Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The disclosures in this quarterly report are complementary to those made in our
2017
Form 10-K. An analysis of results for the
second quarter and first six months
of fiscal year
2018
is provided in this Management’s Discussion and Analysis.
The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this report. Unless otherwise indicated, financial information is presented on a continuing operations basis. All comparisons in the discussion are to the corresponding prior year, unless otherwise stated. All amounts presented are in accordance with U.S. generally accepted accounting principles (GAAP), except as noted. All amounts are presented in millions of dollars, except for per share data, unless otherwise indicated.
Captions such as income from continuing operations attributable to Air Products, net income attributable to Air Products, and diluted earnings per share attributable to Air Products are simply referred to as “income from continuing operations,” “net income,” and “diluted earnings per share (EPS)” throughout this Management’s Discussion and Analysis, unless otherwise stated.
The discussion of results that follows includes comparisons to certain non-GAAP ("adjusted") financial measures. The presentation of non-GAAP measures is intended to provide investors, potential investors, securities analysts, and others with useful supplemental information to evaluate the performance of the business because such measures, when viewed together with our 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. The reconciliations of reported GAAP results to non‑GAAP measures are presented on
pages 43-48
. Descriptions of the excluded items appear on
pages 32-33 and pages 39-40
.
SECOND
QUARTER
2018
VS.
SECOND
QUARTER
2017
SECOND
QUARTER
2018
IN SUMMARY
|
|
•
|
Sales of
$2,155.7
increased
9%
, or
$175.6
, from higher volumes across the regional industrial gases segments of
4%
and favorable currency impacts of
5%
.
|
|
|
•
|
Operating income of
$455.4
increased
15%
, or
$59.8
, and operating margin of
21.1%
increased
110
basis points (bp). On a non-GAAP basis, adjusted operating income of
$455.4
increased
12%
, or
$49.5
, and adjusted operating margin of
21.1%
increased
60 bp
.
|
|
|
•
|
Income from continuing operations of
$416.4
increased
37%
, or
$112.0
, and diluted earnings per share of
$1.89
increased
36%
, or
$.50
. On a non-GAAP basis, adjusted income from continuing operations of
$377.6
increased
20%
, or
$63.4
, and adjusted diluted earnings per share of
$1.71
increased
20%
, or
$.28
. A summary table of changes in diluted earnings per share is presented below.
|
|
|
•
|
Adjusted EBITDA of
$739.1
increased
13%
, or
$87.2
. Adjusted EBITDA margin of
34.3%
increased
140
bp.
|
|
|
•
|
We increased our quarterly dividend by 16% from $.95 to
$1.10
per share, the largest increase in Company history. This represents the 36th consecutive year that we have increased our dividend payment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Diluted Earnings per Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
31 March
|
|
Increase
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
Diluted Earnings per Share
|
|
|
|
|
|
|
Net income
|
|
|
$1.89
|
|
|
|
$9.70
|
|
|
|
($7.81
|
)
|
Income from discontinued operations
|
|
—
|
|
|
8.31
|
|
|
(8.31
|
)
|
Income from Continuing Operations – GAAP Basis
|
|
|
$1.89
|
|
|
|
$1.39
|
|
|
|
$.50
|
|
Operating Income Impact (after-tax)
|
|
|
|
|
|
|
Underlying business
|
|
|
|
|
|
|
Volume
|
|
|
|
|
|
|
$.12
|
|
Price/raw materials
|
|
|
|
|
|
.02
|
|
Costs
|
|
|
|
|
|
(.06
|
)
|
Currency
|
|
|
|
|
|
.09
|
|
Cost reduction and asset actions
|
|
|
|
|
|
.03
|
|
Pension settlement loss
|
|
|
|
|
|
.01
|
|
Total Operating Income Impact (after-tax)
|
|
|
|
|
|
|
$.21
|
|
Other Impact (after-tax)
|
|
|
|
|
|
|
Equity affiliates' income
|
|
|
|
|
|
|
$.03
|
|
Other non-operating income (expense), net
|
|
|
|
|
|
.01
|
|
Noncontrolling interests
|
|
|
|
|
|
(.01
|
)
|
Income tax
|
|
|
|
|
|
.09
|
|
Tax restructuring benefit
|
|
|
|
|
|
.18
|
|
Weighted average diluted shares
|
|
|
|
|
|
(.01
|
)
|
Total Other Impact (after-tax)
|
|
|
|
|
|
|
$.29
|
|
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis
|
|
|
|
|
|
|
$.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
31 March
|
|
Increase
|
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
|
Income from Continuing Operations – GAAP Basis
|
|
|
$1.89
|
|
|
|
$1.39
|
|
|
|
$.50
|
|
Cost reduction and asset actions
|
|
—
|
|
|
.03
|
|
|
(.03
|
)
|
Pension settlement loss
|
|
—
|
|
|
.01
|
|
|
(.01
|
)
|
Tax restructuring benefit
|
|
(.18
|
)
|
|
—
|
|
|
(.18
|
)
|
Income from Continuing Operations – Non-GAAP Basis
|
|
|
$1.71
|
|
|
|
$1.43
|
|
|
|
$.28
|
|
RESULTS OF OPERATIONS
Discussion of Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
Change
|
Sales
|
|
|
$2,155.7
|
|
|
|
$1,980.1
|
|
|
|
$175.6
|
|
|
9
|
%
|
Operating income
|
|
455.4
|
|
|
395.6
|
|
|
59.8
|
|
|
15
|
%
|
Operating margin
|
|
21.1
|
%
|
|
20.0
|
%
|
|
|
|
|
110 bp
|
|
Equity affiliates’ income
|
|
43.7
|
|
|
34.2
|
|
|
9.5
|
|
|
28
|
%
|
Income from continuing operations
|
|
416.4
|
|
|
304.4
|
|
|
112.0
|
|
|
37
|
%
|
Non-GAAP Basis
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
$739.1
|
|
|
|
$651.9
|
|
|
|
$87.2
|
|
|
13
|
%
|
Adjusted EBITDA margin
|
|
34.3
|
%
|
|
32.9
|
%
|
|
|
|
140 bp
|
|
Adjusted operating income
|
|
455.4
|
|
|
405.9
|
|
|
49.5
|
|
|
12
|
%
|
Adjusted operating margin
|
|
21.1
|
%
|
|
20.5
|
%
|
|
|
|
60 bp
|
|
Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
4
|
%
|
Price
|
1
|
%
|
Energy and natural gas cost pass-through
|
(1
|
)%
|
Currency
|
5
|
%
|
Total Consolidated Change
|
9
|
%
|
Sales of
$2,155.7
increased
9%
, or
$175.6
. Underlying sales increased
5%
from higher volumes of
4%
and higher pricing of
1%
. Volumes were higher across all regional Industrial Gases segments, primarily due to new project onstreams and acquisitions in the Industrial Gases – EMEA and Industrial Gases – Asia segments, partially offset by lower sale of equipment activity in the Industrial Gases
–
Global segment. The pricing improvement was largely attributable to the Industrial Gases – Asia segment, primarily driven by improved merchant pricing in China. Lower energy and natural gas cost pass-through to customers
decreased sales by 1%
, and favorable currency impacts, primarily from the Euro, the British Pound Sterling, and the Chinese Renminbi,
increased sales by 5%
.
Operating Income and Margin
Operating income of
$455.4
increased
15%
, or
$59.8
, due to higher volumes of $34, favorable currency impacts of $25,
lower
cost reduction and asset actions of
$10
, and favorable pricing, net of energy, fuel, and raw material costs, of $6, partially offset by unfavorable net operating costs of $15. The increase in net operating costs was primarily driven by higher incentive compensation, lower cost reimbursement, including costs for transition services, and a legal settlement. Operating margin of
21.1%
increased
110
bp, primarily due to the higher volumes.
On a non-GAAP basis, adjusted operating income of
$455.4
increased
12%
, or
$49.5
, primarily due to higher volumes, favorable currency impacts, and favorable pricing, net of energy, fuel, and raw material costs, partially offset by unfavorable net operating costs. Adjusted operating margin of
21.1%
increased
60 bp
, primarily due to the higher volumes.
Adjusted EBITDA
We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.
Adjusted EBITDA of
$739.1
increased
13%
, or
$87.2
, primarily due to higher volumes, favorable pricing, and favorable currency impacts. Adjusted EBITDA margin of
34.3%
increased
140
bp, primarily due to higher volumes, partially offset by higher operating costs and higher energy and natural gas cost pass-through to a new hydrogen plant in India.
Equity Affiliates' Income
Equity affiliates' income of
$43.7
increased
28%
, or
$9.5
, primarily driven by higher volumes and favorable currency impacts.
Cost of Sales and Gross Margin
Cost of sales of
$1,506.5
increased
$102.7
, or
7%
, due to unfavorable currency impacts of $65, higher costs attributable to sales volumes of $38, and higher other costs of $14, partially offset by lower energy and natural gas cost pass-through to customers of $14. Gross margin of
30.1%
increased
100
bp, primarily due to favorable pricing.
Selling and Administrative Expense
Selling and administrative expense of
$194.6
increased
$17.0
, or
10.0%
, primarily driven by unfavorable currency impacts and higher costs, including incentive compensation. For the three months ended 31 March 2018 and 2017, selling and administrative expense, as a percentage of sales, was
9.0%
.
Research and Development
Research and development expense of
$14.5
decreased
$.3
. For the three months ended 31 March 2018 and 2017, research and development expense, as a percentage of sales, was
.7%
.
