Air Products and Chemicals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended 31 March 2019. The financial statements are unaudited and prepared under U.S. GAAP. Air Products supplies industrial gases and related equipment through its Americas, EMEA, Asia, Global, and Corporate and other segments.
Financial performance and position
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Sales | $2,187.7 million | $2,155.7 million | $4,411.7 million | $4,372.3 million |
| Operating income | $516.5 million | $455.4 million | $971.5 million | $916.1 million |
| Operating margin | 23.6% | 21.1% | 22.0% | 21.0% |
| Net income attributable to Air Products | $421.3 million | $416.4 million | $768.8 million | $571.0 million |
| Diluted EPS | $1.90 | $1.89 | $3.48 | $2.59 |
| Adjusted EBITDA | $824.8 million | $739.1 million | $1,619.7 million | $1,474.0 million |
| Adjusted EBITDA margin | 37.7% | 34.3% | 36.7% | 33.7% |
Cash flow and liquidity: Six-month operating cash flow was $1,285.8 million, compared with $1,106.0 million in the prior-year period. Investing cash use was $882.1 million, including $963.5 million of plant and equipment additions and $106.3 million for acquisitions. Financing cash use was $459.8 million, including $483.1 million of shareholder dividends. Cash and cash items were $2,735.9 million at 31 March 2019.
Debt and capitalization: Total debt was $3,790.8 million, including $393.3 million of related-party debt associated with the Lu’An joint venture, versus $3,812.6 million at 30 September 2018. Debt represented 24.8% of total capitalization. The company had no borrowings under its $2.3 billion revolving credit agreement, which matures in March 2022, and was in compliance with its debt covenants.
Dividends: The quarterly dividend increased 5% to $1.16 per share, or $4.64 annually. Management cited the company’s cash flows, financial strength, and growth outlook.
Material changes versus the prior comparable period
- Second-quarter sales increased 1%, while operating income increased 13% and operating margin expanded 250 basis points. Six-month sales increased 1%, operating income increased 6%, and operating margin expanded 100 basis points.
- Underlying Q2 sales increased 6%, driven by 3% volume growth and 3% pricing growth. Energy and natural-gas pass-through added 1%, while currency reduced sales by 4% and an India hydrogen contract modification reduced sales by 2%.
- Asia was the strongest operating contributor in Q2, with sales up 12%, operating income up 34%, and operating margin up 520 basis points, primarily from the Lu’An project and favorable pricing.
- Americas sales increased 9% and operating income increased 15%. EMEA sales declined 12% due mainly to currency and the India contract modification, although operating income increased 5%.
- Industrial Gases–Global sales declined 47% in Q2 and 48% for the six months as the Saudi Arabian Jazan equipment project approached completion. Management expected the project to be completed in 2019.
- Six-month reported earnings benefited from substantially lower Tax Act-related effects than in the prior year. The prior-year period included a $206.5 million tax expense and a $32.5 million equity-affiliate charge related to the Tax Act.
Guidance, outlook, risks, and unusual items
- Capital spending: Fiscal 2019 capital expenditures were expected to be approximately $2.4 billion to $2.5 billion. Equipment sales backlog was $626 million at 31 March 2019, versus $204 million at 30 September 2018.
- Contracted revenue: Remaining performance obligations were estimated at approximately $14 billion, with roughly half expected to be recognized over the next five years and the balance thereafter. Actual amounts may vary with pricing escalators, currency, renewals, and terminations.
- Facility closure: A $29.0 million pretax charge, or $22.1 million after tax, was recorded in the first quarter for the write-off of onsite assets after a customer facility was shut down by the government for environmental reasons. Management did not expect additional charges.
- Tax items: The six-month effective tax rate was 23.3%, versus 37.2% in the prior year. Fiscal 2019 included a $40.6 million discrete Tax Act-related expense, including a $56.2 million reversal of a prior benefit and a $15.6 million reduction in estimated deemed-repatriation costs.
- Pensions: The company recognized a $5.0 million second-quarter pension settlement loss and expected approximately $10 million of settlement losses for fiscal 2019. Fiscal 2019 pension contributions were expected to be approximately $45 million to $65 million.
- Litigation: A Brazilian competition-law fine of approximately $46 million, plus interest, remains pending on appeal. Management considered an adverse final judgment possible but not probable and recorded no provision.
- Environmental matters: The company had 32 unresolved environmental sites. Recorded environmental liabilities were $72.4 million, with reasonably possible exposure estimated at $72 million to $86 million. Payments may extend for up to 30 years.
- Key forward-looking risks include global economic and demand conditions, project delays or cancellations, customer and joint-venture performance, tariffs and regulation, tax law, energy and raw-material costs, currency and interest rates, cybersecurity, facility damage, environmental liabilities, legal proceedings, and execution of productivity and backlog projects.
Important facts for investors to verify
- Whether Lu’An project performance and other new plant onstreams sustain volume and margin growth, particularly in Asia.
- The timing and profitability of completion of the Jazan equipment project and the effect of lower equipment activity on Industrial Gases–Global.
- Actual fiscal 2019 capital expenditures versus the $2.4 billion–$2.5 billion expectation and resulting free cash flow.
- Future cash requirements and earnings effects from the Lu’An related-party debt and approximately $82.7 million of remaining related-party payments.
- Resolution and potential cost of the Brazilian competition matter and changes in environmental remediation estimates.
- Reconciliation of GAAP results to adjusted measures, particularly the effects of Tax Act items, the facility closure, pension settlement losses, and the India contract modification.
- Implementation effects of the new lease standard in fiscal 2020 and other pending accounting guidance.