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
third quarter and first nine 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 46-51
. Descriptions of the excluded items appear on
pages 34-35 and pages 41-42
.
THIRD
QUARTER
2018
VS.
THIRD
QUARTER
2017
THIRD
QUARTER
2018
IN SUMMARY
|
|
•
|
Sales of
$2,259.0
increased
6%
, or
$137.1
, from higher volumes of
3%
across the regional industrial gases segments and favorable currency impacts of
3%
. Favorable pricing of
1%
was offset by lower energy and natural gas cost pass-through to customers.
|
|
|
•
|
Operating income of
$515.8
increased
99%
, or
$257.1
, and operating margin of
22.8%
increased
1,060
basis points (bp). On a non-GAAP basis, adjusted operating income of
$515.8
increased
11%
, or
$52.3
, and adjusted operating margin of
22.8%
increased
100 bp
.
|
|
|
•
|
Income from continuing operations of
$430.7
increased
313%
, or
$326.5
, and diluted earnings per share of
$1.95
increased
315%
, or
$1.48
. On a non-GAAP basis, adjusted income from continuing operations of
$430.7
increased
19%
, or
$67.7
, and adjusted diluted earnings per share of
$1.95
increased
18%
, or
$.30
. A summary table of changes in diluted earnings per share is presented below.
|
|
|
•
|
Adjusted EBITDA of
$819.5
increased
13%
, or
$96.5
. Adjusted EBITDA margin of
36.3%
increased
220
bp.
|
|
|
•
|
We completed the formation of a syngas supply joint venture with Lu'An, including the acquisition of their gasification and syngas clean-up assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Diluted Earnings per Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
30 June
|
|
Increase
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
Diluted Earnings per Share
|
|
|
|
|
|
|
Net income
|
|
|
$2.15
|
|
|
|
$.46
|
|
|
|
$1.69
|
|
Income (Loss) from discontinued operations
|
|
.20
|
|
|
(.01
|
)
|
|
.21
|
|
Income from Continuing Operations – GAAP Basis
|
|
|
$1.95
|
|
|
|
$.47
|
|
|
|
$1.48
|
|
Operating Income Impact (after-tax)
|
|
|
|
|
|
|
Underlying business
|
|
|
|
|
|
|
Volume
|
|
|
|
|
|
|
$.18
|
|
Price/raw materials
|
|
|
|
|
|
.04
|
|
Costs
|
|
|
|
|
|
(.08
|
)
|
Currency
|
|
|
|
|
|
.05
|
|
Cost reduction and asset actions
|
|
|
|
|
|
.14
|
|
Goodwill and intangible asset impairment charge
|
|
|
|
|
|
.70
|
|
Total Operating Income Impact (after-tax)
|
|
|
|
|
|
|
$1.03
|
|
Other Impact (after-tax)
|
|
|
|
|
|
|
Equity affiliates' income
|
|
|
|
|
|
|
$.05
|
|
Equity method investment impairment charge
|
|
|
|
|
|
.36
|
|
Interest expense
|
|
|
|
|
|
(.02
|
)
|
Other non-operating income (expense), net
|
|
|
|
|
|
.03
|
|
Noncontrolling interests
|
|
|
|
|
|
(.04
|
)
|
Income tax
|
|
|
|
|
|
.12
|
|
Tax benefit associated with business separation
|
|
|
|
|
|
(.04
|
)
|
Weighted average diluted shares
|
|
|
|
|
|
(.01
|
)
|
Total Other Impact (after-tax)
|
|
|
|
|
|
|
$.45
|
|
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis
|
|
|
|
|
|
|
$1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
30 June
|
|
Increase
|
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
|
Income from Continuing Operations – GAAP Basis
|
|
|
$1.95
|
|
|
|
$.47
|
|
|
|
$1.48
|
|
Tax benefit associated with business separation
|
|
—
|
|
|
(.04
|
)
|
|
.04
|
|
Cost reduction and asset actions
|
|
—
|
|
|
.14
|
|
|
(.14
|
)
|
Goodwill and intangible asset impairment charge
|
|
—
|
|
|
.70
|
|
|
(.70
|
)
|
Equity method investment impairment charge
|
|
—
|
|
|
.36
|
|
|
(.36
|
)
|
Pension settlement loss
|
|
—
|
|
|
.02
|
|
|
(.02
|
)
|
Income from Continuing Operations – Non-GAAP Basis
|
|
|
$1.95
|
|
|
|
$1.65
|
|
|
|
$.30
|
|
RESULTS OF OPERATIONS
Discussion of Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
Change
|
Sales
|
|
|
$2,259.0
|
|
|
|
$2,121.9
|
|
|
|
$137.1
|
|
|
6
|
%
|
Operating income
|
|
515.8
|
|
|
258.7
|
|
|
257.1
|
|
|
99
|
%
|
Operating margin
|
|
22.8
|
%
|
|
12.2
|
%
|
|
|
|
|
1,060
|
bp
|
Equity affiliates’ income
|
|
58.1
|
|
|
(36.9
|
)
|
|
95.0
|
|
|
257
|
%
|
Income from continuing operations
|
|
430.7
|
|
|
104.2
|
|
|
326.5
|
|
|
313
|
%
|
Non-GAAP Basis
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
$819.5
|
|
|
|
$723.0
|
|
|
|
$96.5
|
|
|
13
|
%
|
Adjusted EBITDA margin
|
|
36.3
|
%
|
|
34.1
|
%
|
|
|
|
220 bp
|
|
Adjusted operating income
|
|
515.8
|
|
|
463.5
|
|
|
52.3
|
|
|
11
|
%
|
Adjusted operating margin
|
|
22.8
|
%
|
|
21.8
|
%
|
|
|
|
100 bp
|
|
Adjusted equity affiliates' income
|
|
58.1
|
|
|
42.6
|
|
|
15.5
|
|
|
36
|
%
|
Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
3
|
%
|
Price
|
1
|
%
|
Energy and natural gas cost pass-through
|
(1
|
)%
|
Currency
|
3
|
%
|
Total Consolidated Change
|
6
|
%
|
Sales of
$2,259.0
increased
6%
, or
$137.1
. Underlying sales increased
4%
from higher volumes of
3%
and higher pricing of
1%
. Volumes were higher across all regional Industrial Gases segments, primarily due to new project onstreams, 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 and Industrial Gases – EMEA segments, primarily driven by improved merchant pricing in China and Europe. 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 3%
.
Operating Income and Margin
Operating income of
$515.8
increased
99%
, or
$257.1
, due to the prior year goodwill and intangible asset impairment charge of $162, higher volumes of $52,
lower
cost reduction and asset actions of
$43
, favorable currency impacts of $13, and favorable pricing, net of energy, fuel, and raw material costs, of $13, partially offset by unfavorable net operating costs of $26. The increase in net operating costs was primarily driven by higher planned maintenance costs and lower cost reimbursement, including costs for transition services. Operating margin of
22.8%
increased
1,060
bp, primarily due to the goodwill and intangible asset impairment charge and cost reduction and asset actions in the prior year.
On a non-GAAP basis, adjusted operating income of
$515.8
increased
11%
, or
$52.3
, 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
22.8%
increased
100 bp
, primarily due to the higher volumes, partially offset by higher net operating costs.
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
$819.5
increased
13%
, or
$96.5
, primarily due to higher volumes, favorable currency impacts, higher income from regional industrial gases equity affiliates, and positive pricing, partially offset by higher operating costs. Adjusted EBITDA margin of
36.3%
increased
220
bp, primarily due to higher volumes and higher income from regional industrial gases equity affiliates, partially offset by higher operating costs.
Equity Affiliates' Income (Loss)
Equity affiliates' income of
$58.1
increased
$95.0
from a loss of
$36.9
in the third quarter of fiscal year 2017. The prior year loss included a noncash impairment charge of
$79.5
(
$.36
per share) on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%-owned equity affiliate in our Industrial Gases – EMEA segment. On a non-GAAP basis, equity affiliates' income of
$58.1
increased
$15.5
, or
36%
, primarily driven by higher volumes and favorable currency impacts.
Cost of Sales and Gross Margin
Cost of sales of
$1,545.4
increased
$59.4
, or
4%
, due to unfavorable currency impacts of $53, higher other costs, including planned maintenance, of $24, and higher costs attributable to sales volumes of $5, partially offset by lower energy and natural gas cost pass-through to customers of $23. Gross margin of
31.6%
increased
160
bp primarily due to higher volumes and favorable pricing, partially offset by higher other costs.
Selling and Administrative Expense
Selling and administrative expense of
$188.6
increased
$4.5
, or
2.0%
, primarily driven by unfavorable currency impacts, partially offset by lower costs, including incentive compensation. Selling and administrative expense, as a percentage of sales,
decreased
from
8.7%
to
8.3%
.