Cost Reduction and Asset Actions
There were no charges recorded for cost reduction and asset actions for the three months ended 31 March 2018.
For the three months ended
31 March 2017
, we recognized an expense of
$10.3
(
$7.2
after-tax, or
$.03
per share) for severance and other benefits related to cost reduction actions. Refer to Note 5, Cost Reduction and Asset Actions, to the consolidated financial statements for additional details.
Other Income (Expense), Net
Other income (expense), net of
$15.3
decreased
$6.7
, or
30.0%
, due to lower income from transition services agreements with Versum and Evonik, partially offset by a favorable foreign exchange impact.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
31 March
|
|
|
2018
|
|
2017
|
Interest incurred
|
|
|
$34.4
|
|
|
|
$36.4
|
|
Less: capitalized interest
|
|
4.0
|
|
|
5.9
|
|
Interest expense
|
|
|
$30.4
|
|
|
|
$30.5
|
|
Interest incurred
decreased
$2.0
as the impact from a lower average debt balance of $6 was partially offset by the impact from a higher average interest rate on the debt portfolio of $4. The change in capitalized interest was driven by a decrease in the carrying value of projects under construction.
Other Non-Operating Income (Expense), Net
Other non-operating income (expense), net of
$11.1
increased
$5.8
due to lower pension expense and higher interest income on cash and cash items. The prior year pension expense included settlement losses of $4.1 (
$2.6
after-tax, or
$.01
per share) to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss, primarily associated with the U.S. Supplementary Pension Plan.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was
11.7%
and
23.4%
in the
second
quarter of
2018
and
2017
, respectively. The current year rate was lower primarily due to a tax benefit of
$38.8
that resulted from the restructuring of foreign subsidiaries, a higher tax benefit from share-based compensation, and the mix of income in jurisdictions with a lower effective tax rate. Additionally, we estimate that the lower U.S. federal statutory rate and other impacts of the Tax Act reduced our effective tax rate by approximately 2.8% for the three months ended
31 March 2018
.
On a non-GAAP basis, the adjusted effective tax rate
decreased
from
23.7%
in
2017
to
19.8%
in
2018
, primarily due to the impacts of the Tax Act, an increased tax benefit from share-based compensation, and the mix of income in jurisdictions with a lower effective tax rate.
Refer to Note 17, Income Taxes, to the consolidated financial statements for additional information.
Discontinued Operations
The results of our former Performance Materials Division (PMD) and Energy-from-Waste (EfW) segment are reflected in our consolidated financial statements as discontinued operations. Refer to Note
3
,
Discontinued Operations
, to the consolidated financial statements for additional information.
Segment Analysis
Industrial Gases – Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$913.2
|
|
|
|
$890.1
|
|
|
|
$23.1
|
|
|
3%
|
Operating income
|
|
222.3
|
|
|
223.2
|
|
|
(.9
|
)
|
|
—%
|
Operating margin
|
|
24.3
|
%
|
|
25.1
|
%
|
|
|
|
(80 bp)
|
Equity affiliates’ income
|
|
16.9
|
|
|
13.0
|
|
|
3.9
|
|
|
30%
|
Adjusted EBITDA
|
|
361.5
|
|
|
352.2
|
|
|
9.3
|
|
|
3%
|
Adjusted EBITDA margin
|
|
39.6
|
%
|
|
39.6
|
%
|
|
|
|
— bp
|
Industrial Gases – Americas Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
4
|
%
|
Price
|
—
|
%
|
Energy and natural gas cost pass-through
|
(2
|
)%
|
Currency
|
1
|
%
|
Total Industrial Gases – Americas Sales Change
|
3
|
%
|
Sales of
$913.2
increased
3%
, or
$23.1
. Underlying sales
were up 4%
from higher volumes as
pricing was flat
. The volume increase was primarily driven by higher hydrogen and merchant volumes. Lower energy and natural gas cost pass-through to customers
decreased sales by 2%
, and favorable currency impacts
increased sales by 1%
.
Industrial Gases – Americas Operating Income and Margin
Operating income of
$222.3
decreased
$.9
, primarily due to higher costs of $8 and lower price, net of power and fuel costs, of $6, mostly offset by favorable volumes of $11 and favorable currency impacts of $2. Operating margin of
24.3%
decreased
80
bp, primarily due to higher costs.
Industrial Gases – Americas Equity Affiliates’ Income
Equity affiliates’ income of
$16.9
increased
$3.9
due to volume growth and favorable currency impacts in our equity affiliate in Mexico.
Industrial Gases – Europe, Middle East, and Africa (EMEA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$561.6
|
|
|
|
$414.2
|
|
|
|
$147.4
|
|
|
36%
|
Operating income
|
|
116.7
|
|
|
88.6
|
|
|
28.1
|
|
|
32%
|
Operating margin
|
|
20.8
|
%
|
|
21.4
|
%
|
|
|
|
(60 bp)
|
Equity affiliates’ income
|
|
11.1
|
|
|
8.3
|
|
|
2.8
|
|
|
34%
|
Adjusted EBITDA
|
|
178.5
|
|
|
138.5
|
|
|
40.0
|
|
|
29%
|
Adjusted EBITDA margin
|
|
31.8
|
%
|
|
33.4
|
%
|
|
|
|
(160 bp)
|
Industrial Gases – EMEA Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
20
|
%
|
Price
|
1
|
%
|
Energy and natural gas cost pass-through
|
—
|
%
|
Currency
|
15
|
%
|
Total Industrial Gases – EMEA Sales Change
|
36
|
%
|
Sales of
$561.6
increased
36%
, or
$147.4
. Underlying sales
were up 21%
from
higher volumes of 20%
and
higher pricing of 1%
. The volume increase was primarily driven by a new hydrogen plant in India and higher merchant and onsite volumes. Energy and natural gas cost pass-through to customers
was flat
versus the prior year. Favorable currency impacts, primarily from the Euro and British Pound Sterling,
increased sales by 15%
.
Industrial Gases – EMEA Operating Income and Margin
Operating income of
$116.7
increased
32%
, or
$28.1
, due to favorable currency impacts of $13, higher volumes of $11, favorable pricing of $3, and lower costs of $1. Operating margin of
20.8%
decreased
60
bp, primarily due to lower margins on the new hydrogen volumes in India.
Industrial Gases – EMEA Equity Affiliates’ Income
Equity affiliates’ income of
$11.1
increased
$2.8
primarily due to lower costs.
Industrial Gases – Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$557.6
|
|
|
|
$435.9
|
|
|
|
$121.7
|
|
|
28%
|
Operating income
|
|
148.7
|
|
|
112.3
|
|
|
36.4
|
|
|
32%
|
Operating margin
|
|
26.7
|
%
|
|
25.8
|
%
|
|
|
|
90 bp
|
Equity affiliates’ income
|
|
15.4
|
|
|
12.9
|
|
|
2.5
|
|
|
19%
|
Adjusted EBITDA
|
|
226.7
|
|
|
174.5
|
|
|
52.2
|
|
|
30%
|
Adjusted EBITDA margin
|
|
40.7
|
%
|
|
40.0
|
%
|
|
|
|
70 bp
|
Industrial Gases – Asia Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
17
|
%
|
Price
|
3
|
%
|
Energy and natural gas cost pass-through
|
—
|
%
|
Currency
|
8
|
%
|
Total Industrial Gases – Asia Sales Change
|
28
|
%
|
Sales of
$557.6
increased
28%
, or
$121.7
. Underlying sales
were up 20%
from
higher volumes of 17%
and
higher pricing of 3%
. The volume increase was primarily driven by new plant onstreams and base merchant business growth. Merchant pricing improved across Asia driven primarily by China. Energy and natural gas cost pass-through to customers
was flat
versus the prior year. Favorable currency impacts, primarily from the Chinese Renminbi, South Korean Won, and Taiwan Dollar,
increased sales by 8%
.
Industrial Gases – Asia Operating Income and Margin
Operating income of
$148.7
increased
32%
, or
$36.4
, due to higher volumes of $25, favorable price, net of power costs, of $9, and favorable currency impacts of $9, partially offset by higher operating costs of $7. Operating margin of
26.7%
increased
90
bp as higher volumes and favorable price, net of power costs, were partially offset by the dilutive impact of unfavorable cost performance.
Industrial Gases – Asia Equity Affiliates’ Income
Equity affiliates’ income of
$15.4
increased
$2.5
, primarily due to higher volumes.
Industrial Gases – Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$101.7
|
|
|
|
$216.5
|
|
|
|
($114.8
|
)
|
|
(53)%
|
Operating income
|
|
12.1
|
|
|
22.7
|
|
|
(10.6
|
)
|
|
(47)%
|
Adjusted EBITDA
|
|
14.3
|
|
|
24.4
|
|
|
(10.1
|
)
|
|
(41)%
|
Industrial Gases – Global Sales and Operating Income
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.
Sales of
$101.7
decreased
$114.8
, or
53%
. The decrease in sales was primarily driven by lower sale of equipment activity on the multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia.
Operating income of
$12.1
decreased
$10.6
, primarily due to the lower sale of equipment activity.
