, and a presentation change under new hedge accounting guidance. Certain foreign-currency hedge components moved from interest expense to other non-operating income.
- The company adopted the new lease standard on October 1, 2019, recording $375.3 million of lease liabilities and $332.3 million of right-of-use assets. Management stated that adoption did not materially affect retained earnings, results of operations, or liquidity.
Outlook, commentary, risks, and unusual items
Management expects fiscal 2020 capital expenditures of approximately $4.0 billion to $4.5 billion, primarily for the Jazan gas and power project and new plants under construction or expected to begin construction. The filing states that operating cash flow, cash balances, and access to commercial paper are expected to meet liquidity needs for the foreseeable future.
Remaining performance obligations were estimated at approximately $19 billion at December 31, 2019, with approximately half expected to be recognized over roughly the next five years and the balance thereafter. This estimate excludes certain contracts and variable consideration and may change with inflation, foreign exchange, contract renewals, or terminations.
Important contingencies include a Brazilian antitrust matter involving a possible fine of approximately $45 million plus interest; management considers an adverse final judgment possible but not probable and recorded no provision. Environmental liabilities were accrued at $67.1 million, with estimated exposure ranging from $67 million to a reasonably possible upper exposure of $80 million across 30 sites. The company also disclosed pension contributions expected to be approximately $30 million to $40 million for fiscal 2020 and potential pension settlement losses of approximately $5 million to $10 million.
Principal disclosed risks include global economic and demand conditions, international political and regulatory developments, project delays or cancellations, execution of technically complex projects, customer and joint-venture performance, tariffs and sanctions, environmental and climate-related regulation, cybersecurity, commodity and energy-price volatility, foreign exchange and interest-rate movements, raw-material availability, litigation, facility or pipeline damage, and impairment risk.
Investor verification points
- Verify whether volume and pricing gains offset lower energy pass-through, currency effects, and the India contract modification in subsequent quarters.
- Assess the funding and execution requirements of the projected $4.0 billion to $4.5 billion fiscal 2020 capital program, including the Jazan project.
- Monitor leverage, related-party Lu’An debt, commercial paper access, and the company’s ability to fund dividends and capital expenditures from operating cash flow.
- Review the Brazilian antitrust appeal and environmental remediation estimates for changes in probability, timing, or ultimate cash exposure.
- Distinguish underlying performance from favorable prior-year comparisons, particularly the $29.0 million facility-closure charge and prior-year Tax Act effects.
- Confirm the impact of lease and hedge-accounting adoption on future balance-sheet presentation and comparability.