AIR PRODUCTS & CHEMICALS, INC.
First Quarter 2020 in Summary 31
First Quarter 2020 Results of Operations 33
Reconciliations of Non-GAAP Financial Measures 38
Liquidity and Capital Resources 42
Contractual Obligations 44
Pension Benefits 44
Commitments and Contingencies 45
Off-Balance Sheet Arrangements 45
Related Party Transactions 45
Critical Accounting Policies and Estimates 45
New Accounting Guidance 45
The discussion that follows includes a comparison of our results of operations
and liquidity and capital resources for fiscal years 2020 and 2019. The
disclosures provided in this quarterly report are complementary to those made in
our 2019 Form 10-K.
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The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this quarterly report. Unless otherwise stated, financial information is presented in millions of dollars, except for per share data. The financial measures included in the discussion that follows are presented in accordance withU.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on a non-GAAP ("adjusted") basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. For each non-GAAP financial measure, including adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, and adjusted effective tax rate, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of these measures are presented on pages 38-42.
FIRST QUARTER 2020 IN SUMMARY
The results below are compared to the first quarter of fiscal year 2019.
• Sales of
favorable pricing of 3% were mostly offset by lower energy and natural gas
cost pass-through to customers of 5%, the impact of a contract modification
to a tolling arrangement in
of 1%.
• Operating income of
24.9% increased 440 basis points ("bp").
• Net income of
increased 570 bp.
• Adjusted EBITDA of
margin of 40.3% increased 460 bp.
• Diluted EPS of
of $2.14 increased 15%, or $0.28 per share. A summary table of changes in
diluted EPS is presented below.
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Changes in Diluted EPS Attributable to Air Products
Three Months Ended
31 December Increase
2019 2018 (Decrease)
Diluted EPS $2.14 $1.57 $0.57
Operating Impacts
Underlying business
Volume $0.15
Price, net of variable costs 0.25
Other costs (0.12 )
Facility closure 0.10
Total Operating Impacts $0.38
Other Impacts
Equity affiliates' income $0.02
Interest expense 0.07
Other non-operating income (expense), net (0.04 )
Change in effective tax rate, excluding
discrete items below (0.02 )
Tax reform repatriation (0.07 )
Tax reform adjustment related to deemed
foreign dividends 0.26
Noncontrolling interests (0.02 )
Weighted average diluted shares (0.01 )
Total Other Impacts $0.19
Total Change in Diluted EPS $0.57
Three Months Ended
31 December Increase
2019 2018 (Decrease)
Diluted EPS $2.14 $1.57 $0.57
Facility closure - 0.10 (0.10 )
Tax reform repatriation - (0.07 ) 0.07
Tax reform adjustment related to deemed foreign
dividends - 0.26 (0.26 )
Adjusted Diluted EPS $2.14 $1.86 $0.28
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FIRST QUARTER 2020 RESULTS OF OPERATIONS
Discussion of Consolidated Results
Three Months Ended
31 December
2019 2018 $ Change Change
GAAP Measures
Sales $2,254.7 $2,224.0 $30.7 1 %
Operating income 561.0 455.0 106.0 23 %
Operating margin 24.9 % 20.5 % - 440 bp
Equity affiliates' income 58.2 52.9 5.3 10 %
Net income 488.9 357.0 131.9 37 %
Net income margin 21.7 % 16.0 % - 570 bp
Non-GAAP Measures
Adjusted EBITDA $908.4 $794.9 $113.5 14 %
Adjusted EBITDA margin 40.3 % 35.7 % - 460 bp
Sales
Sales % Change from Prior Year
Volume 6 %
Price 3 %
Energy and natural gas cost pass-through (5 )%
Currency (1 )%
Other(A) (2 )%
Total Consolidated Sales Change 1 %
(A) Includes the impact from the modification of a hydrogen supply contract to a
tolling arrangement in India in December 2018 (the "India contract
modification").
Sales of $2,254.7 increased 1%, or $30.7 , as higher volumes of 6% and favorable
pricing of 3% were mostly offset by lower energy and natural gas cost
pass-through to customers of 5%, the India contract modification of 2%, and a
negative impact from currency of 1%. Both volume and price were higher across
the regional segments. The volume growth was driven by modest base business
growth, new plants, acquisitions, and a short-term contract in Asia . The pricing
improvement was attributable to our merchant business. Unfavorable currency
impacts were driven by the Chinese Renminbi and Euro.