Research and Development
Research and development expense of
$15.0
increased
$.4
. For both the three months ended
30 June 2018
and
2017
, research and development expense, as a percentage of sales, was
.7%
.
Cost Reduction and Asset Actions
For the three months ended
30 June 2017
, we recognized an expense of
$42.7
(
$30.0
attributable to Air Products after-tax, or
$.14
per share), which includes
$33.2
for asset actions and
$9.5
for severance and other benefits. Refer to Note
5
, Cost Reduction and Asset Actions, to the consolidated financial statements for additional details.
Goodwill and Intangible Asset Impairment Charge
During the third quarter of fiscal year 2017, we determined that the goodwill and indefinite-lived intangible assets (primarily acquired trade names) associated with our Latin America reporting unit of our Industrial Gases – Americas segment were impaired. We recorded a noncash impairment charge of
$162.1
(
$154.1
attributable to Air Products, after-tax, or
$.70
per share), which was driven by lower economic growth and profitability in the region. Refer to Note
9
, Goodwill, and Note
10
, Intangible Assets, to the consolidated financial statements for additional details.
Other Income (Expense), Net
Other income (expense), net of
$5.8
decreased
$20.5
, or
78.0%
, due to lower income from transition services agreements with Versum and Evonik Industries AG (Evonik) and unfavorable foreign exchange impacts.
Interest Expense
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
30 June
|
|
2018
|
|
2017
|
Interest incurred
|
|
$42.4
|
|
|
|
$32.9
|
|
Less: capitalized interest
|
7.5
|
|
|
3.1
|
|
Interest expense
|
|
$34.9
|
|
|
|
$29.8
|
|
Interest incurred
increased
$9.5
, primarily due to project financing associated with the Lu'An joint venture. The change in capitalized interest was driven by an increase in the carrying value of projects under construction.
Other Non-Operating Income (Expense), Net
Other non-operating income (expense), net of
$12.8
increased
$9.1
due to lower pension expense and higher interest income on short-term investments. The prior year pension expense included settlement losses of $5.5 (
$3.4
after-tax, or
$.02
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
19.4%
and
45.6%
in the
third
quarter of fiscal year
2018
and
2017
, respectively. The effective tax rate in the prior year was higher primarily due to the impact of a goodwill impairment charge of $145.3 in our Latin America reporting unit (LASA) and an impairment of $79.5 of an equity method investment for which no tax benefits were available. We estimate that the lower U.S. federal tax rate and other impacts of the U.S. Tax Cuts and Jobs Act ("the Tax Act") reduced our effective tax rate by approximately 3.2% for the three months ended
30 June 2018
. In addition, the current year rate was impacted by a benefit of $9.1 related to a final foreign tax audit settlement.
On a non-GAAP basis, the adjusted effective tax rate
decreased
from
24.0%
in fiscal year
2017
to
19.4%
in fiscal year
2018
, primarily due to the impacts of the Tax Act and the tax audit settlement.
Refer to Note
19
, Income Taxes, to the consolidated financial statements for additional information.
Discontinued Operations
For the three months ended
30 June 2018
, income from discontinued operations, net of tax, on the consolidated income statements was
$43.2
. During the third quarter of fiscal year 2018, we recorded an income tax benefit of $29.6, primarily resulting from the resolution of uncertain tax positions taken in conjunction with the disposition of our former European Homecare business in fiscal year 2012. In addition, we recorded a before-tax benefit of $13.6 primarily resulting from the resolution of certain post-closing adjustments associated with the sale of our former Performance Materials Division (PMD).
For the three months ended 30 June 2017, the loss from discontinued operations, net of tax, on the consolidated income statements was
$2.3
. The loss primarily relates to Energy-from-Waste (EfW) project exit activities and administrative costs.
Refer to Note
3
,
Discontinued Operations
, to the consolidated financial statements for additional information.
Segment Analysis
Industrial Gases – Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$948.7
|
|
|
|
$930.1
|
|
|
|
$18.6
|
|
|
2%
|
Operating income
|
|
237.1
|
|
|
234.9
|
|
|
2.2
|
|
|
1%
|
Operating margin
|
|
25.0
|
%
|
|
25.3
|
%
|
|
|
|
(30 bp)
|
Equity affiliates’ income
|
|
24.1
|
|
|
14.1
|
|
|
10.0
|
|
|
71%
|
Adjusted EBITDA
|
|
381.7
|
|
|
366.0
|
|
|
15.7
|
|
|
4%
|
Adjusted EBITDA margin
|
|
40.2
|
%
|
|
39.4
|
%
|
|
|
|
80 bp
|
Industrial Gases – Americas Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
6
|
%
|
Price
|
—
|
%
|
Energy and natural gas cost pass-through
|
(4
|
)%
|
Currency
|
—
|
%
|
Total Industrial Gases – Americas Sales Change
|
2
|
%
|
Sales of
$948.7
increased
2%
, or
$18.6
. Underlying sales
were up 6%
from higher volumes as
pricing was flat
. The volume increase was primarily driven by higher hydrogen volumes in the U.S. Gulf Coast and a new plant onstream. Merchant volumes were positive but were partially offset by a contract termination that occurred during the fourth quarter of fiscal year 2017. Lower energy and natural gas cost pass-through to customers
decreased sales by 4%
. Currency
was flat
versus the prior year.
Industrial Gases – Americas Operating Income and Margin
Operating income of
$237.1
increased
1%
, or
$2.2
, as favorable volumes of $37 and favorable currency impacts of $2 were mostly offset by higher costs of $31 and lower price, net of power and fuel costs, of $6. The higher costs were primarily driven by higher planned maintenance costs. Operating margin of
25.0%
decreased
30
bp, primarily due to unfavorable cost performance, mostly offset by higher volumes and lower energy and natural gas cost pass-through to customers.
Industrial Gases – Americas Equity Affiliates’ Income
Equity affiliates’ income of
$24.1
increased
$10.0
primarily due to volume growth.
Industrial Gases – Europe, Middle East, and Africa (EMEA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$561.1
|
|
|
|
$451.7
|
|
|
|
$109.4
|
|
|
24%
|
Operating income
|
|
118.8
|
|
|
96.2
|
|
|
22.6
|
|
|
23%
|
Operating margin
|
|
21.2
|
%
|
|
21.3
|
%
|
|
|
|
(10 bp)
|
Equity affiliates’ income
|
|
17.5
|
|
|
15.7
|
|
|
1.8
|
|
|
11%
|
Adjusted EBITDA
|
|
186.1
|
|
|
157.0
|
|
|
29.1
|
|
|
19%
|
Adjusted EBITDA margin
|
|
33.2
|
%
|
|
34.8
|
%
|
|
|
|
(160 bp)
|
Industrial Gases – EMEA Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
12
|
%
|
Price
|
3
|
%
|
Energy and natural gas cost pass-through
|
2
|
%
|
Currency
|
7
|
%
|
Total Industrial Gases – EMEA Sales Change
|
24
|
%
|
Sales of
$561.1
increased
24%
, or
$109.4
. Underlying sales
were up 15%
from
higher volumes of 12%
and
higher pricing of 3%
. The volume increase was primarily driven by a new hydrogen plant in India and base merchant business growth. The pricing improvement was primarily driven by packaged gases. Energy and natural gas cost pass-through to customers
increased sales by 2%
versus the prior year. Favorable currency impacts, primarily from the Euro and British Pound Sterling,
increased sales by 7%
.
Industrial Gases – EMEA Operating Income and Margin
Operating income of
$118.8
increased
23%
, or
$22.6
, due to higher volumes of $11, favorable currency impacts of $7, and favorable pricing, net of power and fuel costs, of $5. Operating margin of
21.2%
decreased
10
bp.
Industrial Gases – EMEA Equity Affiliates’ Income
Equity affiliates’ income of
$17.5
increased
$1.8
primarily due to favorable pricing.
Industrial Gases – Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$623.8
|
|
|
|
$538.3
|
|
|
|
$85.5
|
|
|
16%
|
Operating income
|
|
185.5
|
|
|
149.5
|
|
|
36.0
|
|
|
24%
|
Operating margin
|
|
29.7
|
%
|
|
27.8
|
%
|
|
|
|
190 bp
|
Equity affiliates’ income
|
|
15.1
|
|
|
12.5
|
|
|
2.6
|
|
|
21%
|
Adjusted EBITDA
|
|
270.1
|
|
|
211.6
|
|
|
58.5
|
|
|
28%
|
Adjusted EBITDA margin
|
|
43.3
|
%
|
|
39.3
|
%
|
|
|
|
400 bp
|
Industrial Gases – Asia Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
6
|
%
|
Price
|
4
|
%
|
Energy and natural gas cost pass-through
|
—
|
%
|
Currency
|
6
|
%
|
Total Industrial Gases – Asia Sales Change
|
16
|
%
|
Sales of
$623.8
increased
16%
, or
$85.5
. Underlying sales
were up 10%
from
higher volumes of 6%
and
higher pricing of 4%
. The volume increase was primarily driven by new plant onstreams, base merchant business growth, and acquisitions, partially offset by the impact from short-term sale of equipment activity in the prior year. Pricing improved across Asia driven primarily by the China merchant market. Energy and natural gas cost pass-through to customers
was flat
versus the prior year. Favorable currency impacts, primarily from the Chinese Renminbi,
increased sales by 6%
.