Corporate and other
In addition to our liquefied natural gas (LNG) and helium storage and distribution sale of equipment businesses, the results of the Corporate and other segment include stranded costs related to the former Materials Technologies segment, which is now presented as discontinued operations. Stranded costs primarily relate to costs in support of transition services agreements with Versum and Evonik, the majority of which were reimbursed to Air Products. All transition services were substantially complete as of 31 March 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$21.6
|
|
|
|
$23.4
|
|
|
|
($1.8
|
)
|
|
(8)%
|
Operating loss
|
|
(44.4
|
)
|
|
(40.9
|
)
|
|
(3.5
|
)
|
|
(9)%
|
Adjusted EBITDA
|
|
(41.9
|
)
|
|
(37.7
|
)
|
|
(4.2
|
)
|
|
(11)%
|
Corporate and other Sales and Operating Loss
Sales of
$21.6
decreased
$1.8
, primarily due to lower activity in our helium container business. Operating loss of
$44.4
increased
$3.5
due to higher project development activity.
FIRST
SIX
MONTHS
2018
VS. FIRST
SIX
MONTHS
2017
FIRST
SIX
MONTHS
2018
IN SUMMARY
|
|
•
|
Sales of
$4,372.3
increased
13%
, or
$509.7
from underlying sales growth of
9%
and favorable currency impacts of
4%
.
The underlying sales growth was primarily driven by higher volumes across the regional industrial gases segments.
|
|
|
•
|
Operating income of
$916.1
increased
27%
, or
$192.2
, and operating margin of
21.0%
increased
230
bp. On a non-GAAP basis, adjusted operating income of
$916.1
increased
12%
, or
$99.4
, and adjusted operating margin of
21.0%
decreased
10
bp.
|
|
|
•
|
Income from continuing operations of
$572.0
increased
3%
, or
$16.0
, and diluted earnings per share of
$2.59
increased
2%
, or
$.06
. On a non-GAAP basis, adjusted income from continuing operations of
$772.2
increased
21.0%
, or
$136.0
, and adjusted diluted earnings per share of
$3.50
increased
21%
, or
$.60
. A summary table of changes in diluted earnings per share is presented below.
|
|
|
•
|
Adjusted EBITDA of
$1,474.0
increased
13%
, or
$167.2
. Adjusted EBITDA margin of
33.7%
decreased
10
bp.
|
|
|
•
|
We increased our quarterly dividend by 16% from $.95 to
$1.10
per share, the largest increase in Company history. This represents the 36th consecutive year that we have increased our dividend payment.
|
Changes in Diluted Earnings per Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
31 March
|
|
Increase
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
Diluted Earnings per Share
|
|
|
|
|
|
|
Net income
|
|
|
$2.59
|
|
|
|
$11.06
|
|
|
|
($8.47
|
)
|
Income from discontinued operations
|
|
—
|
|
|
8.53
|
|
|
(8.53
|
)
|
Income from Continuing Operations – GAAP Basis
|
|
|
$2.59
|
|
|
|
$2.53
|
|
|
|
$.06
|
|
Operating Income Impact (after-tax)
|
|
|
|
|
|
|
Underlying business
|
|
|
|
|
|
|
Volume
|
|
|
|
|
|
|
$.31
|
|
Price/raw materials
|
|
|
|
|
|
.10
|
|
Costs
|
|
|
|
|
|
(.21
|
)
|
Currency
|
|
|
|
|
|
.15
|
|
Business separation costs
|
|
|
|
|
|
.12
|
|
Cost reduction and asset actions
|
|
|
|
|
|
.23
|
|
Pension settlement loss
|
|
|
|
|
|
.01
|
|
Operating Income
|
|
|
|
|
|
|
$.71
|
|
Other (after-tax)
|
|
|
|
|
|
|
Equity affiliates' income
|
|
|
|
|
|
.06
|
|
Other non-operating income (expense), net
|
|
|
|
|
|
.05
|
|
Income tax
|
|
|
|
|
|
.17
|
|
Tax reform repatriation
|
|
|
|
|
|
(2.06
|
)
|
Tax reform rate change and other
|
|
|
|
|
|
.97
|
|
Tax restructuring benefit
|
|
|
|
|
|
.18
|
|
Tax costs associated with business separation
|
|
|
|
|
|
.01
|
|
Noncontrolling interests
|
|
|
|
|
|
(.01
|
)
|
Weighted average diluted shares
|
|
|
|
|
|
(.02
|
)
|
Other
|
|
|
|
|
|
|
($.65
|
)
|
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis
|
|
|
|
|
|
|
$.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
31 March
|
|
Increase
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
Income from Continuing Operations – GAAP Basis
|
|
|
$2.59
|
|
|
|
$2.53
|
|
|
|
$.06
|
|
Business separation costs
|
|
—
|
|
|
.12
|
|
|
(.12
|
)
|
Tax costs associated with business separation
|
|
—
|
|
|
.01
|
|
|
(.01
|
)
|
Cost reduction and asset actions
|
|
—
|
|
|
.23
|
|
|
(.23
|
)
|
Pension settlement loss
|
|
—
|
|
|
.01
|
|
|
(.01
|
)
|
Tax reform repatriation
|
|
2.06
|
|
|
—
|
|
|
2.06
|
|
Tax reform rate change and other
|
|
(.97
|
)
|
|
—
|
|
|
(.97
|
)
|
Tax restructuring benefit
|
|
(.18
|
)
|
|
—
|
|
|
(.18
|
)
|
Income from Continuing Operations – Non-GAAP Basis
|
|
|
$3.50
|
|
|
|
$2.90
|
|
|
|
$.60
|
|
RESULTS OF OPERATIONS
Discussion of Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
Change
|
Sales
|
|
|
$4,372.3
|
|
|
|
$3,862.6
|
|
|
|
$509.7
|
|
|
13
|
%
|
Operating income
|
|
916.1
|
|
|
723.9
|
|
|
192.2
|
|
|
27
|
%
|
Operating margin
|
|
21.0
|
%
|
|
18.7
|
%
|
|
|
|
230 bp
|
|
Equity affiliates’ income
|
|
57.5
|
|
|
72.2
|
|
|
(14.7
|
)
|
|
(20
|
)%
|
Income from continuing operations
|
|
572.0
|
|
|
556.0
|
|
|
16.0
|
|
|
3
|
%
|
Non-GAAP Basis
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
1,474.0
|
|
|
1,306.8
|
|
|
167.2
|
|
|
13
|
%
|
Adjusted EBITDA margin
|
|
33.7
|
%
|
|
33.8
|
%
|
|
|
|
(10 bp)
|
|
Adjusted operating income
|
|
916.1
|
|
|
816.7
|
|
|
99.4
|
|
|
12
|
%
|
Adjusted operating margin
|
|
21.0
|
%
|
|
21.1
|
%
|
|
|
|
(10 bp)
|
|
Adjusted equity affiliates' income
|
|
90.0
|
|
|
72.2
|
|
|
17.8
|
|
|
25
|
%
|
Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
8
|
%
|
Price
|
1
|
%
|
Energy and natural gas cost pass-through
|
—
|
%
|
Currency
|
4
|
%
|
Total Consolidated Change
|
13
|
%
|
Sales of
$4,372.3
increased
13%
, or
$509.7
. Underlying sales
were up 9%
from
higher volumes of 8%
and
higher pricing of 1%
. Volumes were higher across all regional Industrial Gases segments driven by new project onstreams in the Industrial Gases – EMEA and Industrial Gases – Asia segments and an equipment sale resulting from the termination of a contract in the Industrial Gases – Asia segment. The pricing improvement was primarily attributable to the Industrial Gases – Asia segment. Energy and natural gas cost pass-through to customers
was flat
versus the prior year. Favorable currency impacts, primarily from the Euro, the British Pound Sterling, and the Chinese Renminbi,
increased sales by 4%
.
Operating Income and Margin
Operating income of
$916.1
increased
27%
, or
$192.2
, due to higher volumes of $86,
lower
cost reduction and asset actions of
$60
, favorable currency impacts of $41, lower business separation costs of $33, favorable pricing, net of energy, fuel, and raw material costs, of $28, partially offset by unfavorable net operating costs of $56. The increase in net operating costs was primarily driven by higher incentive compensation, lower cost reimbursement, including costs for transition services, higher maintenance costs, and a legal settlement. Operating margin of
21.0%
increased
230
bp, primarily due to lower cost reduction and asset actions and lower business separation costs, partially offset by higher operating costs.
On a non-GAAP basis, adjusted operating income of
$916.1
increased
12%
, or
$99.4
, primarily due to higher volumes, favorable currency impacts, and favorable pricing, net of energy, fuel, and raw material costs, partially offset by unfavorable net operating costs. Adjusted operating margin of
21.0%
decreased
10
bp as higher costs were mostly offset by higher volumes and favorable pricing, net of power costs.
Adjusted EBITDA
Adjusted EBITDA of
$1,474.0
increased
13%
, or
$167.2
, primarily due to higher volumes, favorable currency, and favorable pricing, partially offset by higher costs. Adjusted EBITDA margin of
33.7%
decreased
10
bp, primarily due to higher costs, mostly offset by income from regional industrial gases equity affiliates.
Equity Affiliates' Income
Equity affiliates' income of
$57.5
decreased
20%
, or
$14.7
, and includes
$32.5
of expense resulting from the Tax Act. Refer to Note
17
,
Income Taxes
, to the consolidated financial statements for additional information. On a non-GAAP basis, adjusted equity affiliates' income of
$90.0
increased
25%
, or
$17.8
, primarily driven by Industrial Gases
–
Americas and Industrial Gases
–
EMEA affiliates.