Cost of Sales and Gross Margin
Cost of sales of $1,486.6 decreased 5%, or $86.4 , from total cost of sales of
$1,573.0 in the prior year, which included the facility closure further
discussed below. The decrease from the prior year was primarily driven by lower
energy and natural gas cost pass-through to customers of $102 , the favorable
impact from the India contract modification of $41 , the facility closure of $29
that occurred in the prior year, and positive currency impacts of $22 , partially
offset by higher costs attributable to sales volumes of $97 and higher other
costs of $10 . Gross margin of 34.1% increased 480 bp, primarily due to positive
pricing, lower energy and natural gas cost pass-through to customers, the
facility closure that occurred in the prior year, and the India contract
modification, partially offset by unfavorable net operating costs.
Facility Closure
In December 2018 , one of our customers was subject to a government enforced
shutdown due to environmental reasons. As a result, we recognized a charge of
$29.0 ($22.1 after-tax, or $0.10 per share) during the first quarter of fiscal
year 2019 primarily related to the write-off of onsite assets. This charge is
reflected as "Facility closure" on our consolidated income statements for the
three months ended 31 December 2018 .
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Selling and Administrative Selling and administrative expense of$201.7 increased 6%, or$12.1 , from investing in business development resources to support our growth strategy. Selling and administrative expense as a percentage of sales increased from 8.5% to 8.9%. Research and Development Research and development expense of$17.7 increased 18%, or$2.7 . Research and development expense as a percentage of sales increased from 0.7% to 0.8%. Other Income (Expense), Net Other income (expense), net of$12.3 increased 43%, or$3.7 , primarily due to foreign exchange impacts. Operating Income and Operating Margin Operating income of$561.0 increased 23%, or$106.0 , primarily due to positive pricing, net of power and fuel costs, of$69 , favorable volumes of$40 , and a charge for a facility closure of$29 in the prior year, partially offset by higher net operating costs of$30 . Operating margin of 24.9% increased 440 bp, primarily due to positive pricing, the prior year facility closure, and lower energy and natural gas cost pass-through to customers, partially offset by unfavorable net operating costs. Equity Affiliates' Income Equity affiliates' income of$58.2 increased 10%, or$5.3 , primarily due to theJazan Gas Projects Company joint venture. Interest Expense Three Months Ended 31 December 2019 2018 Interest incurred$22.4 $40.0 Less: Capitalized interest 3.7 2.7 Interest expense$18.7 $37.3 Interest incurred decreased 44%, or$17.6 . The prior year included$8.3 of interest expense related to foreign currency forward points and currency swap basis differences of our cash flow hedges of intercompany loans. As discussed in Note 2, New Accounting Guidance, to the consolidated financial statements, we adopted new accounting guidance on hedging activities that changed the presentation of these items from "Interest expense, net" to "Other non-operating income (expense), net" in fiscal year 2020. In addition to this presentation change, interest expense decreased due to lower interest expense associated with financing the Lu'An joint venture and a lower average debt balance. Capitalized interest increased 37%, or$1.0 , due to an increase in the carrying value of projects under construction. Other Non-Operating Income (Expense), Net Other non-operating income (expense), net, of$9.1 decreased 51%, or$9.4 , primarily due to the impact of the adoption of the guidance on hedging activities discussed above and lower interest income on cash and cash items, partially offset by higher non-service pension income. Net Income and Net Income Margin Net income of$488.9 increased 37%, or$131.9 , primarily due to positive pricing and higher volumes as well as the impacts from the facility closure and theU.S. Tax Cuts and Jobs Act in the prior year. Net income margin of 21.7% increased 570 bp, primarily due to the factors noted above as well as lower energy pass-through and theIndia contract modification. Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA of$908.4 increased 14%, or$113.5 , primarily due to positive pricing and higher volumes. Adjusted EBITDA margin of 40.3% increased 460 bp, primarily due to positive pricing, lower energy pass-through, and theIndia contract modification. The lower energy pass-through and theIndia contract modification contributed 230 bp. 34