Industrial Gases – Asia Operating Income and Margin
Operating income of
$185.5
increased
24%
, or
$36.0
, due to favorable price, net of power costs, of $13, higher volumes of $10, favorable currency impacts of $9, and lower operating costs of $4. Operating margin of
29.7%
increased
190
bp primarily due to favorable price, net of power costs, and cost performance.
Industrial Gases – Asia Equity Affiliates’ Income
Equity affiliates’ income of
$15.1
increased
$2.6
, primarily due to plant maintenance costs in the prior year.
Industrial Gases – Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$101.1
|
|
|
|
$187.4
|
|
|
|
($86.3
|
)
|
|
(46)%
|
Operating income
|
|
19.8
|
|
|
27.8
|
|
|
(8.0
|
)
|
|
(29)%
|
Adjusted EBITDA
|
|
23.5
|
|
|
30.4
|
|
|
(6.9
|
)
|
|
(23)%
|
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
$101.1
decreased
46%
, or
$86.3
. 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
$19.8
decreased
29%
, or
$8.0
, 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 are substantially complete.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$24.3
|
|
|
|
$14.4
|
|
|
|
$9.9
|
|
|
69%
|
Operating loss
|
|
(45.4
|
)
|
|
(44.9
|
)
|
|
(.5
|
)
|
|
(1)%
|
Adjusted EBITDA
|
|
(41.9
|
)
|
|
(42.0
|
)
|
|
.1
|
|
|
—%
|
Corporate and other Sales and Operating Loss
Sales of
$24.3
increased
$9.9
, primarily due to higher liquefied natural gas (LNG) sales versus the prior year despite continued weakness in LNG project activity. Operating loss of
$45.4
increased
$.5
.
FIRST
NINE
MONTHS
2018
VS. FIRST
NINE
MONTHS
2017
FIRST
NINE
MONTHS
2018
IN SUMMARY
|
|
•
|
Sales of
$6,631.3
increased
11%
, or
$646.8
from underlying sales growth of
8%
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
$1,431.9
increased
46%
, or
$449.3
, and operating margin of
21.6%
increased
520
bp. On a non-GAAP basis, adjusted operating income of
$1,431.9
increased
12%
, or
$151.7
, and adjusted operating margin of
21.6%
increased
20
bp.
|
|
|
•
|
Income from continuing operations of
$1,002.7
increased
52%
, or
$342.5
, and diluted earnings per share of
$4.54
increased
51%
, or
$1.54
. On a non-GAAP basis, adjusted income from continuing operations of
$1,202.9
increased
20%
, or
$203.7
, and adjusted diluted earnings per share of
$5.45
increased
20%
, or
$.90
. A summary table of changes in diluted earnings per share is presented below.
|
|
|
•
|
Adjusted EBITDA of
$2,293.5
increased
13%
, or
$263.7
. Adjusted EBITDA margin of
34.6%
increased
70
bp.
|
|
|
•
|
We completed the formation of a syngas supply joint venture with Lu'An, including the acquisition of their gasification and syngas clean-up assets.
|
Changes in Diluted Earnings per Share Attributable to Air Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
30 June
|
|
Increase
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
Diluted Earnings per Share
|
|
|
|
|
|
|
Net income
|
|
|
$4.73
|
|
|
|
$11.52
|
|
|
|
($6.79
|
)
|
Income from discontinued operations
|
|
.19
|
|
|
8.52
|
|
|
(8.33
|
)
|
Income from Continuing Operations – GAAP Basis
|
|
|
$4.54
|
|
|
|
$3.00
|
|
|
|
$1.54
|
|
Operating Income Impact (after-tax)
|
|
|
|
|
|
|
Underlying business
|
|
|
|
|
|
|
Volume
|
|
|
|
|
|
|
$.49
|
|
Price/raw materials
|
|
|
|
|
|
.14
|
|
Costs
|
|
|
|
|
|
(.29
|
)
|
Currency
|
|
|
|
|
|
.19
|
|
Business separation costs
|
|
|
|
|
|
.12
|
|
Cost reduction and asset actions
|
|
|
|
|
|
.36
|
|
Goodwill and intangible asset impairment charge
|
|
|
|
|
|
.70
|
|
Operating Income
|
|
|
|
|
|
|
$1.71
|
|
Other (after-tax)
|
|
|
|
|
|
|
Equity affiliates' income
|
|
|
|
|
|
.12
|
|
Equity method investment impairment charge
|
|
|
|
|
|
.36
|
|
Interest expense
|
|
|
|
|
|
(.02
|
)
|
Other non-operating income (expense), net
|
|
|
|
|
|
.09
|
|
Income tax
|
|
|
|
|
|
.28
|
|
Tax reform repatriation
|
|
|
|
|
|
(2.06
|
)
|
Tax reform rate change and other
|
|
|
|
|
|
.97
|
|
Tax restructuring benefit
|
|
|
|
|
|
.18
|
|
Tax benefit associated with business separation
|
|
|
|
|
|
(.02
|
)
|
Noncontrolling interests
|
|
|
|
|
|
(.05
|
)
|
Weighted average diluted shares
|
|
|
|
|
|
(.02
|
)
|
Other
|
|
|
|
|
|
|
($.17
|
)
|
Total Change in Diluted Earnings per Share from Continuing Operations – GAAP Basis
|
|
|
|
|
|
|
$1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
30 June
|
|
Increase
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
Income from Continuing Operations – GAAP Basis
|
|
|
$4.54
|
|
|
|
$3.00
|
|
|
|
$1.54
|
|
Business separation costs
|
|
—
|
|
|
.12
|
|
|
(.12
|
)
|
Tax benefit associated with business separation
|
|
—
|
|
|
(.02
|
)
|
|
.02
|
|
Cost reduction and asset actions
|
|
—
|
|
|
.36
|
|
|
(.36
|
)
|
Goodwill and intangible asset impairment charge
|
|
—
|
|
|
.70
|
|
|
(.70
|
)
|
Equity method investment impairment charge
|
|
—
|
|
|
.36
|
|
|
(.36
|
)
|
Pension settlement loss
|
|
—
|
|
|
.03
|
|
|
(.03
|
)
|
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
|
|
|
$5.45
|
|
|
|
$4.55
|
|
|
|
$.90
|
|
RESULTS OF OPERATIONS
Discussion of Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
Change
|
Sales
|
|
|
$6,631.3
|
|
|
|
$5,984.5
|
|
|
|
$646.8
|
|
|
11
|
%
|
Operating income
|
|
1,431.9
|
|
|
982.6
|
|
|
449.3
|
|
|
46
|
%
|
Operating margin
|
|
21.6
|
%
|
|
16.4
|
%
|
|
|
|
520 bp
|
|
Equity affiliates’ income
|
|
115.6
|
|
|
35.3
|
|
|
80.3
|
|
|
227
|
%
|
Income from continuing operations
|
|
1,002.7
|
|
|
660.2
|
|
|
342.5
|
|
|
52
|
%
|
Non-GAAP Basis
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
2,293.5
|
|
|
2,029.8
|
|
|
263.7
|
|
|
13
|
%
|
Adjusted EBITDA margin
|
|
34.6
|
%
|
|
33.9
|
%
|
|
|
|
70 bp
|
|
Adjusted operating income
|
|
1,431.9
|
|
|
1,280.2
|
|
|
151.7
|
|
|
12
|
%
|
Adjusted operating margin
|
|
21.6
|
%
|
|
21.4
|
%
|
|
|
|
20 bp
|
|
Adjusted equity affiliates' income
|
|
148.1
|
|
|
114.8
|
|
|
33.3
|
|
|
29
|
%
|
Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
7
|
%
|
Price
|
1
|
%
|
Energy and natural gas cost pass-through
|
(1
|
)%
|
Currency
|
4
|
%
|
Total Consolidated Change
|
11
|
%
|
Sales of
$6,631.3
increased
11%
, or
$646.8
. Underlying sales
were up 8%
from
higher volumes of 7%
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
reduced sales by 1%
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
$1,431.9
increased
46%
, or
$449.3
, due to the prior year goodwill and intangible asset impairment charge of $162, higher volumes of $139,
lower
cost reduction and asset actions of
$103
, favorable currency impacts of $55, favorable pricing, net of energy, fuel, and raw material costs, of $41, and lower business separation costs of $33, partially offset by unfavorable net operating costs of $84. 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
21.6%
increased
520
bp, primarily due to the goodwill and intangible asset impairment charge, cost reduction and asset actions, and business separation costs in the prior year.