Cost of Sales and Gross Margin
Cost of sales of
$3,078.3
increased
13%
, or
$357.8
, due to higher costs attributable to sales volumes of $221, unfavorable currency impacts of $101, and higher other costs of $42, partially offset by lower energy and natural gas cost pass-through to customers of $6. Gross margin of
29.6%
was flat versus the prior year.
Selling and Administrative Expense
Selling and administrative expense of
$386.2
increased
$43.9
, or
13.0%
, primarily driven by unfavorable currency impacts and higher other costs, including incentive compensation costs. Selling and administrative expense, as a percentage of sales,
decreased
from
8.9%
to
8.8%
.
Research and Development
Research and development expense of
$29.1
decreased
$.7
. Research and development expense, as a percentage of sales,
decreased
from
.8%
to
.7%
.
Business Separation Costs
With the disposition of the two divisions comprising the former Materials Technologies segment complete, no business separation costs were incurred during the first half of fiscal year 2018. Refer to Note
3
,
Discontinued Operations
, and Note 4, Materials Technologies Separation, to the consolidated financial statements for additional information regarding the dispositions.
For the
six
months ended
31 March 2017
, we incurred legal and advisory fees of
$32.5
(
$26.5
after-tax, or
$.12
per share). Our income tax provision for the
six
months ended
31 March 2017
includes additional tax expense of
$2.7
, or
$.01
per share, related to the separation.
Cost Reduction and Asset Actions
There were no charges recorded for cost reduction and asset actions for the six months ended 31 March 2018.
For the
six
months ended
31 March 2017
, we recognized a net expense of
$60.3
(
$48.4
after-tax, or
$.23
per share), which included
$45.7
for asset actions and
$18.0
for severance and other benefits. These expenses were partially offset by the favorable settlement of the remaining
$3.4
accrued balance associated with business restructuring actions taken in 2015.
Refer to Note
5
,
Cost Reduction and Asset Actions
, to the consolidated financial statements for additional details.
Other Income (Expense), Net
Other income (expense), net of
$37.4
decreased
$9.3
, or
20.0%
, primarily due to lower income from the transition services agreements with Versum and Evonik and lower sales of assets, partially offset by a favorable foreign exchange impact.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
31 March
|
|
|
2018
|
|
2017
|
Interest incurred
|
|
|
$67.0
|
|
|
|
$72.2
|
|
Less: capitalized interest
|
|
6.8
|
|
|
12.2
|
|
Interest expense
|
|
|
$60.2
|
|
|
|
$60.0
|
|
Interest incurred
decreased
$5.2
as the impact from a lower average debt balance of $14 was partially offset by the impact from a higher average interest rate on the debt portfolio of $9. The change in capitalized interest was driven by a decrease in the carrying value of projects under construction.
Other Non-Operating Income (Expense), net
Other non-operating income (expense), net of
$20.9
increased
$15.8
due to higher interest income on cash and cash items and lower pension expense. The prior year pension expense included a settlement loss of $4.1 associated with the U.S. Supplementary Pension Plan and a settlement benefit of
$2.3
related to the disposition of EMD and PMD. The settlement benefit was previously presented in "Business separation costs" prior to the adoption of pension guidance in the first quarter of fiscal year 2018. Refer to Note 2, New Accounting Guidance, to the consolidated financial statements for additional information.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. The effective tax rate was
37.2%
and
23.3%
for the
six
months ended
31 March 2018
and
2017
, respectively. The current year rate was higher primarily due to the enactment of the Tax Act, which significantly changed existing U.S. tax laws, including a reduction in the federal corporate income tax rate from 35% to 21% that is effective 1 January 2018, a deemed repatriation tax on unremitted foreign earnings, as well as other changes. As a result of the Tax Act, our income tax provision for the
six
months ended
31 March 2018
reflects a discrete net income tax expense of $206.5. This included a deemed repatriation tax on accumulated unremitted foreign earnings and adjustments to the future cost of repatriation from foreign investments of
$420.5
, partially offset by a benefit of
$214.0
primarily from the re-measurement of our net U.S. deferred tax liabilities at the lower corporate tax rate. This expense was partially offset by a tax benefit of
$38.8
that resulted from the restructuring of foreign subsidiaries, a higher tax benefit from share-based compensation, and the mix of income in jurisdictions with a lower effective tax rate.
On a non-GAAP basis, the adjusted effective tax rate
decreased
from
22.4%
in
2017
to
18.6%
in
2018
. We estimate that the lower U.S. federal statutory rate and other impacts of the Tax Act reduced our effective tax rate by approximately 2.8% for the
six
months ended
31 March 2018
. The current year rate was also lower due to a higher tax benefit from share-based compensation and the mix of income in other jurisdictions with a lower effective tax rate.
We are reporting the impacts of the Tax Act provisionally based upon reasonable estimates. The impacts are not yet finalized as they are dependent on factors and analysis not yet known or fully completed, including but not limited to, the final cash balances for fiscal year 2018, further book to U.S. tax adjustments for the earnings of foreign entities, the issuance of additional guidance, as well as our ongoing analysis of the Tax Act.
At this time, we do not anticipate a significant change in our full-year rate in fiscal year 2019 versus our estimated fiscal year 2018 full-year rate on a non-GAAP basis related to provisions of the Tax Act.
Refer to Note 17, Income Taxes, to the consolidated financial statements for additional information.
Discontinued Operations
The results of PMD and EfW are reflected in our consolidated financial statements as discontinued operations. Refer to Note
3
,
Discontinued Operations
, to the consolidated financial statements for additional information.
Segment Analysis
Industrial Gases – Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$1,823.0
|
|
|
|
$1,754.0
|
|
|
|
$69.0
|
|
|
4
|
%
|
Operating income
|
|
439.5
|
|
|
446.5
|
|
|
(7.0
|
)
|
|
(2
|
)%
|
Operating margin
|
|
24.1
|
%
|
|
25.5
|
%
|
|
|
|
(140 bp)
|
|
Equity affiliates’ income
|
|
35.5
|
|
|
27.7
|
|
|
7.8
|
|
|
28
|
%
|
Adjusted EBITDA
|
|
715.1
|
|
|
702.0
|
|
|
13.1
|
|
|
2
|
%
|
Adjusted EBITDA margin
|
|
39.2
|
%
|
|
40.0
|
%
|
|
|
|
(80 bp)
|
|
Industrial Gases – Americas Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
4
|
%
|
Price
|
—
|
%
|
Currency
|
1
|
%
|
Energy and natural gas cost pass-through
|
(1
|
)%
|
Total Industrial Gases – Americas Sales Change
|
4
|
%
|
Sales of
$1,823.0
increased
4%
, or
$69.0
. Underlying sales
were up 4%
from higher volumes as
pricing was flat
. The volume increase was primarily driven by higher hydrogen volumes. Lower energy and natural gas cost pass-through to customers decreased sales by
1%
, and favorable currency impacts increased sales by
1%
.
Industrial Gases – Americas Operating Income and Margin
Operating income of
$439.5
decreased
2%
, or
$7.0
, primarily due to higher costs of $22 and lower pricing, net of power and fuel costs, of $7, mostly offset by higher volumes of $19 and favorable currency impacts of $3. The higher costs included higher planned maintenance costs. Operating margin of
24.1%
decreased
140
bp from the prior year, primarily due to higher costs.
Industrial Gases – Americas Equity Affiliates’ Income
Equity affiliates’ income of
$35.5
increased
$7.8
due to volume growth and favorable currency.
Industrial Gases – EMEA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$1,077.5
|
|
|
|
$813.9
|
|
|
|
$263.6
|
|
|
32
|
%
|
Operating income
|
|
221.2
|
|
|
178.6
|
|
|
42.6
|
|
|
24
|
%
|
Operating margin
|
|
20.5
|
%
|
|
21.9
|
%
|
|
|
|
(140 bp)
|
|
Equity affiliates’ income
|
|
24.2
|
|
|
17.8
|
|
|
6.4
|
|
|
36
|
%
|
Adjusted EBITDA
|
|
345.2
|
|
|
280.2
|
|
|
65.0
|
|
|
23
|
%
|
Adjusted EBITDA margin
|
|
32.0
|
%
|
|
34.4
|
%
|
|
|
|
(240 bp)
|
|
Industrial Gases – EMEA Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
18
|
%
|
Price
|
1
|
%
|
Energy and natural gas cost pass-through
|
1
|
%
|
Currency
|
12
|
%
|
Total Industrial Gases – EMEA Sales Change
|
32
|
%
|
Sales of
$1,077.5
increased
32%
, or
$263.6
. Underlying sales
were up 19%
from
higher volumes of 18%
and
higher pricing of 1%
. The volume increase was primarily driven by a new hydrogen plant in India and higher merchant and onsite volumes. Higher energy and natural gas cost pass-through to customers
increased sales by 1%
. Favorable currency impacts, primarily from the Euro and British Pound Sterling,
increased sales by 12%
.
Industrial Gases – EMEA Operating Income and Margin
Operating income of
$221.2
increased
24%
, or
$42.6
, due to higher volumes of $22 and favorable currency impacts of $20. Operating margin of
20.5%
decreased
140
bp from the prior year, primarily due to lower margins on the new hydrogen volumes in India.
Industrial Gases – EMEA Equity Affiliates’ Income
Equity affiliates’ income of
$24.2
increased
$6.4
, primarily due to volume growth, lower costs, and favorable currency.