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Effective Tax Rate The effective tax rate equals the income tax provision divided by income before taxes. The effective tax rate was 19.8% and 27.0% in the first quarter of fiscal years 2020 and 2019, respectively. The higher 2019 tax rate reflected a discrete net income tax expense of$40.6 related to impacts from theU.S. Tax Cuts and Jobs Act (the "Tax Act"). The net expense included the reversal of a non-recurring$56.2 ($.26 per share) benefit recorded in 2018 related to theU.S. taxation of deemed foreign dividends. This was partially offset by a benefit of$15.6 ($0.07 per share) to finalize our estimates of the impacts of the Tax Act and reduce the total expected costs of the deemed repatriation tax. Additionally, the current year included higher excess tax benefits on share-based compensation in 2020. These impacts were partially offset by beneficial changes in foreign tax law and changes in valuation allowance recorded at various entities in 2019. The adjusted effective tax rate increased from 19.0% in the first quarter of fiscal year 2019 to 19.8% in the first quarter of fiscal year 2020. This increase was primarily driven by beneficial changes in foreign tax law and changes in valuation allowance recorded at various entities in 2019. This increase was partially offset by higher excess tax benefits on share-based compensation in 2020. Refer to Note 15, Income Taxes, to the consolidated financial statements for additional information. Segment Analysis Industrial Gases -Americas Three Months Ended 31 December 2019 2018 $ Change % Change Sales$936.2 $989.2 ($53.0 ) (5 )% Operating income 257.2 219.2 38.0 17 % Operating margin 27.5 % 22.2 % - 530 bp Equity affiliates' income 20.6 22.6 (2.0 ) (9 )% Adjusted EBITDA 409.6 367.4 42.2 11 % Adjusted EBITDA margin 43.8 % 37.1 % - 670 bp Sales % Change from Prior Year Volume 1 % Price 3 %
Energy and natural gas cost pass-through (8 )% Currency
(1 )%
Total Industrial Gases - Americas Sales Change (5 )%
Sales of$936.2 decreased 5%, or$53.0 , as lower energy and natural gas cost pass-through of 8% and a negative impact from currency of 1% were only partially offset by positive pricing of 3% and higher volumes of 1%. The pricing improvement was driven by our merchant business. Operating income of$257.2 increased 17%, or$38.0 , primarily due to higher pricing, net of power and fuel costs, of$28 and favorable volumes of$7 . Operating margin of 27.5% increased 530 bp, primarily due to positive pricing, lower energy and natural gas cost pass-through to customers, and favorable cost performance, including lower maintenance. Equity affiliates' income of$20.6 decreased 9%, or$2.0 , primarily due to higher costs. 35
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Industrial Gases - EMEA (
Three Months Ended
31 December
2019 2018 $ Change % Change
Sales $498.7 $524.2 ($25.5 ) (5)%
Operating income 120.5 105.6 14.9 14%
Operating margin 24.2 % 20.1 % - 410 bp
Equity affiliates' income 19.3 13.7 5.6 41%
Adjusted EBITDA 188.2 165.6 22.6 14%
Adjusted EBITDA margin 37.7 % 31.6 % - 610 bp
Sales % Change from Prior Year
Volume 6 %
Price 3 %
Energy and natural gas cost pass-through (4 )%
Currency (2 )%
Other(A) (8 )%
Total Industrial Gases - EMEA Sales Change (5 )%
(A) Includes the impact from the modification of a hydrogen supply contract to a
tolling arrangement in India in December 2018 (the "India contract
modification").
Sales of $498.7 decreased 5%, or $25.5 , as the negative impact from the India
contract modification of 8%, lower energy and natural gas cost pass-through to
customers of 4%, and unfavorable currency impacts of 2% were only partially
offset by favorable volumes of 6% and positive pricing of 3%. Volumes increased
primarily due to demand for hydrogen in our Rotterdam pipeline system and from
the carbon dioxide business we acquired in the second quarter of fiscal year
2019. The pricing improvement was attributable to our merchant business. The
negative currency impact was mainly driven by the Euro.
Operating income of $120.5 increased 14%, or $14.9 , primarily due to higher
pricing, net of power and fuel costs, of $20 and favorable volumes of $5 ,
partially offset by higher costs of $8 and unfavorable currency impacts of
$2 . Operating margin of 24.2% increased 410 bp, primarily due to favorable
pricing, the impact of the India contract modification, and lower energy and
natural gas cost pass-through to customers, partially offset by higher costs.
The lower energy and natural gas pass-through and the India contract
modification contributed 240 bp.
Equity affiliates' income of $19.3 increased 41%, or $5.6 , primarily due to the
Jazan Gas Projects Company joint venture.