On a non-GAAP basis, adjusted operating income of
$1,431.9
increased
12%
, or
$151.7
, 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
21.6%
increased
20
bp as higher volumes and favorable pricing, net of power costs were mostly offset by higher costs.
Adjusted EBITDA
Adjusted EBITDA of
$2,293.5
increased
13%
, or
$263.7
, primarily due to higher volumes, favorable currency, positive pricing, and income from regional industrial gases equity affiliates, partially offset by higher costs. Adjusted EBITDA margin of
34.6%
increased
70
bp, primarily due to higher volumes and income from regional industrial gases equity affiliates, partially offset by higher costs.
Equity Affiliates' Income
Equity affiliates' income of
$115.6
increased
$80.3
. The fiscal year 2017 income included a noncash impairment charge of
$79.5
(
$.36
per share) on our investment in Abdullah Hashim Industrial Gases & Equipment Co., Ltd. (AHG), a 25%-owned equity affiliate in our Industrial Gases – EMEA segment. Refer to Note
8
,
Equity Affiliates
, to the consolidated financial statements for additional information. The fiscal year 2018 income includes an expense of
$32.5
resulting from the Tax Act. Refer to Note
19
,
Income Taxes
, to the consolidated financial statements for additional information. On a non-GAAP basis, adjusted equity affiliates' income of
$148.1
increased
29%
, or
$33.3
, primarily driven by Industrial Gases
–
Americas and Industrial Gases
–
EMEA affiliates.
Cost of Sales and Gross Margin
Cost of sales of
$4,623.7
increased
10%
, or
$417.2
, due to higher costs attributable to sales volumes of $226, unfavorable currency impacts of $154, and higher other costs of $67, partially offset by lower energy and natural gas cost pass-through to customers of $30. Gross margin of
30.3%
increased
60 bp
, primarily due to higher volumes and favorable pricing, partially offset by higher other costs.
Selling and Administrative Expense
Selling and administrative expense of
$574.8
increased
$48.4
, or
9.0%
, 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
8.8%
to
8.7%
.
Research and Development
Research and development expense of
$44.1
decreased
$.3
. For both the
nine
months ended
30 June 2018
and
2017
, research and development expense, as a percentage of sales, was
.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 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
nine
months ended
30 June 2017
, we incurred legal and advisory fees of
$32.5
(
$26.5
after-tax, or
$.12
per share). Our income tax provision for the
nine
months ended
30 June 2017
includes additional tax expense of
$5.5
, or
$.02
per share, related to the separation.
Cost Reduction and Asset Actions
For the
nine
months ended
30 June 2017
, we recognized a net expense of
$103.0
(
$78.4
attributable to Air Products after-tax, or
$.36
per share), which included
$78.9
for asset actions and
$27.5
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.
Goodwill and Intangible Asset Impairment Charge
During the third quarter of fiscal year 2017, we determined that the goodwill and indefinite-lived intangible assets (primarily acquired trade names) associated with our Latin America reporting unit of our Industrial Gases – Americas segment were impaired. We recorded a noncash impairment charge of
$162.1
(
$154.1
attributable to Air Products, after-tax, or
$.70
per share), which was driven by lower economic growth and profitability in the region. Refer to Note
9
, Goodwill, and Note
10
, Intangible Assets, to the consolidated financial statements for additional information.
Other Income (Expense), Net
Other income (expense), net of
$43.2
decreased
$29.8
, or
41.0%
, primarily due to lower income from the transition services agreements with Versum and Evonik and an unfavorable foreign exchange impact.
Interest Expense
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
30 June
|
|
2018
|
|
2017
|
Interest incurred
|
|
$109.4
|
|
|
|
$105.1
|
|
Less: capitalized interest
|
14.3
|
|
|
15.3
|
|
Interest expense
|
|
$95.1
|
|
|
|
$89.8
|
|
Interest incurred
increased
$4.3
as a higher average interest rate on the debt portfolio and project financing associated with the Lu'An joint venture was partially offset by the impact from a lower average debt balance. The change in capitalized interest was driven by a year-to-date decrease in the carrying value of projects under construction.
Other Non-Operating Income (Expense), net
Other non-operating income (expense), net of
$33.7
increased
$24.9
due to higher interest income on cash and cash items and short-term investments and lower pension expense. The prior year pension expense included a settlement loss of $9.6 (
$6.0
after-tax, or
$.03
per share) 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
30.6%
and
28.0%
for the
nine
months ended
30 June 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
nine
months ended
30 June 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 $9.1 benefit related to a final foreign tax audit settlement, higher tax benefits from share-based compensation, and a lower U.S. federal statutory rate on current year income. The effective tax rate in the prior year was impacted by a goodwill impairment charge of $145.3 in our Latin America reporting unit (LASA) and an impairment of $79.5 of an equity method investment for which no tax benefits were available.
On a non-GAAP basis, the adjusted effective tax rate
decreased
from
23.0%
in fiscal year
2017
to
18.9%
in fiscal year
2018
.
We estimate that the lower U.S. federal statutory rate and other impacts of the Tax Act reduced our adjusted effective tax rate by approximately 3.2% for the
nine
months ended
30 June 2018
. The current year rate was also lower due to the benefit of the tax audit settlement and higher tax benefits from share-based compensation.
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
19
, Income Taxes, to the consolidated financial statements for additional information.
Discontinued Operations
For the nine months ended
30 June 2018
, income from discontinued operations, net of tax, on the consolidated income statements was
$42.2
. During the third quarter of fiscal year 2018, we recorded an income tax benefit of $29.6 primarily resulting from the resolution of uncertain tax positions taken in conjunction with the disposition of our former European Homecare business in fiscal year 2012. In addition, we recorded a before-tax benefit of $13.6 primarily resulting from the resolution of certain post-closing adjustments associated with the sale of our former Performance Materials Division (PMD). The nine months ended 30 June 2018 also includes an after-tax loss of $1.0 related to EfW project exit activities and administrative costs incurred during the first quarter of fiscal year 2018.
For the nine months ended 30 June 2017, income from discontinued operations, net of tax, on the consolidated income statements was
$1,871.5
. The year-to-date income included a gain of
$2,870
(
$1,833
after-tax, or
$8.34
per share) recognized on the sale of PMD to Evonik. In addition, we recorded a loss on the disposal of EfW of
$59.3
(
$47.1
after-tax) during the first quarter of 2017, primarily for land lease obligations and to update our estimate of the net realizable value of the plant assets.
Refer to Note
3
,
Discontinued Operations
, to the consolidated financial statements for additional information.
Segment Analysis
Industrial Gases – Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$2,771.7
|
|
|
|
$2,684.1
|
|
|
|
$87.6
|
|
|
3
|
%
|
Operating income
|
|
676.6
|
|
|
681.4
|
|
|
(4.8
|
)
|
|
(1
|
)%
|
Operating margin
|
|
24.4
|
%
|
|
25.4
|
%
|
|
|
|
(100 bp)
|
|
Equity affiliates’ income
|
|
59.6
|
|
|
41.8
|
|
|
17.8
|
|
|
43
|
%
|
Adjusted EBITDA
|
|
1,096.8
|
|
|
1,068.0
|
|
|
28.8
|
|
|
3
|
%
|
Adjusted EBITDA margin
|
|
39.6
|
%
|
|
39.8
|
%
|
|
|
|
(20 bp)
|
|
Industrial Gases – Americas Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
4
|
%
|
Price
|
—
|
%
|
Currency
|
1
|
%
|
Energy and natural gas cost pass-through
|
(2
|
)%
|
Total Industrial Gases – Americas Sales Change
|
3
|
%
|
Sales of
$2,771.7
increased
3%
, or
$87.6
. 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
2%
. Currency
increased sales by 1%
.
Industrial Gases – Americas Operating Income and Margin
Operating income of
$676.6
decreased
1%
, or
$4.8
, primarily due to higher costs of $53 and lower pricing, net of power and fuel costs, of $13, mostly offset by higher volumes of $56 and favorable currency impacts of $5. The higher costs included higher planned maintenance costs. Operating margin of
24.4%
decreased
100
bp from the prior year, primarily due to higher costs, partially offset by favorable volumes.
Industrial Gases – Americas Equity Affiliates’ Income
Equity affiliates’ income of
$59.6
increased
$17.8
due to volume growth and favorable currency.