Industrial Gases – Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$1,201.2
|
|
|
|
$874.2
|
|
|
|
$327.0
|
|
|
37
|
%
|
Operating income
|
|
324.2
|
|
|
230.7
|
|
|
93.5
|
|
|
41
|
%
|
Operating margin
|
|
27.0
|
%
|
|
26.4
|
%
|
|
|
|
60 bp
|
|
Equity affiliates’ income
|
|
29.6
|
|
|
26.4
|
|
|
3.2
|
|
|
12
|
%
|
Adjusted EBITDA
|
|
473.2
|
|
|
353.1
|
|
|
120.1
|
|
|
34
|
%
|
Adjusted EBITDA margin
|
|
39.4
|
%
|
|
40.4
|
%
|
|
|
|
(100 bp)
|
|
Industrial Gases – Asia Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
26
|
%
|
Price
|
5
|
%
|
Energy and natural gas cost pass-through
|
—
|
|
Currency
|
6
|
%
|
Total Industrial Gases – Asia Sales Change
|
37
|
%
|
Sales of
$1,201.2
increased
37%
, or
$327.0
. Underlying sales
were up 31%
from
higher volumes of 26%
and
higher pricing of 5%
. The volume increase was primarily driven by an equipment sale resulting from the termination of a contract in the first quarter of fiscal year 2018, new plant onstreams, and higher merchant volumes. Merchant pricing improved across Asia driven primarily by China. Energy and natural gas cost pass-through to customers
was flat
versus the prior year. Favorable currency impacts, primarily from the Chinese Renminbi, South Korean Won, and Taiwan Dollar,
increased sales by 6%
.
Industrial Gases – Asia Operating Income and Margin
Operating income of
$324.2
increased
41%
, or
$93.5
, due to higher volumes of $66, favorable price, net of power costs, of $32, and favorable currency impacts of $14, partially offset by higher operating costs of $18. Operating margin of
27.0%
increased
60
bp as higher volumes and favorable price, net of power costs, were partially offset by the dilutive impact of the equipment sale noted above and unfavorable cost performance.
Industrial Gases – Asia Equity Affiliates’ Income
Equity affiliates’ income of
$29.6
increased
$3.2
due to higher volumes.
Industrial Gases – Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$234.7
|
|
|
|
$364.4
|
|
|
|
($129.7
|
)
|
|
(36
|
)%
|
Operating income
|
|
21.6
|
|
|
30.9
|
|
|
(9.3
|
)
|
|
(30
|
)%
|
Adjusted EBITDA
|
|
25.8
|
|
|
34.9
|
|
|
(9.1
|
)
|
|
(26
|
)%
|
Industrial Gases – Global Sales and Operating Income
Sales of
$234.7
decreased
36%
, or
$129.7
. The decrease in sales was primarily driven by lower sale of equipment activity on the multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia.
Operating income of
$21.6
decreased
30%
, or
$9.3
, primarily due to the lower sale of equipment activity.
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
31 March
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$35.9
|
|
|
|
$56.1
|
|
|
|
($20.2
|
)
|
|
(36
|
)%
|
Operating loss
|
|
(90.4
|
)
|
|
(70.0
|
)
|
|
(20.4
|
)
|
|
(29
|
)%
|
Adjusted EBITDA
|
|
(85.3
|
)
|
|
(63.4
|
)
|
|
(21.9
|
)
|
|
(35
|
)%
|
Corporate and other Sales and Operating Loss
Sales of
$35.9
decreased
36%
, or
$20.2
, primarily due to lower activity in our LNG projects and our helium container business.
Operating loss of
$90.4
increased
29%
, or
$20.4
, primarily due to lower LNG activity.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Millions of dollars unless otherwise indicated, except for per share data)
The Company has presented certain financial measures on a non-GAAP (“adjusted”) basis and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial 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 our 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.
In many cases, our non-GAAP measures are determined by adjusting the most directly comparable GAAP financial measure to exclude certain disclosed items (“non-GAAP adjustments”) that we believe are not representative of the underlying business performance. For example, Air Products restructured the Company to focus on its core Industrial Gases business. This had resulted in significant cost reduction and asset actions that we believe were important for investors to understand separately from the performance of the underlying business. The reader should be aware that we may incur similar expenses in the future. The tax impact on our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. Investors 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.
During the first quarter of fiscal year 2018, we adopted accounting guidance on the presentation of net periodic pension and postretirement benefit cost. Certain prior year information has been reclassified to conform to the fiscal year 2018 presentation. Refer to Note
2
,
New Accounting Guidance
, to the consolidated financial statements for additional information.
Presented below are reconciliations of the reported GAAP results to the non-GAAP measures for the
second quarter and first six months
of fiscal year
2018
and
2017
:
CONSOLIDATED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
Three Months Ended 31 March
|
Q2 2018 vs. Q2 2017
|
Operating
Income
|
Operating
Margin
(A)
|
Equity Affiliates' Income
|
Income Tax
Provision
|
Net
Income
|
Diluted
EPS
|
2018 GAAP
|
|
$455.4
|
|
21.1
|
%
|
|
$43.7
|
|
|
$56.2
|
|
|
$416.4
|
|
|
$1.89
|
|
2017 GAAP
|
395.6
|
|
20.0
|
%
|
34.2
|
|
94.5
|
|
304.4
|
|
1.39
|
|
Change GAAP
|
|
$59.8
|
|
110
|
bp
|
|
$9.5
|
|
|
($38.3
|
)
|
|
$112.0
|
|
|
$.50
|
|
% Change GAAP
|
15
|
%
|
|
28
|
%
|
(41
|
)%
|
37
|
%
|
36
|
%
|
2018 GAAP
|
|
$455.4
|
|
21.1
|
%
|
|
$43.7
|
|
|
$56.2
|
|
|
$416.4
|
|
|
$1.89
|
|
Tax restructuring benefit
|
—
|
|
—
|
%
|
—
|
|
38.8
|
|
(38.8
|
)
|
(.18
|
)
|
2018 Non-GAAP Measure
|
|
$455.4
|
|
21.1
|
%
|
|
$43.7
|
|
|
$95.0
|
|
|
$377.6
|
|
|
$1.71
|
|
2017 GAAP
|
|
$395.6
|
|
20.0
|
%
|
|
$34.2
|
|
|
$94.5
|
|
|
$304.4
|
|
|
$1.39
|
|
Cost reduction and asset actions
|
10.3
|
|
.5
|
%
|
—
|
|
3.1
|
|
7.2
|
|
.03
|
|
Pension settlement loss
|
—
|
|
—
|
%
|
—
|
|
1.5
|
|
2.6
|
|
.01
|
|
2017 Non-GAAP Measure
|
|
$405.9
|
|
20.5
|
%
|
|
$34.2
|
|
|
$99.1
|
|
|
$314.2
|
|
|
$1.43
|
|
Change Non-GAAP Measure
|
|
$49.5
|
|
60
|
bp
|
|
$9.5
|
|
|
($4.1
|
)
|
|
$63.4
|
|
|
$.28
|
|
% Change Non-GAAP Measure
|
12
|
%
|
|
28
|
%
|
(4
|
)%
|
20
|
%
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
Six Months Ended 31 March
|
2018 vs. 2017
|
Operating
Income
|
Operating
Margin
(A)
|
Equity Affiliates' Income
|
Income Tax
Provision
|
Net
Income
|
Diluted
EPS
|
2018 GAAP
|
|
$916.1
|
|
21.0
|
%
|
|
$57.5
|
|
|
$348.0
|
|
|
$572.0
|
|
|
$2.59
|
|
2017 GAAP
|
723.9
|
|
18.7
|
%
|
72.2
|
|
172.9
|
|
556.0
|
|
2.53
|
|
Change GAAP
|
|
$192.2
|
|
230
|
bp
|
|
($14.7
|
)
|
|
$175.1
|
|
|
$16.0
|
|
|
$.06
|
|
% Change GAAP
|
27
|
%
|
|
(20
|
)%
|
101
|
%
|
3
|
%
|
2
|
%
|
2018 GAAP
|
|
$916.1
|
|
21.0
|
%
|
|
$57.5
|
|
|
$348.0
|
|
|
$572.0
|
|
|
$2.59
|
|
Tax reform repatriation
|
—
|
|
—
|
%
|
32.5
|
|
(420.5
|
)
|
453.0
|
|
2.06
|
|
Tax reform rate change and other
|
—
|
|
—
|
%
|
—
|
|
214.0
|
|
(214.0
|
)
|
(.97
|
)
|
Tax restructuring benefit
|
—
|
|
—
|
%
|
—
|
|
38.8
|
|
(38.8
|
)
|
(.18
|
)
|
2018 Non-GAAP Measure
|
|
$916.1
|
|
21.0
|
%
|
|
$90.0
|
|
|
$180.3
|
|
|
$772.2
|
|
|
$3.50
|
|
2017 GAAP
|
|
$723.9
|
|
18.7
|
%
|
|
$72.2
|
|
|
$172.9
|
|
|
$556.0
|
|
|
$2.53
|
|
Business separation costs
|
32.5
|
|
.8
|
%
|
—
|
|
3.7
|
|
26.5
|
|
.12
|
|
Tax costs associated with business separation
|
—
|
|
—
|
%
|
—
|
|
(2.7
|
)
|
2.7
|
|
.01
|
|
Cost reduction and asset actions
|
60.3
|
|
1.6
|
%
|
—
|
|
11.9
|
|
48.4
|
|
.23
|
|
Pension settlement loss
|
—
|
|
—
|
%
|
—
|
|
1.5
|
|
2.6
|
|
.01
|
|
2017 Non-GAAP Measure
|
|
$816.7
|
|
21.1
|
%
|
|
$72.2
|
|
|
$187.3
|
|
|
$636.2
|
|
|
$2.90
|
|
Change Non-GAAP Measure
|
|
$99.4
|
|
(10
|
)bp
|
|
$17.8
|
|
|
($7.0
|
)
|
|
$136.0
|
|
|
$.60
|
|
% Change Non-GAAP Measure
|
12
|
%
|
|
25
|
%
|
(4
|
)%
|
21
|
%
|
21
|
%
|
|
|
(A)
|
Operating margin is calculated by dividing operating income by sales.
|
ADJUSTED EBITDA
We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, other non‑operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.