Industrial Gases - Asia
Three Months Ended
31 December
2019 2018 $ Change % Change
Sales $692.8 $626.8 $66.0 11%
Operating income 228.5 201.8 26.7 13%
Operating margin 33.0 % 32.2 % - 80 bp
Equity affiliates' income 16.9 16.2 0.7 4%
Adjusted EBITDA 347.0 297.9 49.1 16%
Adjusted EBITDA margin 50.1 % 47.5 % - 260 bp
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Sales % Change from Prior Year Volume 9 % Price 4 % Energy and natural gas cost pass-through - % Currency (2 )%
Total Industrial Gases - Asia Sales Change 11 %
Sales of$692.8 increased 11%, or$66.0 , as higher volumes of 9% and positive pricing of 4% were partially offset by unfavorable currency impacts of 2%. The volume increase was primarily driven by new plants onstream, base business growth, and a short-term supply contract. Pricing improved acrossAsia , driven by our merchant business. The unfavorable currency impact was primarily attributable to the Chinese Renminbi. Energy and natural gas cost pass-through to customers was flat versus the prior year. Operating income of$228.5 increased 13%, or$26.7 , due to positive pricing, net of power and fuel costs, of$20 and favorable volumes of$16 , partially offset by higher net operating costs of$6 and unfavorable currency impacts of$3 . Operating margin of 33.0% increased 80 bp, primarily due to positive pricing, partially offset by higher net operating costs. Equity affiliates' income of$16.9 increased 4%, or$0.7 . Industrial Gases - Global The Industrial Gases - Global segment includes sales of cryogenic and gas processing equipment for air separation and centralized global costs associated with management of all the Industrial Gases segments. Three Months Ended 31 December 2019 2018 $ Change % Change Sales$92.6 $68.2 $24.4 36 % Operating income 3.6 3.9 (0.3 ) (8 )% Adjusted EBITDA 7.4 6.4 1.0 16 % Sales of$92.6 increased 36%, or$24.4 . The increase in sales was primarily driven by unusually high other project activity. Operating income of$3.6 decreased 8%, or$0.3 , as the current quarter project activity was mostly offset by favorable impacts from the Jazan project in the prior year. Corporate and other The Corporate and other segment includes our liquefied natural gas ("LNG"), turbo machinery equipment, and distribution sale of equipment businesses and corporate support functions that benefit all segments. The results of the Corporate and other segment also include income and expense that is not directly associated with the other segments, such as foreign exchange gains and losses. Three Months Ended 31 December 2019 2018 $ Change % Change Sales$34.4 $15.6 $18.8 121 % Operating loss (48.8 ) (46.5 ) (2.3 ) (5 )% Adjusted EBITDA (43.8 ) (42.4 ) (1.4 ) (3 )% Sales of$34.4 increased 121%, or$18.8 , primarily due to higher LNG activity. Operating loss of$48.8 increased 5%, or$2.3 , primarily due to higher corporate costs, including business development costs to support our growth strategy, partially offset by the higher LNG activity. 37
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RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES (Millions of dollars unless otherwise indicated, except for per share data) The Company presents certain financial measures, other than in accordance withU.S. generally accepted accounting principles ("GAAP"), on an "adjusted" or "non-GAAP" basis. On a consolidated basis, these measures include adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, and adjusted effective tax rate. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, which are presented above, we also include certain supplemental non-GAAP financial measures that are presented below to help the reader understand the impact that our non-GAAP adjustments have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present below a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP.The Company's non-GAAP measures are not meant to be considered in isolation or as a substitute for the most directly comparable measure calculated in accordance with GAAP. The Company believes these non-GAAP measures provide investors, potential investors, securities analysts, and others with useful information to evaluate the performance of the business because such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting the Company's historical financial performance and projected future results. In many cases, non-GAAP measures are determined by adjusting the most directly comparable GAAP measure to exclude certain disclosed items, or "non-GAAP adjustments," that the Company believes are not representative of underlying business performance. For example, the Company previously excluded certain expenses associated with cost reduction actions, impairment charges, and gains on disclosed transactions. The reader should be aware that the Company may recognize similar losses or gains in the future. Readers should also consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another. The tax impact on our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax impact of our non-GAAP adjustments. These tax impacts are primarily driven by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. 38
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ADJUSTED DILUTED EPS
The table below provides a reconciliation to the most directly comparable GAAP
measure for each of the major components used to calculate adjusted diluted EPS,
which the Company views as a key performance metric. We believe it is important
for the reader to understand the per share impact of our non-GAAP adjustments as
management does not consider these impacts when evaluating underlying business
performance.
There were no non-GAAP adjustments to arrive at the adjusted diluted EPS in the
first quarter of fiscal year 2020.