Industrial Gases – EMEA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$1,638.6
|
|
|
|
$1,265.6
|
|
|
|
$373.0
|
|
|
29
|
%
|
Operating income
|
|
340.0
|
|
|
274.8
|
|
|
65.2
|
|
|
24
|
%
|
Operating margin
|
|
20.7
|
%
|
|
21.7
|
%
|
|
|
|
(100 bp)
|
|
Equity affiliates’ income
|
|
41.7
|
|
|
33.5
|
|
|
8.2
|
|
|
24
|
%
|
Adjusted EBITDA
|
|
531.3
|
|
|
437.2
|
|
|
94.1
|
|
|
22
|
%
|
Adjusted EBITDA margin
|
|
32.4
|
%
|
|
34.5
|
%
|
|
|
|
(210 bp)
|
|
Industrial Gases – EMEA Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
16
|
%
|
Price
|
2
|
%
|
Energy and natural gas cost pass-through
|
1
|
%
|
Currency
|
10
|
%
|
Total Industrial Gases – EMEA Sales Change
|
29
|
%
|
Sales of
$1,638.6
increased
29%
, or
$373.0
. Underlying sales
were up 18%
from
higher volumes of 16%
and
higher pricing of 2%
. 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 10%
.
Industrial Gases – EMEA Operating Income and Margin
Operating income of
$340.0
increased
24%
, or
$65.2
, due to higher volumes of $33, favorable currency impacts of $28, and higher pricing, net of power and fuel costs, of $6, partially offset by unfavorable costs $2. Operating margin of
20.7%
decreased
100
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
$41.7
increased
$8.2
, primarily due to volume growth, lower costs, and favorable currency.
Industrial Gases – Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$1,825.0
|
|
|
|
$1,412.5
|
|
|
|
$412.5
|
|
|
29
|
%
|
Operating income
|
|
509.7
|
|
|
380.2
|
|
|
129.5
|
|
|
34
|
%
|
Operating margin
|
|
27.9
|
%
|
|
26.9
|
%
|
|
|
|
100 bp
|
|
Equity affiliates’ income
|
|
44.7
|
|
|
38.9
|
|
|
5.8
|
|
|
15
|
%
|
Adjusted EBITDA
|
|
743.3
|
|
|
564.7
|
|
|
178.6
|
|
|
32
|
%
|
Adjusted EBITDA margin
|
|
40.7
|
%
|
|
40.0
|
%
|
|
|
|
70 bp
|
|
Industrial Gases – Asia Sales
|
|
|
|
|
% Change from
Prior Year
|
Underlying business
|
|
Volume
|
19
|
%
|
Price
|
4
|
%
|
Energy and natural gas cost pass-through
|
—
|
|
Currency
|
6
|
%
|
Total Industrial Gases – Asia Sales Change
|
29
|
%
|
Sales of
$1,825.0
increased
29%
, or
$412.5
. Underlying sales
were up 23%
from
higher volumes of 19%
and
higher pricing of 4%
. 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, partially offset by the impact of short-term sale of equipment activity in the third quarter of fiscal year 2017. Pricing improved across Asia driven primarily by the China merchant market. 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
$509.7
increased
34%
, or
$129.5
, due to higher volumes of $76, favorable price, net of power costs, of $45, and favorable currency impacts of $23, partially offset by higher operating costs of $14. Operating margin of
27.9%
increased
100
bp as favorable price, net of power costs, and higher volumes were partially offset by unfavorable cost performance.
Industrial Gases – Asia Equity Affiliates’ Income
Equity affiliates’ income of
$44.7
increased
$5.8
due to higher volumes.
Industrial Gases – Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$335.8
|
|
|
|
$551.8
|
|
|
|
($216.0
|
)
|
|
(39
|
)%
|
Operating income
|
|
41.4
|
|
|
58.7
|
|
|
(17.3
|
)
|
|
(29
|
)%
|
Adjusted EBITDA
|
|
49.3
|
|
|
65.3
|
|
|
(16.0
|
)
|
|
(25
|
)%
|
Industrial Gases – Global Sales and Operating Income
Sales of
$335.8
decreased
39%
, or
$216.0
. 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
$41.4
decreased
29%
, or
$17.3
, primarily due to the lower sale of equipment activity.
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
30 June
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
Sales
|
|
|
$60.2
|
|
|
|
$70.5
|
|
|
|
($10.3
|
)
|
|
(15
|
)%
|
Operating loss
|
|
(135.8
|
)
|
|
(114.9
|
)
|
|
(20.9
|
)
|
|
(18
|
)%
|
Adjusted EBITDA
|
|
(127.2
|
)
|
|
(105.4
|
)
|
|
(21.8
|
)
|
|
(21
|
)%
|
Corporate and other Sales and Operating Loss
Sales of
$60.2
decreased
15%
, or
$10.3
, primarily due to lower year-to-date activity in our LNG projects and our helium container business. Operating loss of
$135.8
increased
18%
, or
$20.9
, 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, we restructured the Company to focus on its core Industrial Gases business. This 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
third quarter and first nine months
of fiscal years
2018
and
2017
:
CONSOLIDATED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
Three Months Ended 30 June
|
Q3 2018 vs. Q3 2017
|
Operating
Income
|
Operating
Margin
(A)
|
Equity Affiliates' Income (Loss)
|
Income Tax
Provision
|
Net
Income
|
Diluted
EPS
|
2018 GAAP
|
|
$515.8
|
|
22.8
|
%
|
|
$58.1
|
|
|
$107.1
|
|
|
$430.7
|
|
|
$1.95
|
|
2017 GAAP
|
258.7
|
|
12.2
|
%
|
(36.9
|
)
|
89.3
|
|
104.2
|
|
.47
|
|
Change GAAP
|
|
$257.1
|
|
1,060
|
bp
|
|
$95.0
|
|
|
$17.8
|
|
|
$326.5
|
|
|
$1.48
|
|
% Change GAAP
|
99
|
%
|
|
257
|
%
|
20
|
%
|
313
|
%
|
315
|
%
|
2018 GAAP
|
|
$515.8
|
|
22.8
|
%
|
|
$58.1
|
|
|
$107.1
|
|
|
$430.7
|
|
|
$1.95
|
|
2018 Non-GAAP Measure
|
|
$515.8
|
|
22.8
|
%
|
|
$58.1
|
|
|
$107.1
|
|
|
$430.7
|
|
|
$1.95
|
|
2017 GAAP
|
|
$258.7
|
|
12.2
|
%
|
|
($36.9
|
)
|
|
$89.3
|
|
|
$104.2
|
|
|
$.47
|
|
Tax benefit associated with business separation
|
—
|
|
—
|
%
|
—
|
|
8.2
|
|
(8.2
|
)
|
(.04
|
)
|
Cost reduction and assets actions
(B)
|
42.7
|
|
2.0
|
%
|
—
|
|
12.2
|
|
30.0
|
|
.14
|
|
Goodwill and intangible asset impairment charge
(C)
|
162.1
|
|
7.6
|
%
|
—
|
|
4.6
|
|
154.1
|
|
.70
|
|
Equity method investment impairment charge
|
—
|
|
—
|
%
|
79.5
|
|
—
|
|
79.5
|
|
.36
|
|
Pension settlement loss
|
—
|
|
—
|
%
|
—
|
|
2.1
|
|
3.4
|
|
.02
|
|
2017 Non-GAAP Measure
|
|
$463.5
|
|
21.8
|
%
|
|
$42.6
|
|
|
$116.4
|
|
|
$363.0
|
|
|
$1.65
|
|
Change Non-GAAP Measure
|
|
$52.3
|
|
100
|
bp
|
|
$15.5
|
|
|
($9.3
|
)
|
|
$67.7
|
|
|
$.30
|
|
% Change Non-GAAP Measure
|
11
|
%
|
|
36
|
%
|
(8
|
)%
|
19
|
%
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
Nine Months Ended 30 June
|
2018 vs. 2017
|
Operating
Income
|
Operating
Margin
(A)
|
Equity Affiliates' Income
|
Income Tax
Provision
|
Net
Income
|
Diluted
EPS
|
2018 GAAP
|
|
$1,431.9
|
|
21.6
|
%
|
|
$115.6
|
|
|
$455.1
|
|
|
$1,002.7
|
|
|
$4.54
|
|
2017 GAAP
|
982.6
|
|
16.4
|
%
|
35.3
|
|
262.2
|
|
660.2
|
|
3.00
|
|
Change GAAP
|
|
$449.3
|
|
520
|
bp
|
|
$80.3
|
|
|
$192.9
|
|
|
$342.5
|
|
|
$1.54
|
|
% Change GAAP
|
46
|
%
|
|
227
|
%
|
74
|
%
|
52
|
%
|
51
|
%
|
2018 GAAP
|
|
$1,431.9
|
|
21.6
|
%
|
|
$115.6
|
|
|
$455.1
|
|
|
$1,002.7
|
|
|
$4.54
|
|
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
|
|
$1,431.9
|
|
21.6
|
%
|
|
$148.1
|
|
|
$287.4
|
|
|
$1,202.9
|
|
|
$5.45
|
|
2017 GAAP
|
|
$982.6
|
|
16.4
|
%
|
|
$35.3
|
|
|
$262.2
|
|
|
$660.2
|
|
|
$3.00
|
|
Business separation costs
|
32.5
|
|
.6
|
%
|
—
|
|
3.7
|
|
26.5
|
|
.12
|
|
Tax benefit associated with business separation
|
—
|
|
—
|
%
|
—
|
|
5.5
|
|
(5.5
|
)
|
(.02
|
)
|
Cost reduction and assets actions
(B)
|
103.0
|
|
1.7
|
%
|
—
|
|
24.1
|
|
78.4
|
|
.36
|
|
Goodwill and intangible asset impairment charge
(C)
|
162.1
|
|
2.7
|
%
|
—
|
|
4.6
|
|
154.1
|
|
.70
|
|
Equity method investment impairment charge
|
—
|
|
—
|
%
|
79.5
|
|
—
|
|
79.5
|
|
.36
|
|
Pension settlement loss
|
—
|
|
—
|
%
|
—
|
|
3.6
|
|
6.0
|
|
.03
|
|
2017 Non-GAAP Measure
|
|
$1,280.2
|
|
21.4
|
%
|
|
$114.8
|
|
|
$303.7
|
|
|
$999.2
|
|
|
$4.55
|
|
Change Non-GAAP Measure
|
|
$151.7
|
|
20
|
bp
|
|
$33.3
|
|
|
($16.3
|
)
|
|
$203.7
|
|
|
$.90
|
|
% Change Non-GAAP Measure
|
12
|
%
|
|
29
|
%
|
(5
|
)%
|
20
|
%
|
20
|
%
|
|
|
(A)
|
Operating margin is calculated by dividing operating income by sales.
