Air Products & Chemicals, Inc. — Fiscal Q2 2022 Form 10-Q
Reporting period: Three and six months ended 31 March 2022; fiscal year ending 30 September. The filing was submitted 5 May 2022. Results are unaudited and prior-period segment data was recast following a reporting reorganization effective 1 October 2021.
Business Context
Air Products operates regional industrial-gas businesses in the Americas, Asia, Europe, and the Middle East and India, plus a Corporate and other segment that includes equipment and services. Revenue is generated primarily through on-site and merchant gas supply, with additional equipment sales. Approximately half of sales are from on-site operations, where contracts generally permit energy-cost pass-through.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Sales | $2,945.1 million | $2,502.0 million | Up 18% |
| Operating income | $561.9 million | $548.5 million | Up 2% |
| Operating margin | 19.1% | 21.9% | Down 280 bp |
| Net income | $536.8 million | $477.1 million | Up 13% |
| Net income margin | 18.2% | 19.1% | Down 90 bp |
| Diluted EPS from continuing operations | $2.38 | $2.13 | Up 12% |
| Adjusted EBITDA | $1,018.6 million | $934.0 million | Up 9% |
| Adjusted EBITDA margin | 34.6% | 37.3% | Down 270 bp |
| Equity affiliates’ income | $120.8 million | $69.8 million | Up 73% |
For the first six months, sales increased 22% to $5,939.3 million, while operating income was broadly flat at $1,084.9 million. Net income rose 13% to $1,086.4 million and diluted EPS from continuing operations increased 15% to $4.90. Adjusted EBITDA increased 8% to $2,021.7 million, but adjusted EBITDA margin declined to 34.0% from 38.3%.
Cash Flow, Liquidity, Debt, and Capital Deployment
- Operating cash flow for the first six months was $1,305.0 million, down from $1,580.3 million, primarily because working capital used $262.2 million of cash versus $91.2 million in the prior year.
- Cash used in investing activities was $2,635.8 million, including $1,433.6 million for plant and equipment, $65.1 million for acquisitions, and $1,650.9 million invested in or advanced to unconsolidated affiliates.
- Defined capital expenditures were $3,149.6 million, compared with $1,297.6 million in the prior year. Fiscal 2022 capital expenditures were expected to be approximately $4.5 billion to $5.0 billion.
- Cash and cash items were $2,348.7 million at 31 March 2022, compared with $4,468.9 million at 30 September 2021. Short-term investments were $848.9 million.
- Total debt was approximately $7,441.5 million, down from $7,637.2 million at 30 September 2021. Debt-to-total-capitalization was 33.9%, compared with 35.2% at fiscal year-end.
- The revolving credit facility was increased from $2.5 billion to $2.75 billion and transitioned from LIBOR to SOFR. No borrowings were outstanding under this facility. Foreign subsidiary facilities had $446.9 million outstanding out of $486.5 million available.
- Cash dividends paid during the first six months were $664.7 million. The quarterly dividend was increased 8% to $1.62 per share, the 40th consecutive annual increase. No share repurchases were made; $485.3 million remained under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected 8% higher volumes, 6% pricing, and 6% energy-cost pass-through, partially offset by a 2% unfavorable currency impact.
- Higher energy, maintenance, distribution, supply-chain, inflation, and project-start-up costs compressed gross and operating margins despite pricing actions.
- Equity affiliates’ income benefited substantially from the Jazan Integrated Gasification and Power Company joint venture, which began contributing in late October 2021. Air Products invested approximately $1.6 billion initially and expects an additional investment of approximately $1.0 billion in 2023.
- Europe sales increased 32% in Q2, but operating income declined 12% and operating margin fell to 15.8%, principally because of energy-cost pass-through, unfavorable costs, mix, and currency effects.
- The prior-year comparison included a $23.2 million facility-closure charge and a $36.8 million gain on an exchange with a joint venture partner; neither item was recorded in Q2 2022.
- Net income in the first six months of 2021 included a $10.3 million discontinued-operations tax benefit; there was no comparable benefit in 2022.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2022 capital expenditures of approximately $4.5 billion to $5.0 billion and an additional approximately $1.0 billion JIGPC investment in 2023.
- Management expected total fiscal 2022 pension contributions of approximately $40 million to $50 million and approximately $10 million of pension settlement losses, including approximately $5 million expected in Q3.
- Management stated that pricing actions remained focused on recovering elevated power and fuel costs, particularly in Europe. It also expected higher planned-maintenance costs in Asia during the second half of the fiscal year.
- Air Products announced its intent to divest its small Russian industrial-gas business and suspended construction of a plant in Ukraine. The Russian and Ukrainian operations were not material to fiscal 2021 sales, but sanctions, retaliatory measures, contract-exit costs, and asset-recovery risks could affect future results. Approximately $54.1 million of Russian assets were classified as held for sale; approximately $45 million related to the suspended Ukraine project remained in plant and equipment.
- Unconditional purchase obligations for helium and rare gases totaled approximately $8.7 billion, with most obligations occurring after fiscal 2027.
- Environmental accruals totaled $74.1 million, with estimated exposure ranging from $73 million to a reasonably possible upper exposure of $87 million. The company disclosed 32 sites under investigation or remediation.
- Potential contingencies include a Brazilian competition-law matter with a maximum possible loss of approximately $38 million plus interest, although management considers an adverse final judgment not probable, and unresolved Texas energy-management litigation arising from Winter Storm Uri. Potential losses from the Texas matter could not be estimated.
- Principal forward-looking risks include inflation, energy and raw-material costs, supply-chain disruptions, foreign exchange, interest rates, COVID-19 effects, geopolitical events, project delays, sanctions, cybersecurity, environmental regulation, litigation, and the execution of large-scale hydrogen, gasification, and other projects.
Important Facts for Investors to Verify
- Whether pricing actions continue to offset energy, maintenance, distribution, inflationary, and supply-chain costs without further margin deterioration.
- The sustainability and cash-distribution profile of JIGPC earnings, including the expected 2023 investment and project-financing structure.
- Progress and potential financial consequences of the Russia divestiture and suspended Ukraine project.
- Actual fiscal 2022 capital expenditures versus the $4.5 billion to $5.0 billion expectation and the resulting effect on cash balances and debt.
- Operating performance and margin recovery in Europe, where sales growth was accompanied by significant margin compression.
- Exposure to the $8.7 billion helium and rare-gas purchase commitments and the ability to pass related costs through to customers.
- Developments in the Texas Winter Storm Uri litigation, Brazilian competition matter, and environmental remediation obligations.
- Management’s non-GAAP measures, including adjusted EBITDA and adjusted EPS, alongside the underlying GAAP results and the unusual items excluded from prior-period comparisons.