Air Products & Chemicals Inc. (NYSE:APD)

The total inventory balance exhibited a significant contraction between 2015 and 2017, decreasing from 657.8 million to 335.4 million. Following this period of decline, inventory levels stabilized, fluctuating between 388.3 million and 404.8 million from 2018 through 2020.

Finished Goods Analysis

A substantial reduction in finished goods is observed between 2016 and 2017, with values dropping from 456.7 million to 120.0 million. This sharp decline represents the primary driver of the overall decrease in total inventories during that period. From 2017 to 2020, finished goods remained relatively stable, showing a marginal upward trend to 134.5 million.

Raw Materials and Work in Process Trends

Raw materials, supplies, and other inventories remained the most consistent component of the inventory portfolio, fluctuating within a narrow range between 204.0 million and 249.5 million. Work in process levels remained consistently low relative to other categories, peaking at 38.2 million in 2016 and ending the period at 21.3 million, suggesting a streamlined conversion process.

Inventory Valuation and LIFO Reserve

A transition in accounting valuation is evident in the LIFO reserve data. Between 2015 and 2017, the excess of FIFO cost over LIFO cost decreased from 100.8 million to 23.3 million. By 2018, this reserve was eliminated, as the FIFO cost and the reported total inventories became identical. This indicates a shift toward a consistent FIFO valuation method for the remainder of the analyzed period.

An analysis of the financial data from 2015 to 2020 reveals a systematic convergence between reported and adjusted values, stemming from the transition or elimination of the LIFO (Last-In, First-Out) reserve in inventory valuation. Between 2015 and 2017, a significant discrepancy existed between reported and adjusted inventory levels, which completely disappeared by the 2018 fiscal year, indicating a shift toward FIFO (First-In, First-Out) valuation or the full liquidation of the LIFO reserve.

Inventory Valuation and Reserve Trends

A substantial LIFO reserve was present in 2015, with adjusted inventories exceeding reported inventories by 100.8 million US$. This gap narrowed to 79 million US$ in 2016 and further decreased to 23.3 million US$ in 2017. By September 30, 2018, the reported and adjusted inventory figures reached parity at 396.1 million US$, a state of alignment that persisted through 2020. Overall inventory levels experienced a sharp decline between 2016 and 2017 before stabilizing in the 388 million to 405 million US$ range.

Impact on Balance Sheet Strength

The adjustments to inventory had a direct, proportional impact on current assets, total assets, and shareholders' equity. In 2015, the conversion to FIFO increased total assets by 100.8 million US$ and shareholders' equity by the same amount. As the LIFO reserve diminished, the variance between reported and adjusted balance sheet figures contracted, reaching zero by 2018. Despite these adjustments, a long-term upward trend in the company's scale is evident, with reported total assets growing from approximately 17.4 billion US$ in 2015 to 25.2 billion US$ by 2020, and shareholders' equity increasing from 7.2 billion US$ to 12.1 billion US$ over the same period.

Net Income Volatility and Adjustments

The transition from LIFO to FIFO resulted in periodic adjustments to net income, reflecting changes in the LIFO reserve. In 2015 and 2016, the adjusted net income was lower than the reported net income, with the most significant decrease occurring in 2016 (a reduction of 21.8 million US$). Conversely, in 2017, the adjusted net income was 11.6 million US$ higher than the reported figure. From 2018 onward, no adjustments were necessary, as the valuation methods converged. Net income remained volatile throughout the period, peaking in 2017 at approximately 3 billion US$ before stabilizing between 1.5 billion and 1.9 billion US$ from 2018 to 2020.

Liquidity and Asset Composition

Reported current assets exhibited significant growth, particularly between 2017 and 2020, rising from 5.88 billion US$ to 8.68 billion US$. The initial impact of the LIFO reserve on current assets was material in 2015, adding approximately 3.4% to the reported current asset base, but this influence became negligible by 2017 and non-existent by 2018.

An analysis of the financial ratios from 2015 to 2020 reveals a significant shift in liquidity and a convergence between reported and adjusted figures, suggesting a diminishing impact of LIFO reserves on the overall financial position.

Liquidity and Solvency

A strong upward trend is observed in the current ratio, which rose from 0.80 in 2015 to 3.59 by 2020. This indicates a substantial improvement in the ability to cover short-term obligations. Financial leverage peaked in 2016 at 2.55 before declining to a low of 1.71 in 2019 and subsequently increasing to 2.08 in 2020, reflecting fluctuations in the capital structure over the period.

Profitability and Return Metrics

Net profit margins exhibited high volatility, with a notable spike to 36.65% in 2017 before stabilizing between 16% and 21% from 2018 to 2020. This volatility is mirrored in the Return on Equity (ROE) and Return on Assets (ROA), both of which peaked in 2017 at 29.75% and 16.25%, respectively. By 2020, ROE settled at 15.62% and ROA at 7.50%.