|
|
|
(B)
|
Noncontrolling interests impact of $.5 for the three and nine months ended 30 June 2017.
|
|
|
(C)
|
Noncontrolling interests impact of $3.4 for the three and nine months ended 30 June 2017.
|
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
|
Nine Months Ended
|
|
30 June
|
30 June
|
|
2018
|
2017
|
2018
|
2017
|
Income from Continuing Operations
(A)
|
|
$444.7
|
|
|
$106.4
|
|
|
$1,031.0
|
|
|
$674.7
|
|
Add: Interest expense
|
34.9
|
|
29.8
|
|
95.1
|
|
89.8
|
|
Less: Other non-operating income (expense), net
|
12.8
|
|
3.7
|
|
33.7
|
|
8.8
|
|
Add: Income tax provision
|
107.1
|
|
89.3
|
|
455.1
|
|
262.2
|
|
Add: Depreciation and amortization
|
245.6
|
|
216.9
|
|
713.5
|
|
634.8
|
|
Add: Business separation costs
|
—
|
|
—
|
|
—
|
|
32.5
|
|
Add: Cost reduction and asset actions
|
—
|
|
42.7
|
|
—
|
|
103.0
|
|
Add: Goodwill and intangible asset impairment charge
|
—
|
|
162.1
|
|
—
|
|
162.1
|
|
Add: Equity method investment impairment charge
|
—
|
|
79.5
|
|
—
|
|
79.5
|
|
Add: Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
32.5
|
|
—
|
|
Adjusted EBITDA
|
|
$819.5
|
|
|
$723.0
|
|
|
$2,293.5
|
|
|
$2,029.8
|
|
Change GAAP
|
|
|
|
|
Income from continuing operations change
|
|
$338.3
|
|
|
|
$356.3
|
|
|
Income from continuing operations % change
|
318
|
%
|
|
53
|
%
|
|
Change Non-GAAP
|
|
|
|
|
Adjusted EBITDA change
|
|
$96.5
|
|
|
|
$263.7
|
|
|
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 30 June 2018
|
Operating income (loss)
|
|
$237.1
|
|
|
$118.8
|
|
|
$185.5
|
|
|
$19.8
|
|
|
($45.4
|
)
|
|
$515.8
|
|
Operating margin
|
25.0
|
%
|
21.2
|
%
|
29.7
|
%
|
|
|
22.8
|
%
|
Three Months Ended 30 June 2017
|
Operating income (loss)
|
|
$234.9
|
|
|
$96.2
|
|
|
$149.5
|
|
|
$27.8
|
|
|
($44.9
|
)
|
|
$463.5
|
|
Operating margin
|
25.3
|
%
|
21.3
|
%
|
27.8
|
%
|
|
|
21.8
|
%
|
Operating income (loss) change
|
|
$2.2
|
|
|
$22.6
|
|
|
$36.0
|
|
|
($8.0
|
)
|
|
($.5
|
)
|
|
$52.3
|
|
Operating income (loss) % change
|
1
|
%
|
23
|
%
|
24
|
%
|
(29
|
)%
|
(1
|
)%
|
11
|
%
|
Operating margin change
|
(30
|
) bp
|
(10
|
) bp
|
190
|
bp
|
|
|
100
|
bp
|
NON-GAAP MEASURE
|
|
|
|
|
|
|
Three Months Ended 30 June 2018
|
Operating income (loss)
|
|
$237.1
|
|
|
$118.8
|
|
|
$185.5
|
|
|
$19.8
|
|
|
($45.4
|
)
|
|
$515.8
|
|
Add: Depreciation and amortization
|
120.5
|
|
49.8
|
|
69.5
|
|
2.3
|
|
3.5
|
|
245.6
|
|
Add: Equity affiliates' income
|
24.1
|
|
17.5
|
|
15.1
|
|
1.4
|
|
—
|
|
58.1
|
|
Adjusted EBITDA
|
|
$381.7
|
|
|
$186.1
|
|
|
$270.1
|
|
|
$23.5
|
|
|
($41.9
|
)
|
|
$819.5
|
|
Adjusted EBITDA margin
|
40.2
|
%
|
33.2
|
%
|
43.3
|
%
|
|
|
36.3
|
%
|
Three Months Ended 30 June 2017
|
Operating income (loss)
|
|
$234.9
|
|
|
$96.2
|
|
|
$149.5
|
|
|
$27.8
|
|
|
($44.9
|
)
|
|
$463.5
|
|
Add: Depreciation and amortization
|
117.0
|
|
45.1
|
|
49.6
|
|
2.3
|
|
2.9
|
|
216.9
|
|
Add: Equity affiliates' income
|
14.1
|
|
15.7
|
|
12.5
|
|
.3
|
|
—
|
|
42.6
|
|
Adjusted EBITDA
|
|
$366.0
|
|
|
$157.0
|
|
|
$211.6
|
|
|
$30.4
|
|
|
($42.0
|
)
|
|
$723.0
|
|
Adjusted EBITDA margin
|
39.4
|
%
|
34.8
|
%
|
39.3
|
%
|
|
|
34.1
|
%
|
Adjusted EBITDA change
|
|
$15.7
|
|
|
$29.1
|
|
|
$58.5
|
|
|
($6.9
|
)
|
|
$.1
|
|
|
$96.5
|
|
Adjusted EBITDA % change
|
4
|
%
|
19
|
%
|
28
|
%
|
(23
|
)%
|
—
|
%
|
13
|
%
|
Adjusted EBITDA margin change
|
80
|
bp
|
(160
|
) bp
|
400
|
bp
|
|
|
220
|
bp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Gases–
Americas
|
Industrial
Gases–
EMEA
|
Industrial
Gases–
Asia
|
Industrial
Gases–
Global
|
Corporate
and other
|
Segment
Total
|
GAAP MEASURE
|
|
|
|
|
|
|
Nine Months Ended 30 June 2018
|
Operating income (loss)
|
|
$676.6
|
|
|
$340.0
|
|
|
$509.7
|
|
|
$41.4
|
|
|
($135.8
|
)
|
|
$1,431.9
|
|
Operating margin
|
24.4
|
%
|
20.7
|
%
|
27.9
|
%
|
|
|
21.6
|
%
|
Nine Months Ended 30 June 2017
|
Operating income (loss)
|
|
$681.4
|
|
|
$274.8
|
|
|
$380.2
|
|
|
$58.7
|
|
|
($114.9
|
)
|
|
$1,280.2
|
|
Operating margin
|
25.4
|
%
|
21.7
|
%
|
26.9
|
%
|
|
|
21.4
|
%
|
Operating income (loss) change
|
|
($4.8
|
)
|
|
$65.2
|
|
|
$129.5
|
|
|
($17.3
|
)
|
|
($20.9
|
)
|
|
$151.7
|
|
Operating income (loss) % change
|
(1
|
)%
|
24
|
%
|
34
|
%
|
(29
|
)%
|
(18
|
)%
|
12
|
%
|
Operating margin change
|
(100
|
) bp
|
(100
|
) bp
|
100
|
bp
|
|
|
20
|
bp
|
NON-GAAP MEASURE
|
|
|
|
|
|
|
Nine Months Ended 30 June 2018
|
Operating income (loss)
|
|
$676.6
|
|
|
$340.0
|
|
|
$509.7
|
|
|
$41.4
|
|
|
($135.8
|
)
|
|
$1,431.9
|
|
Add: Depreciation and amortization
|
360.6
|
|
149.6
|
|
188.9
|
|
5.8
|
|
8.6
|
|
713.5
|
|
Add: Equity affiliates' income
|
59.6
|
|
41.7
|
|
44.7
|
|
2.1
|
|
—
|
|
148.1
|
|
Adjusted EBITDA
|
|
$1,096.8
|
|
|
$531.3
|
|
|
$743.3
|
|
|
$49.3
|
|
|
($127.2
|
)
|
|
$2,293.5
|
|
Adjusted EBITDA margin
|
39.6
|
%
|
32.4
|
%
|
40.7
|
%
|
|
|
34.6
|
%
|
Nine Months Ended 30 June 2017
|
Operating income (loss)
|
|
$681.4
|
|
|
$274.8
|
|
|
$380.2
|
|
|
$58.7
|
|
|
($114.9
|
)
|
|
$1,280.2
|
|
Add: Depreciation and amortization
|
344.8
|
|
128.9
|
|
145.6
|
|
6.0
|
|
9.5
|
|
634.8
|
|
Add: Equity affiliates' income
|
41.8
|
|
33.5
|
|
38.9
|
|
.6
|
|
—
|
|
114.8
|
|
Adjusted EBITDA
|
|
$1,068.0
|
|
|
$437.2
|
|
|
$564.7
|
|
|
$65.3
|
|
|
($105.4
|
)
|
|
$2,029.8
|
|
Adjusted EBITDA margin
|
39.8
|
%
|
34.5
|
%
|
40.0
|
%
|
|
|
33.9
|
%
|
Adjusted EBITDA change
|
|
$28.8
|
|
|
$94.1
|
|
|
$178.6
|
|
|
($16.0
|
)
|