Below is a reconciliation of Income from Continuing Operations on a GAAP basis to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
31 March
|
31 March
|
|
2018
|
2017
|
2018
|
2017
|
Income from Continuing Operations
(A)
|
|
$423.6
|
|
|
$310.1
|
|
|
$586.3
|
|
|
$568.3
|
|
Add: Interest expense
|
30.4
|
|
30.5
|
|
60.2
|
|
60.0
|
|
Less: Other non-operating income (expense), net
|
11.1
|
|
5.3
|
|
20.9
|
|
5.1
|
|
Add: Income tax provision
|
56.2
|
|
94.5
|
|
348.0
|
|
172.9
|
|
Add: Depreciation and amortization
|
240.0
|
|
211.8
|
|
467.9
|
|
417.9
|
|
Add: Business separation costs
|
—
|
|
—
|
|
—
|
|
32.5
|
|
Add: Cost reduction and asset actions
|
—
|
|
10.3
|
|
—
|
|
60.3
|
|
Add: Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
32.5
|
|
—
|
|
Adjusted EBITDA
|
|
$739.1
|
|
|
$651.9
|
|
|
$1,474.0
|
|
|
$1,306.8
|
|
Change GAAP
|
|
|
|
|
Income from continuing operations change
|
|
$113.5
|
|
|
|
$18.0
|
|
|
Income from continuing operations % change
|
37
|
%
|
|
3
|
%
|
|
Change Non-GAAP
|
|
|
|
|
Adjusted EBITDA change
|
|
$87.2
|
|
|
|
$167.2
|
|
|
Adjusted EBITDA % change
|
13
|
%
|
|
13
|
%
|
|
|
|
(A)
|
Includes net income attributable to noncontrolling interests.
|
Below is a reconciliation of segment operating income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Segment
Total
|
GAAP MEASURE
|
|
|
|
|
|
|
Three Months Ended 31 March 2018
|
Operating income (loss)
|
|
$222.3
|
|
|
$116.7
|
|
|
$148.7
|
|
|
$12.1
|
|
|
($44.4
|
)
|
|
$455.4
|
|
Operating margin
|
24.3
|
%
|
20.8
|
%
|
26.7
|
%
|
|
|
21.1
|
%
|
Three Months Ended 31 March 2017
|
Operating income (loss)
|
|
$223.2
|
|
|
$88.6
|
|
|
$112.3
|
|
|
$22.7
|
|
|
($40.9
|
)
|
|
$405.9
|
|
Operating margin
|
25.1
|
%
|
21.4
|
%
|
25.8
|
%
|
|
|
20.5
|
%
|
Operating income (loss) change
|
|
($.9
|
)
|
|
$28.1
|
|
|
$36.4
|
|
|
($10.6
|
)
|
|
($3.5
|
)
|
|
$49.5
|
|
Operating income (loss) % change
|
—
|
%
|
32
|
%
|
32
|
%
|
(47
|
)%
|
(9
|
)%
|
12
|
%
|
Operating margin change
|
(80
|
) bp
|
(60
|
) bp
|
90
|
bp
|
|
|
60
|
bp
|
NON-GAAP MEASURE
|
|
|
|
|
|
|
Three Months Ended 31 March 2018
|
Operating income (loss)
|
|
$222.3
|
|
|
$116.7
|
|
|
$148.7
|
|
|
$12.1
|
|
|
($44.4
|
)
|
|
$455.4
|
|
Add: Depreciation and amortization
|
122.3
|
|
50.7
|
|
62.6
|
|
1.9
|
|
2.5
|
|
240.0
|
|
Add: Equity affiliates' income
|
16.9
|
|
11.1
|
|
15.4
|
|
.3
|
|
—
|
|
43.7
|
|
Adjusted EBITDA
|
|
$361.5
|
|
|
$178.5
|
|
|
$226.7
|
|
|
$14.3
|
|
|
($41.9
|
)
|
|
$739.1
|
|
Adjusted EBITDA margin
|
39.6
|
%
|
31.8
|
%
|
40.7
|
%
|
|
|
34.3
|
%
|
Three Months Ended 31 March 2017
|
Operating income (loss)
|
|
$223.2
|
|
|
$88.6
|
|
|
$112.3
|
|
|
$22.7
|
|
|
($40.9
|
)
|
|
$405.9
|
|
Add: Depreciation and amortization
|
116.0
|
|
41.6
|
|
49.3
|
|
1.7
|
|
3.2
|
|
211.8
|
|
Add: Equity affiliates' income
|
13.0
|
|
8.3
|
|
12.9
|
|
—
|
|
—
|
|
34.2
|
|
Adjusted EBITDA
|
|
$352.2
|
|
|
$138.5
|
|
|
$174.5
|
|
|
$24.4
|
|
|
($37.7
|
)
|
|
$651.9
|
|
Adjusted EBITDA margin
|
39.6
|
%
|
33.4
|
%
|
40.0
|
%
|
|
|
32.9
|
%
|
Adjusted EBITDA change
|
|
$9.3
|
|
|
$40.0
|
|
|
$52.2
|
|
|
($10.1
|
)
|
|
($4.2
|
)
|
|
$87.2
|
|
Adjusted EBITDA % change
|
3
|
%
|
29
|
%
|
30
|
%
|
(41
|
)%
|
(11
|
)%
|
13
|
%
|
Adjusted EBITDA margin change
|
—
|
|
(160
|
) bp
|
70
|
bp
|
|
|
140
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Segment
Total
|
GAAP MEASURE
|
|
|
|
|
|
|
Six Months Ended 31 March 2018
|
Operating income (loss)
|
|
$439.5
|
|
|
$221.2
|
|
|
$324.2
|
|
|
$21.6
|
|
|
($90.4
|
)
|
|
$916.1
|
|
Operating margin
|
24.1
|
%
|
20.5
|
%
|
27.0
|
%
|
|
|
21.0
|
%
|
Six Months Ended 31 March 2017
|
Operating income (loss)
|
|
$446.5
|
|
|
$178.6
|
|
|
$230.7
|
|
|
$30.9
|
|
|
($70.0
|
)
|
|
$816.7
|
|
Operating margin
|
25.5
|
%
|
21.9
|
%
|
26.4
|
%
|
|
|
21.1
|
%
|
Operating income (loss) change
|
|
($7.0
|
)
|
|
$42.6
|
|
|
$93.5
|
|
|
($9.3
|
)
|
|
($20.4
|
)
|
|
$99.4
|
|
Operating income (loss) % change
|
(2
|
)%
|
24
|
%
|
41
|
%
|
(30
|
)%
|
(29
|
)%
|
12
|
%
|
Operating margin change
|
(140
|
) bp
|
(140
|
) bp
|
60
|
bp
|
|
|
(10
|
) bp
|
NON-GAAP MEASURE
|
|
|
|
|
|
|
Six Months Ended 31 March 2018
|
Operating income (loss)
|
|
$439.5
|
|
|
$221.2
|
|
|
$324.2
|
|
|
$21.6
|
|
|
($90.4
|
)
|
|
$916.1
|
|
Add: Depreciation and amortization
|
240.1
|
|
99.8
|
|
119.4
|
|
3.5
|
|
5.1
|
|
467.9
|
|
Add: Equity affiliates' income
|
35.5
|
|
24.2
|
|
29.6
|
|
.7
|
|
—
|
|
90.0
|
|
Adjusted EBITDA
|
|
$715.1
|
|
|
$345.2
|
|
|
$473.2
|
|
|
$25.8
|
|
|
($85.3
|
)
|
|
$1,474.0
|
|
Adjusted EBITDA margin
|
39.2
|
%
|
32.0
|
%
|
39.4
|
%
|
|
|
33.7
|
%
|
Six Months Ended 31 March 2017
|
Operating income (loss)
|
|
$446.5
|
|
|
$178.6
|
|
|
$230.7
|
|
|
$30.9
|
|
|
($70.0
|
)
|
|
$816.7
|
|
Add: Depreciation and amortization
|
227.8
|
|
83.8
|
|
96.0
|
|
3.7
|
|
6.6
|
|
417.9
|
|
Add: Equity affiliates' income
|
27.7
|
|
17.8
|
|
26.4
|
|
.3
|
|
—
|
|
72.2
|
|
Adjusted EBITDA
|
|
$702.0
|
|
|
$280.2
|
|
|
$353.1
|
|
|
$34.9
|
|
|
($63.4
|
)
|
|
$1,306.8
|
|
Adjusted EBITDA margin
|
40.0
|
%
|
34.4
|
%
|
40.4
|
%
|
|
|
33.8
|
%
|
Adjusted EBITDA change
|
|
$13.1
|
|
|
$65.0
|
|
|
$120.1
|
|
|
($9.1
|
)
|
|
($21.9
|
)
|
|
$167.2
|
|
Adjusted EBITDA % change
|
2
|
%
|
23
|
%
|
34
|
%
|
(26
|
)%
|
(35
|
)%
|
13
|
%
|
Adjusted EBITDA margin change
|
(80
|
) bp
|
(240
|
) bp
|
(100
|
) bp
|
|
|
(10
|
) bp
|
Below is a reconciliation of segment total operating income to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
31 March
|
31 March
|
Operating Income
|
2018
|
2017
|
2018
|
2017
|
Segment total
|
|
$455.4
|
|
|
$405.9
|
|
|
$916.1
|
|
|
$816.7
|
|
Business separation costs
|
—
|
|
—
|
|
—
|
|
(32.5
|
)
|
Cost reduction and asset actions
|
—
|
|
(10.3
|
)
|
—
|
|
(60.3
|
)
|
Consolidated Total
|
|
$455.4
|
|
|
$395.6
|
|
|
$916.1
|
|
|
$723.9
|
|
Below is a reconciliation of segment total
equity affiliates' income
to consolidated
equity affiliates' income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
31 March
|
31 March
|
Equity Affiliates' Income
|
2018
|
2017
|
2018
|
2017
|
Segment total
|
|
$43.7
|
|
|
$34.2
|
|
|
$90.0
|
|
|
$72.2
|
|
Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
(32.5
|
)
|
—
|
|
Consolidated Total
|
|
$43.7
|
|
|
$34.2
|
|
|
$57.5
|
|
|
$72.2
|
|
INCOME TAXES
The tax impact on our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. For additional discussion on the fiscal year 2018 non-GAAP tax adjustments, including the impact of
the Tax Act, refer to Note
17
,
Income Taxes
, to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
Three Months Ended
31 March
|
|
Six Months Ended
31 March
|
|
2018
|
2017
|
|
2018
|
2017
|
Income Tax Provision—GAAP
|
|
$56.2
|
|
|
$94.5
|
|
|
|
$348.0
|
|
|
$172.9
|
|
Income From Continuing Operations Before Taxes—GAAP
|
|
$479.8
|
|
|
$404.6
|
|
|
|
$934.3
|
|
|
$741.2
|
|
Effective Tax Rate—GAAP
|
11.7
|
%
|
23.4
|
%
|
|
37.2
|
%
|
23.3
|
%
|
Income Tax Provision—GAAP
|
|
$56.2
|
|
|
$94.5
|
|
|
|
$348.0
