Air Products & Chemicals, Inc. — Fiscal Q2 2024 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended 31 March 2024, compared with the corresponding periods of fiscal 2023. Air Products supplies industrial gases through on-site and merchant channels and sells equipment for air separation, hydrocarbon recovery, natural gas liquefaction, and liquid helium and hydrogen transport and storage. Reportable segments are Americas, Asia, Europe, Middle East and India, and Corporate and other.
Key financial metrics
| Metric | Q2 FY2024 | Q2 FY2023 | Change |
|---|---|---|---|
| Sales | $2,930.2 million | $3,200.1 million | Down 8% |
| Operating income | $637.2 million | $459.8 million | Up 39% |
| Operating margin | 21.7% | 14.4% | Up 730 basis points |
| Net income | $580.9 million | $449.9 million | Up 29% |
| Net income attributable to Air Products | $572.4 million | $439.8 million | Up 30% |
| Diluted EPS | $2.57 | $1.97 | Up $0.60 |
| Adjusted EBITDA | $1,198.3 million | $1,150.9 million | Up 4% |
| Adjusted EBITDA margin | 40.9% | 36.0% | Up 490 basis points |
| Equity affiliates’ income | $143.3 million | $165.9 million | Down 14% |
For the first six months, sales were $5,927.6 million, down 7%; operating income was $1,304.1 million, up 17%; net income was $1,202.5 million, up 16%; diluted EPS was $5.30, up 17%; and adjusted EBITDA was $2,372.8 million, up 6%. Six-month operating and net margins were 22.0% and 20.3%, respectively.
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities for the first six months was $1,428.3 million, compared with $1,358.0 million in the prior year.
- Cash used in investing activities was $3,226.0 million, including $3,114.9 million of additions to plant and equipment and $392.4 million of investments in financing receivables.
- Reported capital expenditures were $2,671.1 million, compared with $2,417.8 million in the prior year. Fiscal 2024 capital expenditures are expected to be approximately $5.0 billion to $5.5 billion.
- Cash provided by financing activities was $2,712.5 million, principally reflecting $3,649.0 million of long-term debt proceeds, partly offset by $777.9 million of dividends.
- Cash and cash items were $2,535.0 million at 31 March 2024, compared with $1,617.0 million at 30 September 2023. Foreign cash represented $1,333.0 million.
- Total debt increased to $13,621.7 million from $10,305.8 million, primarily because of new green senior notes and additional NEOM project financing. Debt was 86% fixed-rate and 14% variable-rate at quarter-end.
- In February 2024, the company issued $2.5 billion of green senior notes: $750 million due 2029 at 4.600%, $600 million due 2031 at 4.750%, and $1.15 billion due 2034 at 4.850%.
- New liquidity facilities include a $3.0 billion five-year revolving credit agreement and a $500 million 364-day revolving agreement. No borrowings were outstanding under either facility at 31 March 2024.
Material changes versus the prior comparable period
- Sales declined primarily because energy cost pass-through to customers was lower by 6% in the quarter and 9% for the six-month period. Quarterly volume declined 2%, while pricing increased 1%.
- Profitability improved substantially due to lower energy-related pass-through costs, favorable pricing, lower costs, and significantly lower business and asset action charges.
- Q2 FY2024 included $57.0 million of severance and postemployment charges under a global cost-reduction plan affecting approximately 1,100 employees. Q2 FY2023 included a $185.6 million noncash asset write-off related mainly to exited projects in Indonesia and Ukraine.
- Adjusted diluted EPS increased 4% to $2.85 in Q2 and 5% to $5.67 for the first six months, indicating more moderate underlying growth than reported GAAP EPS.
- Segment performance was mixed: Q2 Americas operating income rose 15%, Europe rose 16%, Asia fell 13%, and Middle East and India rose from a low base. Asia experienced weaker China-related demand, unfavorable currency, and unfavorable business mix.
- Interest expense rose to $59.9 million from $40.9 million in Q2 and to $113.4 million from $82.1 million for the first six months, reflecting higher debt balances and project financing, partially offset by increased capitalized interest.
- During the first six months, project cost estimate changes reduced operating income by approximately $65 million, including approximately $35 million in Q2.
Outlook, commentary, risks, and unusual items
Management states that available cash, operating cash flow, capital-market access, commercial paper capacity, and committed credit facilities are sufficient to meet liquidity needs. The filing does not provide a specific earnings or revenue forecast in the disclosed text, but maintains the fiscal 2024 capital-expenditure expectation of approximately $5.0 billion to $5.5 billion.
- The NEOM Green Hydrogen Company project is a consolidated variable-interest entity. It has approximately $6.1 billion of non-recourse project financing expected to fund about 73% of the project, plus approximately $500 million of additional facilities. Principal borrowings were approximately $2.5 billion at 31 March 2024. Creditors generally have no recourse to Air Products’ general credit.
- Air Products’ maximum exposure to loss related to World Energy and the sustainable aviation fuel expansion project was approximately $2.0 billion, including $1.4 billion of project-related spending, approximately $285 million of open purchase commitments, and approximately $300 million of financing receivables.
- Remaining performance obligations were estimated at approximately $27 billion, with approximately half expected to be recognized over the next five years and the balance thereafter. Actual amounts may change due to inflation, currency, contract amendments, cancellations, or renewals.
- Key disclosed risks include economic and demand conditions, energy and raw-material costs, inflation, interest rates, foreign exchange, project delays and cost escalations, supply-chain disruption, execution of technically complex projects, geopolitical conflict, sanctions, regulatory and climate-related requirements, cybersecurity incidents, safety events, environmental liabilities, litigation, and asset impairments.
- Environmental liabilities totaled $62.2 million at 31 March 2024, with estimated exposure ranging from $62 million to a reasonably possible upper exposure of $75 million. The company is involved at 27 sites where remediation or settlement remains unresolved.
- A Brazilian competition-law matter remains pending on appeal. No provision has been recorded because an adverse judgment is not considered probable; the estimated maximum possible loss is approximately $36 million plus interest.
- A Texas court entered judgment in Air Products’ favor in March 2024 concerning Winter Storm Uri energy-management charges. The judgment is subject to appeal and had no recorded financial-statement impact.
- Management concluded that disclosure controls and procedures were effective as of 31 March 2024 and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower energy pass-through benefits margins sustainably or primarily reflects changes in natural gas and power prices.
- Progress, funding requirements, construction costs, timing, and commercial performance of the NEOM project and other large growth projects.
- Execution against the $5.0 billion–$5.5 billion fiscal 2024 capital-expenditure plan and the resulting effect on leverage and free cash flow.
- Whether Asia’s weaker merchant demand and business mix improve, particularly in China.
- The effect of higher debt and interest expense on future earnings, liquidity, and credit metrics.
- Potential additional cost-reduction charges, project cost-estimate revisions, environmental remediation costs, and litigation outcomes.
- The composition and comparability of adjusted EPS and adjusted EBITDA, particularly the exclusions for business and asset actions and non-service pension costs.