|
($21.8
|
)
|
|
$263.7
|
|
Adjusted EBITDA % change
|
3
|
%
|
22
|
%
|
32
|
%
|
(25
|
)%
|
(21
|
)%
|
13
|
%
|
Adjusted EBITDA margin change
|
(20
|
) bp
|
(210
|
) bp
|
70
|
bp
|
|
|
70
|
bp
|
Below is a reconciliation of segment total operating income to consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
30 June
|
30 June
|
Operating Income
|
2018
|
2017
|
2018
|
2017
|
Segment total
|
|
$515.8
|
|
|
$463.5
|
|
|
$1,431.9
|
|
|
$1,280.2
|
|
Business separation costs
|
—
|
|
—
|
|
—
|
|
(32.5
|
)
|
Cost reduction and asset actions
|
—
|
|
(42.7
|
)
|
—
|
|
(103.0
|
)
|
Goodwill and intangible asset impairment charge
|
—
|
|
(162.1
|
)
|
—
|
|
(162.1
|
)
|
Consolidated Total
|
|
$515.8
|
|
|
$258.7
|
|
|
$1,431.9
|
|
|
$982.6
|
|
Below is a reconciliation of segment total
equity affiliates' income
to consolidated
equity affiliates' income (loss)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
30 June
|
30 June
|
Equity Affiliates' Income (Loss)
|
2018
|
2017
|
2018
|
2017
|
Segment total
|
|
$58.1
|
|
|
$42.6
|
|
|
$148.1
|
|
|
$114.8
|
|
Equity method investment impairment charge
|
—
|
|
(79.5
|
)
|
—
|
|
(79.5
|
)
|
Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
(32.5
|
)
|
—
|
|
Consolidated Total
|
|
$58.1
|
|
|
($36.9
|
)
|
|
$115.6
|
|
|
$35.3
|
|
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
19
,
Income Taxes
, to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
Three Months Ended
30 June
|
|
Nine Months Ended
30 June
|
|
2018
|
2017
|
|
2018
|
2017
|
Income Tax Provision—GAAP
|
|
$107.1
|
|
|
$89.3
|
|
|
|
$455.1
|
|
|
$262.2
|
|
Income From Continuing Operations Before Taxes—GAAP
|
|
$551.8
|
|
|
$195.7
|
|
|
|
$1,486.1
|
|
|
$936.9
|
|
Effective Tax Rate—GAAP
|
19.4
|
%
|
45.6
|
%
|
|
30.6
|
%
|
28.0
|
%
|
Income Tax Provision—GAAP
|
|
$107.1
|
|
|
$89.3
|
|
|
|
$455.1
|
|
|
$262.2
|
|
Business separation costs
|
—
|
|
—
|
|
|
—
|
|
3.7
|
|
Tax benefit associated with business separation
|
—
|
|
8.2
|
|
|
—
|
|
5.5
|
|
Cost reduction and asset actions
|
—
|
|
12.2
|
|
|
—
|
|
24.1
|
|
Pension settlement loss
|
—
|
|
2.1
|
|
|
—
|
|
3.6
|
|
Goodwill and intangible asset impairment charge
|
—
|
|
4.6
|
|
|
—
|
|
4.6
|
|
Equity method investment impairment charge
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Tax reform repatriation
|
—
|
|
—
|
|
|
(420.5
|
)
|
—
|
|
Tax reform rate change and other
|
—
|
|
—
|
|
|
214.0
|
|
—
|
|
Tax restructuring benefit
|
—
|
|
—
|
|
|
38.8
|
|
—
|
|
Income Tax Provision—Non-GAAP Measure
|
|
$107.1
|
|
|
$116.4
|
|
|
|
$287.4
|
|
|
$303.7
|
|
Income From Continuing Operations Before Taxes—GAAP
|
|
$551.8
|
|
|
$195.7
|
|
|
|
$1,486.1
|
|
|
$936.9
|
|
Business separation costs
|
—
|
|
—
|
|
|
—
|
|
30.2
|
|
Cost reduction and asset actions
|
—
|
|
42.7
|
|
|
—
|
|
103.0
|
|
Pension settlement loss
|
—
|
|
5.5
|
|
|
—
|
|
9.6
|
|
Goodwill and intangible asset impairment charge
|
—
|
|
162.1
|
|
|
—
|
|
162.1
|
|
Equity method investment impairment charge
|
—
|
|
79.5
|
|
|
—
|
|
79.5
|
|
Tax reform repatriation - equity method investment
|
—
|
|
—
|
|
|
32.5
|
|
—
|
|
Income From Continuing Operations Before Taxes—Non-GAAP Measure
|
|
$551.8
|
|
|
$485.5
|
|
|
|
$1,518.6
|
|
|
$1,321.3
|
|
Effective Tax Rate—Non-GAAP Measure
|
19.4
|
%
|
24.0
|
%
|
|
18.9
|
%
|
23.0
|
%
|
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
nine
months ended
30 June 2018
and
2017
, net periodic pension cost was
$37.5
and
$56.4
, respectively. We recognized service-related costs of $39.5 and $41.1, respectively, on our consolidated income statements within operating income. The non-service benefit of $2.0 and cost of $15.3 were included in "Other non-operating income (expense), net" for the
nine
months ended
30 June 2018
and
2017
, respectively. The decrease in pension expense in fiscal year
2018
results from lower loss amortization primarily due to favorable asset experience.
The costs capitalized in fiscal year
2018
and
2017
were not material.
For the
nine
months ended
30 June 2018
and
2017
, we recognized a pension settlement
loss
of
$4.8
and
$9.6
, 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 2018 and 2017 was associated with the U.S. Supplementary Pension Plan. 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
nine
months ended
30 June 2018
and
2017
, our cash contributions to funded pension plans and benefit payments under unfunded pension plans were
$43.0
and
$57.0
, 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
13
,
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
30 June 2018
, we had $1,136.0 of foreign cash and cash items compared to total cash and cash items of
$2,986.5
. 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
nine
months of
2018
, cash provided by operating activities was
$1,863.3
. Income from continuing operations of
$1,002.7
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
19
, Income Taxes, to the consolidated financial statements for additional information. The working capital accounts were a
use
of cash of $124.3, primarily driven by $164.9 from payables and accrued liabilities. The use of cash within payables and accrued liabilities includes a decrease in customer advances of $87.5 primarily related to sale of equipment activity, a decrease of $24.8 for severance payments, and a $23.2 decrease in accrued incentive compensation due to payments on the 2017 plan.
