Air Products has reported GAAP net income from continuing operations of $252m, down 10% compared to the previous year, and diluted earnings per share (EPS) from continuing operations of $1.15, down 11% versus the prior year, for its fiscal Q1 ended 31st December 2016.
For the quarter, on a non-GAAP basis, adjusted net income from continuing operations of $322m was up 10% versus prior year, and adjusted diluted earnings per share from continuing operations of $1.47 was up 9% versus the previous year.
On a GAAP basis, the effective tax rate in the quarter was 23.3%. The adjusted effective tax rate in the quarter was 21.2%, lower than it has been recently due to the MT separation, new accounting for share-based compensation, and one-time adjustments.
Q1 sales of $1,883bn increased 1% from the previous year, as 2% higher volumes and 2% favourable energy pass-through were partially offset by 3% unfavourable currency. The volume increase was driven by strength in Industrial Gases – Asia and continued progress on the Jazan project. Pricing was flat with the prior year.
For the quarter, on a GAAP basis, operating income of $328m decreased 12% and operating margin of 17.4% decreased 260 basis points versus prior year.
Adjusted operating income of $408m increased 6%, and adjusted EBITDA of $652m increased 3% over the previous year. Adjusted operating margin of 21.7% improved 110 basis points and adjusted EBITDA margin of 34.7% improved 80 basis points over the prior year. Adjusted ROCE increased 180 basis points to 12.7%. Productivity actions drove these results.
Commenting on the results for the quarter, Seifi Ghasemi, Chairmen, President and CEO, said, “This was another quarter of strong operating performance by our dedicated employees who are making Air Products the safest and most profitable industrial gases company in the world. We increased adjusted EPS by 9% over the previous year, improved both adjusted operating and adjusted EBITDA margins, and increased our adjusted ROCE by 180 basis points to 12.7%.”
“This is the tenth consecutive quarter where we are reporting high single-digit or double-digit growth in our profitability. We also operated for the whole quarter without a lost-time accident. I am very proud that our people achieved these results while also delivering excellent safety performance and completing the sale of the Performance Materials Division to Evonik in early January. Despite the weak economy and currency headwinds, our robust financial position and ongoing productivity programs have us operating from a position of strength. All of this means that we remain in a strong position to grow Air Products’ core industrial gases business and deliver value for our shareholders,” Ghasemi added.
Industrial Gases – Americas sales of $864m increased 3% versus prior year as 5% higher energy pass-through was partially offset by 2% lower volumes, primarily from weakness in Latin America and customer-driven outages in the US Gulf Coast. Pricing and currency were flat versus prior year. Segment operating income of $224m increased 6% over prior year and adjusted EBITDA of $350m increased 5%, driven by productivity actions. Segment operating margin of 25.9% improved 60 basis points, and adjusted EBITDA margin of 40.5% improved 40 basis points over prior year. Excluding energy pass-through, operating margin increased 150 basis points.
Industrial Gases – EMEA sales of $400m declined 9% versus last year on 6% unfavorable currency, 2% lower volumes and 1% lower energy pass-through. Pricing was flat. Segment operating income of $88m and adjusted EBITDA of $140m both decreased 5% from the prior year; on a constant currency basis, they increased slightly, as productivity actions more than offset the impact from lower volumes. Segment operating margin of 22.0% increased 100 basis points and adjusted EBITDA margin of 35.0% increased 160 basis points over the prior year, driven by productivity actions.
Industrial Gases – Asia sales of $438m increased 6% versus prior year, as volume growth of 10% was partially offset by 3% unfavorable currency and 1% lower pricing. Segment operating income of $118m increased 1% and adjusted EBITDA of $178m decreased 1%. Segment operating margin of 26.9% declined 140 basis points, and adjusted EBITDA margin of 40.7% declined 290 basis points from the prior year, mainly due to increased utility cost pass-through at new plants.
Non-GAAP results for the Company in the fiscal Q1 of 2017 exclude expenses of $30.2m, or $0.12 per share, for business separation costs; $2.7m, or $0.01 per share, of tax costs associated with the business separation; and $50.0m, or $0.19 per share, for cost reduction and asset actions.
Full year and outlook
Ghasemi commented, “Air Products is in a strong position. We have put in place a robust and geographically-focused organisation, and our productivity programs already implemented and the new ones underway will drive our EPS growth as we move forward. In addition, we now have an excellent balance sheet with effectively no net debt. Reflecting this financial strength, we raised the dividend for the 35th consecutive year and remain confident in the tremendous growth opportunities to invest in our core industrial gases business.”
“But like any other global company, we are not immune from macro-economic and geopolitical events. The new administration in the US has not yet articulated its full economic and foreign policy. In Europe, it is not yet certain how the UK government will address the exit from the European Union. In addition, it is impossible to predict how other countries will react to the new economic and political developments in the US and Europe. All of these events can have significant effects on currency exchange rates and the level of economic activity around the world. As a result, we are now more cautious in our outlook.”
Air Products expects fiscal 2017 adjusted EPS of $6.00 to $6.25, which at midpoint, represents an increase of 9% over last year. This includes an expected full-year adjusted tax rate of approximately 23%. For the fiscal 2017 second quarter, Air Products expects adjusted EPS from continuing operations of $1.30 to $1.40.
The capital expenditure forecast for fiscal year 2017 is approximately $1bn on a GAAP and non-GAAP basis.
Update on non-binding proposed transaction with Yingde Gases Group Company Ltd (Yingde)
As previously announced on the 8th and 20th of January, Air Products has submitted to the board of directors of Yingde a preliminary, non-binding indication of interest to acquire all of the outstanding shares of Yingde, a Hong Kong listed company and a major industrial gas company in China. Air Products seeks to engage in a friendly transaction, which Air Products believes would be strategically and financially compelling for employees, customers and shareholders of both companies. Air Products currently has about $1bn of sales and more than 2,500 people employed in its successful China business.
At this time, no agreement between Air Products and Yingde has been reached with respect to the proposal, and there cannot be any assurance that such an agreement will be reached or, if such an agreement is reached, that a transaction will be completed.