Operational Efficiency

Total asset turnover shows a general downward trend, decreasing from 0.57 in 2015 to 0.35 in 2020. This decline suggests a reduction in the efficiency of asset utilization in generating revenue over the six-year period.

LIFO vs. FIFO Adjustment Impact

The variance between reported and adjusted ratios is marginal across all metrics. In the earlier years (2015-2017), slight differences are visible in the current ratio and ROE, where adjustments slightly modified the reported performance. However, by 2019 and 2020, the reported and adjusted figures converged completely. This indicates that the impact of inventory valuation methods on liquidity, profitability, and leverage became immaterial to the final ratio calculations toward the end of the analyzed period.

The analysis of liquidity metrics from 2015 to 2020 reveals a significant and sustained improvement in the short-term financial position. There is a clear upward trend in both total current assets and the resulting liquidity ratios, indicating a strengthened ability to meet short-term obligations.

Current Asset Evolution

Reported current assets grew from 2,910,800 thousand US dollars in 2015 to 8,684,900 thousand US dollars by 2020. While a period of slight contraction occurred between 2017 and 2019, where assets declined from 5,876,700 thousand to 4,618,300 thousand US dollars, this was followed by a substantial increase in 2020, representing the peak value within the observed period.

Liquidity Ratio Trends

The reported current ratio demonstrated a consistent climb, starting at 0.80 in 2015, which indicated that current liabilities exceeded current assets. The ratio crossed the 1.0 threshold in 2016 (1.31) and continued to rise, reaching 3.59 by 2020. This trajectory signifies a transition from a tight liquidity position to a highly liquid state.

Analysis of Adjusted Metrics

In the early years of the period, specifically between 2015 and 2017, a slight variance existed between reported and adjusted current assets and ratios. For instance, in 2015, the adjusted current ratio was 0.83 compared to the reported 0.80. However, from 2018 through 2020, the reported and adjusted figures converged completely, with no difference observed between the two metrics in the final three years of the analysis.

Comparative Growth Patterns

The most aggressive growth in liquidity occurred between 2015 and 2017 and again in 2020. The jump in the adjusted current ratio from 2.54 in 2019 to 3.59 in 2020 aligns with the sharp increase in current assets, suggesting a strategic accumulation of liquid resources or a significant reduction in current liabilities during the final fiscal year.

The financial performance from 2015 to 2020 is characterized by significant volatility in the initial years followed by a period of steady recovery and margin expansion.

Profitability Volatility (2015–2018)

A sharp contraction in the adjusted net profit margin is observed between 2015 and 2016, where the ratio declined from 12.87% to 6.40%. This low point was followed by an exceptional spike in 2017, with the adjusted net profit margin reaching a peak of 36.79%, coinciding with a substantial increase in adjusted net income to 3.01 billion US dollars. By 2018, the margin experienced a significant correction, returning to 16.51%, which suggests that the 2017 results were driven by non-recurring factors.

Stabilization and Growth Trend (2018–2020)

Following the volatility of the preceding years, a consistent upward trend is evident from 2018 through 2020. The adjusted net profit margin improved incrementally from 16.51% in 2018 to 19.73% in 2019, eventually reaching 21.30% by September 30, 2020. This expansion in margin was supported by a steady increase in adjusted net income, which grew from 1.47 billion US dollars in 2018 to 1.89 billion US dollars in 2020.

Convergence of Reported and Adjusted Metrics

The variance between reported and adjusted net profit margins was most pronounced between 2015 and 2018. However, a total convergence is observed in 2019 and 2020, where the reported and adjusted net profit margins are identical at 19.73% and 21.30%, respectively. This indicates that the impact of adjusting items on the net income attributable to the company became negligible during the final two years of the analyzed period.

The analysis of asset utilization from 2015 to 2020 reveals a general downward trend in efficiency, as the capacity to generate revenue relative to the asset base diminished over the six-year period.

Adjusted Total Asset Growth

The asset base exhibited a consistent upward trajectory from 2015 through 2018, increasing from US$ 17,538,900 thousand to US$ 19,178,300 thousand. Following a marginal contraction in 2019, a substantial increase occurred in 2020, where adjusted total assets rose to US$ 25,168,500 thousand, marking a significant expansion of the balance sheet.

Adjusted Total Asset Turnover Trends

The turnover ratio declined from 0.56 in 2015 to 0.35 by 2020. A notable decrease occurred in 2017, when the ratio fell to 0.44. While the ratio experienced a period of relative stability at 0.47 during 2018 and 2019, the sharp increase in total assets in 2020 resulted in a precipitous drop in the turnover ratio, indicating a reduction in asset productivity.