For the first nine months of 2017, cash provided by operating activities was $1,613.4. Income from continuing operations of $660.2 included the goodwill and intangible asset impairment charge of $162.1, the equity method investment impairment charge of $79.5, and the write-down of long lived assets associated with cost reduction actions of $59.1. Refer to Note
5
, Cost Reduction and Asset Actions; Note
8
, Equity Affiliates; Note
9
, Goodwill; and Note
10
, Intangible Assets, to the consolidated financial statements for additional information on these charges. Other adjustments of $110.7 included the remeasurement of intercompany transactions as the related hedging instruments that eliminate the earnings impact are included in other receivables and payables and accrued liabilities. The working capital accounts were a use of cash of $69.4, primarily driven by payables and accrued liabilities and other working capital, partially offset by other receivables. The use of cash in payables and accrued liabilities of $99.9 was primarily driven by a decrease in customer advances of $51.7 related to our joint venture in Jazan, Saudi Arabia, and a $53.7 decrease in accrued incentive compensation, primarily due to payments on the 2016 plan. Other working capital was a use of $50.0, primarily driven by payments for accrued income taxes. Other receivables was a source of $80.0, primarily due to the maturities of forward exchange contracts that hedged foreign currency exposures.
We estimate that cash paid for taxes, net of refunds, on a continuing operations basis was
$311.6
and
$357.0
for the
nine
months ended
30 June 2018
and
2017
, respectively.
Investing Activities
For the first
nine
months of
2018
, cash used for investing activities was
$1,038.9
. Capital expenditures for plant and equipment were
$1,158.1
. Cash paid for acquisitions, net of cash acquired, was
$320.2
. See Note
6
, Acquisitions, to the consolidated financial statements for further details. Proceeds from investments of $745.2 resulted from maturities of short-term instruments with original terms greater than three months but less than one year. Purchases of investments of $349.8 include time deposits with original maturities greater than three months and less than one year.
For the first nine months of 2017, cash used for investing activities was $1,810.8. Capital expenditures for plant and equipment were $806.8. Purchases of investments of $2,488.6 include time deposits with original maturities greater than three months and less than one year. Proceeds from investments of $1,473.5 resulted from maturities of short-term instruments with original terms greater than three months but less than one year.
Capital expenditures are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
30 June
|
|
|
2018
|
|
2017
|
Additions to plant and equipment
|
|
|
$1,158.1
|
|
|
|
$806.8
|
|
Acquisitions, less cash acquired
|
|
320.2
|
|
|
—
|
|
Investment in and advances to unconsolidated affiliates
|
|
—
|
|
|
8.1
|
|
Capital expenditures on a GAAP basis
|
|
|
$1,478.3
|
|
|
|
$814.9
|
|
Capital lease expenditures
(A)
|
|
15.3
|
|
|
6.8
|
|
Capital expenditures on a Non-GAAP basis
|
|
|
$1,493.6
|
|
|
|
$821.7
|
|
|
|
(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
, Acquisitions, 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
30 June 2018
was $298, compared to $481 at
30 September 2017
.
Financing Activities
For the first
nine
months of
2018
, cash used for financing activities was
$1,097.8
. This consisted primarily of dividend payments to shareholders of
$656.6
and repayment on long-term debt of
$418.2
. 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 nine months of 2017, cash used for financing activities was $1,854.4. This consisted primarily of repayments of commercial paper and short-term borrowings of $799.2, payments on long-term debt of $483.5, and dividend payments to shareholders of $580.9. 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 nine months of 2017, cash flows of discontinued operations primarily included impacts associated with the spin-off of EMD as Versum on 1 October 2016 and the sale of PMD to Evonik on 3 January 2017. Cash used for operating activities of $768.0 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
30 June 2018
and
30 September 2017
, expressed as a percentage of total capitalization (total debt plus total equity), was
26.4%
and
28.0%
, respectively. Total debt decreased from
$3,962.8
at
30 September 2017
to
$3,871.2
at
30 June 2018
, primarily due to the repayment of the 1.2% U.S. Senior Note. The current year total debt balance includes
$399
of related party debt associated with the Lu'An joint venture.
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 no greater than 70%. No borrowings were outstanding under the 2017 Credit Agreement as of
30 June 2018
.
Commitments totaling $7.3 are maintained by our foreign subsidiaries, all of which was borrowed and outstanding at
30 June 2018
.
As of
30 June 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
nine
months of fiscal year
2018
, we did not purchase any of our outstanding shares. At
30 June 2018
, $485.3 in share repurchase authorization remained.
Dividends
On 19 July 2018, the Board of Directors declared the fourth quarter dividend of $1.10 per share. The dividend is payable on 12 November 2018 to shareholders of record at the close of business on 1 October 2018.
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
19
,
Income Taxes
, to the consolidated financial statements, our income tax provision includes an expense of
$364.1
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. We expect to apply
$71.5
of existing foreign tax credits towards the
$364.1
deemed repatriation tax. The remaining obligation of
$292.6
will be paid over eight years beginning in fiscal year 2019.
Our unconditional purchase obligations for helium purchases were approximately
$6,500
as of
30 June 2018
. The majority of these obligations occur after fiscal year 2022. Helium purchases include crude feedstock supply to multiple helium refining plants in North America as well as refined helium purchases from sources around the world. As a rare byproduct of natural gas production in the energy sector, these helium sourcing agreements are medium- to long-term and contain take-if-tendered provisions. The refined helium is distributed globally and sold as a merchant gas, primarily under medium-term requirements contracts. While contract terms in the energy sector are longer than those in merchant, helium is a rare gas used in applications with few or no substitutions because of its unique physical and chemical properties.
On 26 April 2018, we completed the formation of Air Products Lu’an (Changzhi) Co., Ltd., a 60%-owned joint venture (JV) with Lu'An Clean Energy Company ("Lu'An") and acquired their gasification and syngas clean-up assets. In connection with the acquisition, Lu'An made a loan of
2.6 billion
RMB ($
399
) to the JV, and we established a liability of
2.3 billion
RMB (
$345
) for cash payments expected to be made to or on behalf of Lu'An in the fourth quarter of fiscal year 2018. The long-term debt from Lu'An is presented on the consolidated balance sheets as "
Long-term debt – related party
," and our expected cash payment is presented within "Payables and accrued liabilities." See Note
6
, Acquisitions, 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
14
,
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 nine
months ended
30 June 2018
, sales were approximately
$50
and
$200
, respectively, related to this contract. During the
three and nine
months ended
30 June 2017
, sales were approximately
$140
and
$420
, respectively.
On 26 April 2018, we completed the formation of Air Products Lu’an (Changzhi) Co., Ltd., a 60%-owned JV with Lu'An Clean Energy Company ("Lu'An") and acquired their gasification and syngas clean-up assets. The JV will receive coal, steam and power from Lu’An and will supply syngas to Lu’An under a long-term onsite contract. In connection with the acquisition, Lu'An made a loan of
2.6 billion
RMB ($
399
) to the JV, and we established a liability of
2.3 billion
(
$345
) for cash payments expected to be made to or on behalf of Lu'An in the fourth quarter of fiscal year 2018. The long-term debt from Lu'An is presented on the consolidated balance sheets as "
Long-term debt – related party
," and our expected cash payment is presented within "Payables and accrued liabilities." During the three months ended
30 June 2018
, sales related to the JV were not material.
See Note
6
, Acquisitions, to the consolidated financial statements for additional information.
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
$15
and
$25
for the
three and nine
months ended
30 June 2018
, respectively. Changes in estimates on projects accounted for under the percentage-of-completion method favorably impacted operating income by approximately
$15
and
$27
for the
three and nine
months ended
30 June 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 nine months ended 30 June 2018. The impacts, which were recorded in the first quarter of fiscal year 2018, 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
19
, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information on our utilization of financial instruments and an analysis of the sensitivity of these instruments to selected changes in market rates and prices is included in our
2017
Form 10-K.
Our net financial instrument position decreased from a liability of $3,832.3 at
30 September 2017
to a liability of
$3,771.5
at
30 June 2018
.
Interest Rate Risk
The sensitivity analysis related to the interest rate risk on the fixed portion of our debt portfolio assumes an instantaneous 100 bp move in interest rates from the level at 30 June 2018, with all other variables held constant. A 100 bp increase in market interest rates would result in a decrease of $101 and $112 in the net liability position of financial instruments at 30 June 2018 and 30 September 2017, respectively. A 100 bp decrease in market interest rates would result in an increase of $107 and $119 in the net liability position of financial instruments at 30 June 2018 and 30 September 2017, respectively.
There were no material changes to the sensitivity analysis related to the variable portion of our debt portfolio since 30 September 2017.
Foreign Currency Exchange Rate Risk
The sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in the foreign currency exchange rates from their levels at period end, with all other variables held constant. A 10% strengthening or weakening of the functional currency of an entity versus all other currencies would result in a decrease or increase, respectively, of $398 and $312 in the net liability position of financial instruments at
30 June 2018
and
30 September 2017
, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of
30 June 2018
. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
30 June 2018
, the disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
30 June 2018
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.