Air Products & Chemicals, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended 31 March 2016, compared with the corresponding periods ended 31 March 2015. Results are presented primarily on a continuing-operations basis unless noted. The company operates through Industrial Gases—Americas, EMEA, Asia and Global, Materials Technologies, and Corporate and other.
Financial performance and position
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $2,271.2 million | $2,414.5 million | $4,627.0 million | $4,975.3 million |
| Operating income | $513.3 million | $376.9 million | $1,023.9 million | $809.2 million |
| Operating margin | 22.6% | 15.6% | 22.1% | 16.3% |
| Income from continuing operations attributable to Air Products | $379.8 million | $291.9 million | $757.6 million | $618.2 million |
| Diluted EPS from continuing operations | $1.74 | $1.34 | $3.47 | $2.85 |
| Adjusted EBITDA | $796.5 million | $711.2 million | $1,585.5 million | $1,436.6 million |
| Adjusted EBITDA margin | 35.1% | 29.5% | 34.3% | 28.9% |
- Reported net loss: $465.5 million for the quarter and $93.5 million for six months, versus net income of $296.9 million and $634.4 million, respectively, in the prior-year periods. The losses primarily reflect the Energy-from-Waste disposal charge.
- Net loss attributable to Air Products: $473.3 million for the quarter and $109.7 million for six months; diluted EPS was $(2.17) and $(0.51), respectively.
- Cash flow: Six-month cash provided by operating activities was $1,087.5 million, compared with $987.1 million in 2015. Investing cash use was $466.7 million, including $534.8 million of capital expenditures. Financing cash use was $398.9 million, including $349.1 million of dividends.
- Liquidity: Cash and cash items were $313.1 million at 31 March 2016, including $301.6 million held by foreign subsidiaries. Management stated that operating cash flow and financing access are expected to meet foreseeable liquidity needs.
- Debt: Total debt was $5,818.0 million, or 45.2% of total debt plus total capitalization, compared with $5,879.0 million and 44.3% at 30 September 2015. Current borrowings and debt due within 12 months totaled $2,244.8 million. No borrowings were outstanding under the $2,690.0 million revolving credit facility.
- Working capital and equity: Negative working capital was $807.9 million, primarily due to short-term borrowings and current maturities of long-term debt. Total equity was $7,053.1 million at 31 March 2016.
- Dividend: The quarterly dividend increased 6%, from $0.81 to $0.86 per share, representing the 34th consecutive annual dividend increase.
Material changes versus the prior comparable periods
- Sales declined 6% in the quarter and 7% year to date. Underlying sales were flat for the quarter and increased 1% year to date, but currency reduced sales by 3% and 4%, respectively, while lower energy and raw-material pass-through reduced sales by 3% and 4%.
- Reported operating income increased 36% in the quarter and 27% year to date. The improvement was driven primarily by cost reductions, lower energy and maintenance costs, lower incentive compensation, and favorable pricing net of raw-material costs.
- Adjusted EBITDA increased 12% in the quarter and 10% year to date, with margin expansion of 560 basis points and 540 basis points, respectively.
- Industrial Gases—Asia sales increased 3% in the quarter and 4% year to date, supported by higher volumes and new plants in China, while pricing pressure and currency effects remained adverse.
- Industrial Gases—Americas and EMEA sales declined because of currency, lower energy pass-through, and weaker volumes, although both segments reported substantially higher operating income and margins.
- Materials Technologies sales declined 7% in both periods because of lower volumes, particularly in electronic materials and end markets related to oil, gas and marine coatings. Operating income nevertheless increased 4% in the quarter and 12% year to date.
- Industrial Gases—Global recognized $30 million of Jazan project sales in the quarter and $90 million year to date. No profit was recognized because of uncertainty regarding costs to complete.
- Cost-reduction and restructuring charges declined materially from the prior year: $8.6 million was recorded in the current quarter and six-month period, versus $55.4 million and $87.8 million, respectively, in 2015.
Outlook, commentary, risks and unusual items
- Energy-from-Waste exit: On 29 March 2016, the board approved exiting the two Tees Valley, United Kingdom, Energy-from-Waste projects. The company recorded a $945.7 million pretax disposal loss, including a $913.5 million asset write-down, resulting in an $846.6 million after-tax loss. Additional exit costs of $50 million to $100 million are expected.
- Materials Technologies separation: The company continued preparing Versum Materials for a potential tax-free spin-off and incurred separation costs of $7.4 million in the quarter and $19.4 million year to date. Completion remains subject to market conditions and board approval; the filing does not provide a definitive completion date.
- Capital spending and backlog: Fiscal 2016 capital expenditures are expected to be approximately $1.2 billion. Equipment sales backlog was $1.709 billion at 31 March 2016, down from $1.931 billion at 30 September 2015.
- Cost actions and pensions: Approximately 170 positions were eliminated in the quarter. Management expects additional cost-saving costs and additional pension settlement losses in the second half of fiscal 2016. Fiscal 2016 pension contributions are expected to be approximately $100 million to $120 million.
- Jazan joint venture: Air Products owns 25% of the Saudi Arabian joint venture, expects to invest approximately $100 million, and has a $94.4 million noncurrent liability for its share of future equity contributions under the equity bridge loan.
- Contingencies: A Brazilian antitrust fine of approximately $50 million remains pending on appeal; no provision has been recorded because an adverse final judgment was not considered probable. Environmental accruals totaled $77.0 million, with reasonably possible exposure estimated up to $91 million.
- Market and operating risks: Principal risks include foreign currency and interest-rate volatility, weaker regional and end-market demand, energy and raw-material pricing, project cost overruns, customer cancellations, litigation and regulatory matters, environmental liabilities, execution of the Materials Technologies separation, and the effectiveness of cost-reduction programs.
- Accounting and controls: The company adopted noncurrent classification for deferred taxes. Management concluded that disclosure controls were effective at 31 March 2016 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported net losses and EPS with the Energy-from-Waste disposal loss and assess the estimated additional exit costs.
- Evaluate whether cost reductions and margin gains are sustainable after separating restructuring, pension, and other unusual items.
- Monitor the potential Versum Materials spin-off, including required approvals, market conditions, transaction costs, and resulting changes to continuing operations.
- Assess liquidity against $2,244.8 million of debt due within 12 months, negative working capital, planned capital spending, dividends, and the company’s reliance on commercial paper markets.
- Track Jazan project costs, profit recognition, backlog conversion, and the company’s approximately $100 million expected joint-venture investment.
- Review exposure from the Brazilian antitrust matter, environmental sites, pension funding, foreign exchange, interest rates, and weaker LNG and industrial end markets.