Correlation Between Expansion and Efficiency

An inverse correlation is observed between the scale of the asset base and the turnover efficiency. The most pronounced decline in the adjusted total asset turnover ratio coincides with the period of most aggressive asset growth in 2020. This suggests that the substantial increase in assets has not been matched by a proportional increase in revenue, leading to a lower overall efficiency ratio.

The analysis of adjusted financial leverage reveals a non-linear trend between 2015 and 2020, characterized by an initial peak, a period of significant deleveraging, and a subsequent increase in the final year.

Adjusted Total Assets Trend

Adjusted total assets exhibited steady growth from 2015 to 2018, rising from US$ 17.5 billion to US$ 19.2 billion. After a marginal decrease in 2019, a substantial expansion occurred in 2020, with assets increasing to US$ 25.2 billion, representing a significant increase in the company's asset base.

Adjusted Shareholders' Equity Growth

Equity levels remained relatively stable between 2015 and 2016 but experienced a sharp increase in 2017, rising from US$ 7.2 billion to US$ 10.1 billion. This upward trajectory continued through 2020, reaching US$ 12.1 billion, indicating a strengthened capital position over the six-year period.

Adjusted Financial Leverage Dynamics

The adjusted financial leverage ratio peaked in 2016 at 2.53. A marked decline followed, reaching a low of 1.71 by 2019. This downward trend was primarily driven by the rapid expansion of adjusted shareholders' equity relative to asset growth. However, the ratio rose to 2.08 in 2020, correlating with the significant surge in total assets during that fiscal year.

Comparison of Reported and Adjusted Metrics

Adjusted financial leverage remained closely aligned with reported financial leverage throughout the analyzed period. The minor variances observed between 2015 and 2016 converged completely from 2017 through 2020, where reported and adjusted ratios became identical.

The financial performance between September 2015 and September 2020 is characterized by significant volatility in adjusted net income and a consistent expansion of the adjusted shareholders' equity base.

Adjusted Return on Equity (ROE) Trends

The Adjusted ROE experienced substantial fluctuations, starting at 17.32% in 2015 and dropping to a period low of 8.51% in 2016. A sharp increase followed in 2017, where the ratio reached a peak of 29.79%, driven by a substantial surge in adjusted net income to US$ 3,012,000 thousand. Subsequently, the ROE normalized, settling into a stable range between 13.58% and 15.92% from 2018 through 2020.

Profitability and Equity Growth

Adjusted net income exhibited high variance, particularly between 2016 and 2018. However, from 2018 onward, a steady upward trajectory in earnings is observed, rising from US$ 1,474,500 thousand to US$ 1,886,700 thousand by 2020. Simultaneously, the adjusted shareholders' equity grew consistently from US$ 7,349,800 thousand in 2015 to US$ 12,079,800 thousand in 2020, indicating a sustained increase in the capital base.

Convergence of Reported and Adjusted Metrics

A high degree of correlation exists between reported and adjusted figures throughout the period. By 2019 and 2020, the reported and adjusted ROE and equity figures converged completely, suggesting that non-recurring items had a negligible impact on the financial results during the latter part of the analysis period.

The financial performance from 2015 to 2020 is characterized by significant volatility in earnings and a substantial expansion of the asset base toward the end of the period. While adjusted net income fluctuated considerably, the asset base remained relatively stable until a sharp increase occurred in 2020, impacting the overall return on assets.

Adjusted Net Income Trends

Adjusted net income exhibited high volatility, decreasing from 1,273,300 thousand USD in 2015 to a low of 609,300 thousand USD in 2016. A sharp increase followed in 2017, reaching a peak of 3,012,000 thousand USD, before correcting to 1,474,500 thousand USD in 2018. A steady recovery was observed from 2019 through 2020, with income rising to 1,886,700 thousand USD.

Asset Base Expansion

Adjusted total assets showed a gradual upward trend from 17,538,900 thousand USD in 2015 to 18,942,800 thousand USD in 2019. However, a significant expansion is observed in 2020, where assets increased to 25,168,500 thousand USD, representing a substantial growth in the company's resource base within a single fiscal year.

Adjusted Return on Assets (ROA) Analysis

The Adjusted ROA closely mirrored the volatility of net income, dropping to 3.36% in 2016 and peaking at 16.29% in 2017. Following this peak, the ratio stabilized between 7.69% and 9.29% from 2018 to 2019. In 2020, despite an increase in adjusted net income, the Adjusted ROA declined to 7.50%. This decline is attributable to the disproportionate increase in total assets, which diluted the return relative to the earnings growth.