Air Products & Chemicals, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Air Products provides industrial gases, related equipment, applications expertise, and large-scale hydrogen and carbon-capture solutions across approximately 50 countries. Its reporting segments are Americas, Asia, Europe, Middle East and India, and Corporate and other. The filing covers the fiscal year ended 30 September 2022; the source is an annual filing rather than a standalone fourth-quarter filing.
Fiscal 2022 results were affected by inflation, energy and raw-material cost increases, supply-chain constraints, foreign-currency movements, COVID-19 conditions, and Russia’s invasion of Ukraine. The company continued its two-pillar strategy of expanding the core industrial-gases business and developing world-scale clean-hydrogen projects.
Key financial metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Sales | $12,698.6 million | $10,323.0 million | Up 23% |
| Operating income | $2,338.8 million | $2,281.4 million | Up 3% |
| Operating margin | 18.4% | 22.1% | Down 370 basis points |
| Equity affiliates’ income | $481.5 million | $294.1 million | Up 64% |
| Net income | $2,266.5 million | $2,114.9 million | Up 7% |
| Net income attributable to Air Products | $2,256.1 million | $2,099.1 million | Up 7% |
| Net income margin | 17.8% | 20.5% | Down 270 basis points |
| Diluted EPS from continuing operations | $10.08 | $9.12 | Up 11% |
| Adjusted diluted EPS from continuing operations | $10.41 | $9.02 | Up 15% |
| Adjusted EBITDA | $4,247.0 million | $3,883.2 million | Up 9% |
| Adjusted EBITDA margin | 33.4% | 37.6% | Down 420 basis points |
| Cash provided by operating activities | $3,170.6 million | $3,335.2 million | Down $164.6 million |
| Capital expenditures | $4,650.0 million | $2,550.7 million | Up $2,099.3 million |
| Cash and cash items | $2,711.0 million | $4,468.9 million | Down $1,757.9 million |
| Total debt | $7,644.8 million | $7,637.2 million | Up $7.6 million |
Material changes versus the prior comparable period
- Sales growth reflected 13% higher energy-cost pass-through, 8% volume growth, and 6% pricing, partially offset by a 4% unfavorable currency impact.
- On-site sales represented 52% of total sales, compared with 49% in fiscal 2021. Long-term contracts generally provide fixed charges, minimum purchase requirements, and energy-cost pass-through protections.
- Margins declined substantially because higher energy-cost pass-through, inflation, planned maintenance, distribution and sourcing costs, supply-chain issues, and growth-related spending more than offset pricing benefits.
- Equity affiliates’ income benefited from the Jazan Integrated Gasification and Power Company, or JIGPC, joint venture, which began contributing in late October 2021. JIGPC drove a significant increase in Middle East and India equity-affiliate income.
- Capital expenditures increased primarily because of the approximately $1.6 billion initial investment in JIGPC. Air Products expects an additional investment of approximately $1 billion in fiscal 2023 for the project’s second phase.
- Air Products consolidated the NEOM Green Hydrogen Company joint venture beginning in the third quarter of fiscal 2022. The project is expected to be on-stream in 2026.
- The company recorded a $73.7 million noncash charge, or $61.0 million after tax, related to the divestiture of its small Russian industrial-gas business. It also suspended construction of a plant in Ukraine; approximately $45 million of related assets remained at risk of recovery as of 30 September 2022.
- A $14.8 million noncash impairment charge was recorded for two small Asia equity-method investments.
- Cash dividends increased to $1.62 per share quarterly, and fiscal-year dividends totaled $6.36 per share versus $5.84 in fiscal 2021. No share repurchases occurred; $485.3 million remained available under the authorization.
Liquidity, debt, and financial position
- Operating cash flow of $3.17 billion was below capital expenditures of $4.65 billion, resulting in significant use of cash for investment and growth projects.
- Total debt was $7.64 billion, representing 35.8% of total capitalization. The company reported compliance with all debt covenants.