|
|
|
$172.9
|
|
Business separation costs
|
—
|
|
—
|
|
|
—
|
|
3.7
|
|
Tax costs associated with business separation
|
—
|
|
—
|
|
|
—
|
|
(2.7
|
)
|
Cost reduction and asset actions
|
—
|
|
3.1
|
|
|
—
|
|
11.9
|
|
Pension settlement loss
|
—
|
|
1.5
|
|
|
—
|
|
1.5
|
|
Tax reform repatriation
|
—
|
|
—
|
|
|
(420.5
|
)
|
—
|
|
Tax reform rate change and other
|
—
|
|
—
|
|
|
214.0
|
|
—
|
|
Tax restructuring benefit
|
38.8
|
|
—
|
|
|
38.8
|
|
—
|
|
Income Tax Provision—Non-GAAP Measure
|
|
$95.0
|
|
|
$99.1
|
|
|
|
$180.3
|
|
|
$187.3
|
|
Income From Continuing Operations Before Taxes—GAAP
|
|
$479.8
|
|
|
$404.6
|
|
|
|
$934.3
|
|
|
$741.2
|
|
Business separation costs
|
—
|
|
—
|
|
|
—
|
|
30.2
|
|
Cost reduction and asset actions
|
—
|
|
10.3
|
|
|
—
|
|
60.3
|
|
Pension settlement loss
|
—
|
|
4.1
|
|
|
—
|
|
4.1
|
|
Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
|
32.5
|
|
—
|
|
Income From Continuing Operations Before Taxes—Non-GAAP Measure
|
|
$479.8
|
|
|
$419.0
|
|
|
|
$966.8
|
|
|
$835.8
|
|
Effective Tax Rate—Non-GAAP Measure
|
19.8
|
%
|
23.7
|
%
|
|
18.6
|
%
|
22.4
|
%
|
PENSION BENEFITS
As noted in Note
2
,
New Accounting Guidance
, to the consolidated financial statements,
we early adopted guidance on the presentation of net periodic pension and postretirement benefit cost during the first quarter of fiscal year 2018. The amendments require that the service cost component of the net periodic benefit cost be presented in the same line items as other compensation costs arising from services rendered by employees during the period. The non-service related costs are presented outside of operating income in "Other non-operating income (expense), net."
For the
six
months ended
31 March 2018
and
2017
, total company net periodic pension cost was
$25.2
and
$36.2
, respectively. We recognized service-related costs of $26.3 and $27.4, respectively, on our consolidated income statements within operating income. The non-service benefit of $1.1 and cost of $8.8 were included in "Other non-operating income (expense), net" for the
six
months ended
31 March 2018
and
2017
, respectively. The decrease in pension expense in fiscal year
2018
results from lower loss amortization primarily due to favorable asset experience and the effects of the disposition of the former Materials Technologies segment.
The costs capitalized in fiscal year
2018
and
2017
were not material.
For the
six
months ended
31 March 2018
and
2017
, we recognized a pension settlement
loss
of
$3.3
and
$5.8
, respectively, in "Other non-operating income (expense), net" on our consolidated income statements to accelerate recognition of a portion of actuarial gains and losses deferred in accumulated other comprehensive loss. The pension settlement loss in fiscal year
2018
was associated with the U.S. Supplementary Pension Plan. The pension settlement loss in fiscal year
2017
resulted from the disposition of the former Materials Technologies segment. We expect total pension settlement losses of approximately $6 in fiscal year
2018
.
Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. For the
six
months ended
31 March 2018
and
2017
, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were
$35.9
and
$40.8
, respectively. Total contributions for fiscal
2018
are expected to be approximately
$50
to
$70
. During fiscal
2017
, total contributions were
$64.1
.
Refer to Note
11
,
Retirement Benefits
, to the consolidated financial statements for details on pension cost and cash contributions.
LIQUIDITY AND CAPITAL RESOURCES
We have consistent access to commercial paper markets, and our cash balance and cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future.
As of
31 March 2018
, we had $1,408.4 of foreign cash and cash items compared to total cash and cash items of
$3,066.9
. As a result of the Tax Act, we currently do not expect that a significant portion of the earnings of our foreign subsidiaries and affiliates will be subject to U.S. income tax upon subsequent repatriation to the United States. Depending on the country in which the subsidiaries and affiliates reside, the repatriation of these earnings may be subject to foreign withholding and other taxes.
Operating Activities
For the first
six
months of
2018
, cash provided by operating activities was
$1,110.1
. Income from continuing operations of
$572.0
was adjusted for items including depreciation and amortization, deferred income taxes, impacts from the Tax Act, undistributed earnings of unconsolidated affiliates, share-based compensation, and noncurrent capital lease receivables. The tax reform repatriation adjustment of $310.3 represents our obligation for the deemed repatriation tax resulting from the Tax Act and is payable over a period of eight years. Undistributed earnings of unconsolidated affiliates includes $32.5 of expense resulting from the Tax Act. See Note 17, Income Taxes, to the consolidated financial statements for additional information. The working capital accounts were a
use
of cash of $260.8, primarily driven by $260.4 from payables and accrued liabilities. The use of cash within payables and accrued liabilities is primarily driven by a decrease in customer advances of $68.1, primarily related to sale of equipment activity, a $47.6 decrease in accrued incentive compensation due to payments on the 2017 plan, and $23.8 of severance payments.
For the first six months of 2017, cash provided by operating activities was $861.2, which includes income from continuing operations of $556.0. The working capital accounts were a use of cash of $149.7, primarily driven by payables and accrued liabilities, trade receivables, and other working capital, partially offset by other receivables. The decrease in payables and accrued liabilities of $178.6 was primarily driven by a decrease in customer advances of $85.1 related to our joint venture in Jazan, Saudi Arabia, and a $75.8 decrease in accrued incentive compensation due to payments on the 2016 plan. The decrease in trade receivables of $53.8 includes amounts billed to our joint venture in Jazan, Saudi Arabia. Other working capital was a use of $51.4, primarily driven by payments for accrued income taxes. The decrease in other receivables, which resulted in a source of $118.4, was primarily due to the maturity of forward foreign exchange contracts that hedged intercompany loans.
We estimate that cash paid for taxes, net of refunds, on a continuing operations basis was
$153.7
and
$275.0
for the
six
months ended
31 March 2018
and
2017
, respectively.
Investing Activities
For the first
six
months of
2018
, cash used for investing activities was
$544.9
. Capital expenditures for plant and equipment were
$572.5
. Cash paid for acquisitions, net of cash acquired, was
$271.4
. See Note 6, Business Combinations, to the consolidated financial statements for further details. Net proceeds from the maturities of short-term investments was a source of cash of $267.2.
