Air Products & Chemicals, Inc. — Fiscal Q2 2023 Form 10-Q Summary
Reporting period: Quarter and six months ended 31 March 2023; fiscal year ends 30 September. Comparisons are with the corresponding periods ended 31 March 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Air Products operates through the Americas, Asia, Europe, Middle East and India, and Corporate and other segments. Its principal businesses are industrial gases supplied through on-site and merchant modes, together with equipment sales. The company is also developing large-scale projects, including the NEOM Green Hydrogen Project and the Jazan gasification and power project.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Sales | $3,200.1 million | $2,945.1 million | +9% |
| Operating income | $459.8 million | $561.9 million | -18% |
| Operating margin | 14.4% | 19.1% | -470 bp |
| Net income | $449.9 million | $536.8 million | -16% |
| Net income margin | 14.1% | 18.2% | -410 bp |
| Net income attributable to Air Products | $439.8 million | $530.5 million | -17% |
| Diluted EPS | $1.97 | $2.38 | -17% |
| Adjusted EBITDA | $1,150.9 million | $1,018.6 million | +13% |
| Adjusted EBITDA margin | 36.0% | 34.6% | +140 bp |
For the first six months, sales increased 7% to $6,374.8 million, operating income increased 2% to $1,111.8 million, net income declined 5% to $1,033.7 million, and diluted EPS declined 7% to $4.54. Adjusted EBITDA increased 11% to $2,234.4 million, with an adjusted EBITDA margin of 35.1% versus 34.0%.
Cash Flow, Liquidity, and Debt
- Six-month operating cash flow was $1,358.0 million, compared with $1,305.0 million in the prior year.
- Cash used in investing was $2,476.0 million, including $1,841.1 million of plant additions and $912.0 million invested in or advanced to unconsolidated affiliates.
- Reported capital expenditures were $2,417.8 million, including a $335.3 million adjustment for NGHC expenditures not funded by Air Products equity. Fiscal 2023 capital expenditures are expected to be approximately $5.0 billion to $5.5 billion.
- Cash provided by financing activities was $603.4 million, primarily reflecting $1,891.6 million of long-term debt proceeds, partly offset by $596.0 million of debt repayments and $719.2 million of shareholder dividends.
- Cash and cash items were $2,242.4 million at 31 March 2023, compared with $2,711.0 million at 30 September 2022; short-term investments were $271.3 million.
- Total debt increased to $9,140.9 million from $7,644.8 million, and debt-to-total-capitalization increased to 38.4% from 35.8%. The company remained in compliance with its debt covenants.
- Air Products issued $600 million of 4.800% notes due 2033 and €700 million of 4.000% notes due 2035 under its Green Finance Framework. No borrowings were outstanding under the $2.75 billion revolving credit agreement.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected higher pricing of 8% and volumes of 6%, partially offset by a 4% unfavorable currency effect and 1% lower energy cost pass-through.
- Gross margin improved to 28.7% from 26.9%, primarily because of pricing actions, but operating income declined because of a significant one-time charge and higher costs.
- The company recorded a $185.6 million noncash charge, or $153.7 million after tax attributable to Air Products, to write off assets under construction after withdrawing from coal gasification projects in Indonesia and suspending construction of a plant in Ukraine. The charge reduced Q2 diluted EPS by $0.69.
- Higher inflation, planned maintenance, merchant-business power costs, incentive compensation, and project-development costs offset part of the pricing benefit. Project cost estimate changes reduced operating income by approximately $35 million in Q2 and $60 million year to date.
- Equity affiliates’ income increased 37% in Q2 to $165.9 million, primarily because of higher contributions from JIGPC following completion of the second phase of its asset acquisition in January 2023.
- Interest expense increased to $40.9 million from $32.3 million in Q2 and to $82.1 million from $62.8 million for the first six months. Management expects additional interest expense from the March 2023 green bond issuance.
- Adjusted diluted EPS increased 17% to $2.74 in Q2 and 12% to $5.38 for the first six months after excluding business and asset actions and non-service pension costs.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2023 capital expenditures of approximately $5.0 billion to $5.5 billion and remaining JIGPC investment of approximately $115 million later in calendar 2023.
- The NEOM Green Hydrogen Project is expected to be on-stream in 2026. Air Products consolidates NGHC as the primary beneficiary and expects the project to be financed through partner investments and non-recourse project financing.
- Management expects to continue paying cash dividends at comparable or increased levels. The quarterly dividend was increased 8% to $1.75 per share, the 41st consecutive annual increase in the quarterly dividend.
- Key risks include inflation, interest rates, foreign exchange, energy and raw-material availability, supply-chain disruptions, project delays or cancellations, execution of technically complex projects, regulatory and environmental requirements, cybersecurity, geopolitical events including the Russia-Ukraine conflict, and legal or environmental contingencies.
- Environmental liabilities were $68.9 million at 31 March 2023, with estimated exposure ranging from $68 million to a reasonably possible upper exposure of $82 million. The company disclosed 28 environmental sites without final settlement or remediation.
- A Brazilian competition-law fine of approximately $35 million remains pending on appeal; management considers an adverse final judgment possible but not probable and has recorded no provision.
- Management stated that COVID-19 and inflationary pressures had not materially affected reported results, although future effects remain uncertain. Disclosure controls and procedures were assessed as effective.
Most Important Facts for Investors to Verify
- Whether pricing gains can continue to offset inflation, maintenance, project-development costs, and currency pressure.
- The recurring earnings and cash-flow impact of the Indonesia and Ukraine project write-offs and whether additional impairments or cancellations occur.
- Execution, funding structure, timing, and Air Products’ ultimate capital requirements for NEOM, JIGPC, and other large projects.
- Whether leverage, interest expense, and foreign subsidiary borrowings remain manageable as capital expenditures increase.
- The sustainability of the improvement in adjusted EBITDA and adjusted EPS relative to GAAP earnings, including the effect of recurring pension-cost adjustments.
- Actual fiscal 2023 capital expenditures and operating cash flow compared with management’s stated outlook.
- Potential outcomes and timing of environmental remediation, the Brazilian competition matter, and other legal or regulatory proceedings.