Three Months Ended 31 December
Equity Net Income
Operating Affiliates' Income Tax Attributable to Diluted
Q1 2020 vs. Q1 2019 Income Income Provision Air Products EPS
2020 GAAP $561.0 $58.2 $120.7 $475.6 $2.14
2019 GAAP 455.0 52.9 132.1 347.5 1.57
Change GAAP $128.1 $0.57
% Change GAAP 37 % 36 %
2020 GAAP $561.0 $58.2 $120.7 $475.6 $2.14
2020 Non-GAAP Measure ("Adjusted") $561.0 $58.2 $120.7 $475.6 $2.14
2019 GAAP $455.0 $52.9 $132.1 $347.5 $1.57
Facility closure 29.0 - 6.9 22.1 0.10
Tax reform repatriation - - 15.6 (15.6 ) (0.07 )
Tax reform adjustment related to
deemed foreign dividends - - (56.2 ) 56.2 0.26
2019 Non-GAAP Measure ("Adjusted") $484.0 $52.9 $98.4 $410.2 $1.86
Change Non-GAAP Measure
("Adjusted") $65.4 $0.28
% Change Non-GAAP Measure
("Adjusted") 16 % 15 %
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ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN
We define adjusted EBITDA as net income less income (loss) from discontinued
operations, net of tax (when applicable), and excluding certain nonGAAP
adjustments, which the Company does not believe to be indicative of underlying
business trends, before interest expense, other nonoperating income (expense),
net, income tax provision, and depreciation and amortization expense. Adjusted
EBITDA and adjusted EBITDA margin provide useful metrics for management to
assess operating performance. Margin is calculated for each period by dividing
each line item by consolidated sales for the respective period.
Below is a presentation of consolidated sales and a reconciliation of net income
on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to
adjusted EBITDA margin:
Three Months Ended
31 December
2019 2018
$ Margin $ Margin
Sales $2,254.7 $2,224.0
Net income and net income margin $488.9 21.7 % $357.0 16.0 %
Add: Interest expense 18.7 0.8 % 37.3 1.7 %
Less: Other non-operating income (expense), net 9.1 0.4 % 18.5 0.8 %
Add: Income tax provision 120.7 5.4 % 132.1 5.9 %
Add: Depreciation and amortization 289.2 12.8 % 258.0 11.6 %
Add: Facility closure - - % 29.0 1.3 %
Adjusted EBITDA and adjusted EBITDA margin $908.4 40.3 % $794.9 35.7 %
Change GAAP
Net income $ change $131.9
Net income % change 37 %
Net income margin change 570 bp
Change Non-GAAP
Adjusted EBITDA $ change $113.5
Adjusted EBITDA % change 14 %
Adjusted EBITDA margin change 460 bp
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Below is a reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin by segment for the three months ended31 December 2019 and 2018: Industrial Industrial Industrial Industrial Gases- Gases- Gases- Gases- Corporate Americas EMEA Asia Global and other Total GAAP MEASURES Three Months Ended31 December 2019 Operating income (loss)$257.2 $120.5 $228.5 $3.6 ($48.8 )$561.0 (A) Operating margin 27.5 % 24.2 % 33.0 % Three Months Ended31 December 2018 Operating income (loss)$219.2 $105.6 $201.8 $3.9 ($46.5 )$484.0 (A) Operating margin 22.2 % 20.1 % 32.2 % Operating income (loss) change$38.0 $14.9 $26.7 ($0.3 ) ($2.3 ) Operating income (loss) % change 17 % 14 % 13 % (8 )% (5 )% Operating margin change 530 bp 410 bp 80 bp NON-GAAP MEASURES Three Months Ended31 December 2019 Operating income (loss)$257.2 $120.5 $228.5 $3.6 ($48.8 )$561.0 (A) Add: Depreciation and amortization 131.8 48.4 101.6 2.4 5.0 289.2 Add: Equity affiliates' income 20.6 19.3 16.9 1.4 - 58.2 Adjusted EBITDA$409.6 $188.2 $347.0 $7.4 ($43.8 )$908.4 Adjusted EBITDA margin 43.8 % 37.7 % 50.1 % Three Months Ended31 December 2018 Operating income (loss)$219.2 $105.6 $201.8 $3.9 ($46.5 )$484.0 (A) Add: Depreciation and amortization 125.6 46.3 79.9 2.1 4.1 258.0 Add: Equity affiliates' income 22.6 13.7 16.2 0.4 - 52.9 Adjusted EBITDA$367.4 $165.6 $297.9 $6.4 ($42.4 )$794.9 Adjusted EBITDA margin 37.1 % 31.6 % 47.5 % Adjusted EBITDA change$42.2 $22.6 $49.1 $1.0 ($1.4 ) Adjusted EBITDA % change 11 % 14 % 16 % 16 % (3 )% Adjusted EBITDA margin change 670 bp 610 bp 260 bp
(A) The table below reconciles operating income as reflected on our consolidated
income statements to total operating income in the table above:
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