For the first six months of 2017, cash used for investing activities was $1,952.4. Purchases of investments of $1,823.2 include time deposits, certificates of deposit, and repurchase agreement funds with original maturities greater than 90 days and less than one year. Proceeds from investments of $400.0 resulted from an early call on an instrument which had an original term greater than 90 days but less than one year. These proceeds were reinvested in a new short-term investment, which is included in the purchase of investments. Capital expenditures for plant and equipment were $532.2.
Capital expenditures are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
31 March
|
|
|
2018
|
|
2017
|
Additions to plant and equipment
|
|
|
$572.5
|
|
|
|
$532.2
|
|
Acquisitions, less cash acquired
|
|
271.4
|
|
|
—
|
|
Investment in and advances to unconsolidated affiliates
|
|
—
|
|
|
8.9
|
|
Capital expenditures on a GAAP basis
|
|
|
$843.9
|
|
|
|
$541.1
|
|
Capital lease expenditures
(A)
|
|
12.3
|
|
|
5.8
|
|
Capital expenditures on a Non-GAAP basis
|
|
|
$856.2
|
|
|
|
$546.9
|
|
|
|
(A)
|
We utilize a non-GAAP measure in the computation of capital expenditures and include spending associated with facilities accounted for as capital leases. Certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases, and such spending is reflected as a use of cash within cash provided by operating activities if the arrangement qualifies as a capital lease. The presentation of this non-GAAP measure is intended to enhance the usefulness of information by providing a measure that our management uses internally to evaluate and manage our expenditures.
|
We expect capital expenditures of approximately
$1,800
to
$2,000
on a GAAP and non-GAAP basis in fiscal year
2018
. This range includes our investment in our joint venture, Air Products Lu’an (Changzhi) Co., Ltd., with Lu’An Clean Energy Company, which closed on 26 April 2018. See Note 6, Business Combinations, to the consolidated financial statements for additional information.
Sales backlog represents our estimate of revenue to be recognized in the future on sale of equipment orders and related process technologies that are under firm contracts. The sales backlog for the Company at
31 March 2018
was $317, compared to $481 at
30 September 2017
.
Financing Activities
For the first
six
months of
2018
, cash used for financing activities was
$815.6
. This consisted primarily of repayment on long-term debt of
$409.2
and dividend payments to shareholders of
$415.5
. Payments on long-term debt primarily related to the repayment of a 1.2% U.S. Senior Note of $400.0 that matured on 16 October 2017.
For the first six months of 2017, cash used for financing activities was $1,661.8. This consisted primarily of repayments of commercial paper and short-term borrowings of $816.6, payments on long-term debt of $469.7, and dividend payments to shareholders of $374.0. Payments on long-term debt primarily consisted of the repayment of a 4.625% Eurobond of €300 million ($317.2) that matured on 15 March 2017 and $138.0 for the repayment of industrial revenue bonds.
Discontinued Operations
For the first six months of 2017, cash flows of discontinued operations primarily include impacts associated with the spin-off of EMD as Versum on 1 October 2016 and the sale of PMD on 3 January 2017. Cash used for operating activities of $520.8 was primarily driven by taxes paid on the gain on sale of PMD. Cash provided by investing activities of $3,750.6 primarily resulted from the proceeds on the sale of PMD. Cash provided by financing activities resulted from a $69.5 receipt of cash from Versum related to finalization of the spin-off. Refer to Note 3, Discontinued Operations, and Note 4, Materials Technologies Separation, to the consolidated financial statements for additional information.
Financing and Capital Structure
Capital needs were satisfied primarily with cash from operations. Total debt at
31 March 2018
and
30 September 2017
, expressed as a percentage of total capitalization (total debt plus total equity), was
25.0%
and
28.0%
, respectively. Total debt decreased from
$3,962.8
at
30 September 2017
to
$3,566.5
at
31 March 2018
, primarily due to the repayment of the 1.2% U.S. Senior Note.
On 31 March 2017, we entered into a five-year
$2,500.0
revolving credit agreement with a syndicate of banks (the “2017 Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. The 2017 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. The Company’s only financial covenant is a maximum ratio of total debt to total capitalization (total debt plus total equity) no greater than 70%. No borrowings were outstanding under the 2017 Credit Agreement as of
31 March 2018
.
Commitments totaling $16.6 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at
31 March 2018
.
As of
31 March 2018
, we were in compliance with all of the financial and other covenants under our debt agreements.
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. During the first
six
months of fiscal year
2018
, we did not purchase any of our outstanding shares. At
31 March 2018
, $485.3 in share repurchase authorization remained.
CONTRACTUAL OBLIGATIONS
We are obligated to make future payments under various contracts, such as debt agreements, lease agreements, unconditional purchase obligations, and other long-term obligations. As discussed in Note
17
,
Income Taxes
, to the consolidated financial statements, our income tax provision includes an expense for a deemed repatriation tax on unremitted foreign earnings resulting from the Tax Act that was enacted during the first quarter of fiscal year 2018. Of the expense,
$263
is recorded in noncurrent liabilities and will be paid over eight years beginning in fiscal year 2019.
Our unconditional purchase obligations for helium purchases were approximately $6,500 as of 31 March 2018. The majority of these obligations occur after fiscal year 2022. Helium purchases include crude feedstock supply to multiple helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-if-tendered provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in the energy sector are longer than those in merchant, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.
On 10 September 2017, Air Products signed an agreement to form a joint venture, Air Products Lu’an (Changzhi) Co., Ltd. ("the JV"), with Lu’An Clean Energy Company ("Lu'An"). Air Products has already invested $300 to build, own, and operate four large air separation units to supply the Changzhi City site. Under the agreement, Air Products will contribute the air separation units and invest an additional $500 to acquire gasification and syngas clean-up assets from Lu'An. Air Products will own 60% of the JV and will consolidate its financial results. On 26 April 2018, we completed the formation of the JV and paid cash of approximately
1.7
billion RMB (approximately
$270
). We expect to make a final payment of approximately
1.5
billion RMB (approximately
$230
as of 26 April 2018) in the fourth quarter of 2018. See Note 6, Business Combinations, to the consolidated financial statements for additional information.
Other than the above, there have been no material changes to our contractual obligations since
30 September 2017
.
COMMITMENTS AND CONTINGENCIES
Refer to Note
12
,
Commitments and Contingencies
, to the consolidated financial statements for information concerning our commitments and contingencies, including litigation and environmental matters.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to off-balance sheet arrangements since
30 September 2017
. We are not a primary beneficiary in any material variable interest entity. Our off-balance sheet arrangements are not reasonably likely to have a material impact on financial condition, changes in financial condition, results of operations, or liquidity.
RELATED PARTY TRANSACTIONS
Our principal related parties are equity affiliates operating in the industrial gas business. In 2015, we entered into a long-term sale of equipment contract to engineer, procure, and construct industrial gas facilities with a 25%-owned joint venture for Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia. The agreement included terms that are consistent with those that we believe would have been negotiated at an arm’s length with an independent party. Sales related to this contract are included in the results of our Industrial Gases – Global segment. During the
three and six
months ended
31 March 2018
, sales were approximately
$60
and
$150
, respectively, related to this contract. During the
three and six
months ended
31 March 2017
, sales were approximately
$170
and
$280
, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of our financial condition and results of operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other than those detailed below and in Note
2
,
New Accounting Guidance
, to the consolidated financial statements, there have been no changes in accounting policy or accounting estimate in the current period that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.
Revenue Recognition
Revenue from equipment sale contracts is recorded primarily using the percentage-of-completion method. Changes in estimates on projects accounted for under the percentage-of-completion method favorably impacted operating income by approximately
$10
and
$12
for the three months ended
31 March 2018
and
2017
, respectively.
We assess the performance of our sale of equipment projects as they progress. Our earnings could be positively or negatively impacted by changes to our forecast of revenues and costs on these projects in the future.
Income Taxes
On 22 December 2017, the United States enacted the Tax Act, which had a significant impact on our consolidated financial statements for the six months ended 31 March 2018. The impacts reflect provisional amounts for which accounting was incomplete but a reasonable estimate could be determined. Updates to the estimates are permissible for a period of no greater than one year. Refer to Note
17
, Income Taxes, to the consolidated financial statements for additional information.
NEW ACCOUNTING GUIDANCE
See Note
2
,
New Accounting Guidance
, to the consolidated financial statements for information concerning the implementation and impact of new accounting guidance.
FORWARD-LOOKING STATEMENTS
This quarterly report contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about business outlook. These forward-looking statements are based on management’s reasonable expectations and assumptions as of the date of this report. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, global or regional economic conditions and supply and demand dynamics in market segments into which the Company sells; political risks, including the risks of unanticipated government actions; acts of war or terrorism; significant fluctuations in interest rates and foreign currencies from that currently anticipated; future financial and operating performance of major customers; unanticipated contract terminations or customer cancellations or postponement of projects and sales; our ability to execute the projects in our backlog; asset impairments due to economic conditions or specific events; the impact of price fluctuations in natural gas and disruptions in markets and the economy due to oil price volatility; costs and outcomes of litigation or regulatory investigations; the success of productivity and operational improvement programs; the timing, impact, and other uncertainties of future acquisitions or divestitures, including reputational impacts; the Company's ability to implement and operate with new technologies; the impact of changes in environmental, tax or other legislation, economic sanctions and regulatory activities in jurisdictions in which the Company and its affiliates operate; and other risk factors described in the Company’s Form 10-K for its fiscal year ended
30 September 2017
. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this report to reflect any change in the Company’s assumptions, beliefs or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.