- The revolving credit facility was increased to $2.75 billion and transitioned from LIBOR to SOFR. No borrowings were outstanding under this facility at year-end.
- Foreign subsidiary credit facilities totaled $749.0 million, of which $457.5 million was borrowed and outstanding at year-end.
- Scheduled principal maturities total $744.0 million in fiscal 2023, $496.8 million in fiscal 2024, and $398.4 million in fiscal 2025, with $4.27 billion due thereafter.
- Unconditional purchase obligations totaled $10.588 billion, including approximately $6.6 billion for helium and rare gases and approximately $3.1 billion of estimated future plant and equipment purchases under open purchase orders.
- Management stated that cash balances and operating cash flow are generally sufficient for liquidity needs and that it did not expect to use the revolving credit facility for additional liquidity at the filing date.
Guidance, outlook, commentary, and unusual items
- Management expects global economic challenges to continue in fiscal 2023 but plans to pursue additional pricing actions, volume opportunities, and cost controls.
- The on-site business, which generates approximately half of company sales, is expected to continue providing stable cash flow because of contractual protections against energy-cost fluctuations.
- The second phase of the JIGPC gasification and power project was expected to commence in the second quarter of fiscal 2023.
- Fiscal 2023 capital expenditures were expected to be approximately $5.0 billion to $5.5 billion, funded primarily with cash, operating cash flow, and financing as needed.
- Management expects potential future benefits from U.S. Inflation Reduction Act incentives for carbon sequestration and clean-hydrogen production once relevant projects become operational.
- The company reported approximately $23 billion of remaining performance obligations at 30 September 2022, with approximately half expected to be recognized over the next five years.
- Environmental liabilities were accrued at $71.3 million, with a reasonably possible exposure range of approximately $71 million to $84 million. The company is involved in remediation at 30 sites.
- A Brazilian competition-law matter remains pending. No provision was recorded because an adverse final judgment was not considered probable; the stated maximum possible loss was approximately $33 million plus interest.
- Litigation related to the February 2021 Winter Storm Uri energy-management dispute remained unresolved, and potential losses could not be estimated.
- Management and Deloitte & Touche concluded that internal control over financial reporting was effective as of 30 September 2022.
Principal risks
- Execution, financing, permitting, cost-overrun, technology, and customer risks associated with large-scale hydrogen, carbon-capture, gasification, and other complex projects.
- Energy, natural-gas, helium, raw-material, labor, and supply-chain cost and availability risks, including the possibility that price increases cannot be fully passed through to customers.
- Foreign-exchange, geopolitical, sanctions, tariff, regulatory, and security risks from extensive international operations.
- Demand, pricing, credit, project-delay, and impairment risks associated with customer industries and global economic conditions.
- Environmental, greenhouse-gas, climate-policy, safety, cybersecurity, legal, tax, and competition-law exposures.
- Joint-venture governance and performance risk, including reliance on partners and limitations on Air Products’ ability to direct certain ventures.
Investor verification checklist
- Verify the sustainability and returns assumptions underlying the planned $5.0 billion to $5.5 billion of fiscal 2023 capital expenditures and the additional approximately $1 billion JIGPC investment.
- Assess whether pricing actions and contractual pass-through provisions can offset energy, inflation, maintenance, distribution, and project-startup costs without further margin erosion.
- Monitor JIGPC and NEOM project execution, financing, commissioning dates, ownership economics, and potential noncontrolling-interest effects.
- Review recovery prospects for the approximately $45 million of Ukraine project assets and the financial impact of the Russia divestiture.
- Evaluate liquidity against planned capital spending, debt maturities, purchase obligations, dividends, and foreign subsidiary borrowing.
- Review the status and potential exposure of the Brazilian competition matter, Winter Storm Uri litigation, environmental remediation, tax examinations, and other contingencies.
- Reconcile adjusted EBITDA and adjusted EPS with GAAP results, particularly the treatment of the Russia charge and equity-method impairment.