Air Products & Chemicals, Inc. — Fiscal Q1 2023 Form 10-Q Summary
Business context and reporting period
Air Products is a global industrial-gases and equipment company operating through the Americas, Asia, Europe, Middle East and India, and Corporate and other segments. The filing covers the three months ended 31 December 2022, the first quarter of fiscal 2023, with comparative results for the three months ended 31 December 2021. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $3,174.7 million | $2,994.2 million | Up 6% |
| Operating income | $652.0 million | $523.0 million | Up 25% |
| Operating margin | 20.5% | 17.5% | Up 300 bp |
| Net income | $583.8 million | $549.6 million | Up 6% |
| Net income attributable to Air Products | $572.2 million | $560.4 million | Up 2% |
| Diluted EPS | $2.57 | $2.52 | Up 2% |
| Adjusted EBITDA | $1,083.5 million | $1,003.1 million | Up 8% |
| Adjusted EBITDA margin | 34.1% | 33.5% | Up 60 bp |
| Cash provided by operations | $719.3 million | $785.2 million | Down $65.9 million |
| Capital expenditures | $834.2 million | $2,331.1 million | Down $1,496.9 million |
Sales growth reflected 7% higher pricing, 3% higher energy-cost pass-through, and 2% higher volumes, partly offset by a 6% unfavorable currency impact. Gross margin increased to 28.4% from 25.7%. Selling and administrative expense was $234.4 million, or 7.4% of sales, compared with 7.8% in the prior year.
Interest expense increased to $41.2 million from $30.5 million, primarily because of higher average interest rates on variable-rate debt. The effective tax rate increased to 18.9% from 17.1%. Adjusted diluted EPS was $2.64 versus $2.48, excluding non-service pension costs.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash items were $3,131.0 million at 31 December 2022, compared with $2,711.0 million at 30 September 2022. Foreign cash represented $1,516.3 million.
- Operating cash flow was $719.3 million. Working capital used $337.6 million, primarily from lower payables and accrued liabilities and higher inventories.
- Investing cash outflow was $256.2 million, including $834.2 million of additions to plant and equipment, partly offset by $591.5 million of investment proceeds.
- Financing cash outflow was $85.6 million, including $359.4 million of dividends and $195.9 million of debt repayments, partly offset by $476.3 million of long-term debt proceeds.
- Total debt increased to $8,057.8 million from $7,644.8 million at 30 September 2022. Related-party debt totaled $791.5 million.
- The company had no borrowings under its $2.75 billion revolving credit agreement, which matures in March 2026. Debt represented 35.7% of total capitalization, and the company reported compliance with its debt covenants.
- Total assets were $28,278.3 million and total equity was $14,517.4 million at quarter-end.
Material changes versus the prior comparable period
- Operating income benefited from $191 million of positive pricing net of power and fuel costs and $8 million from higher volumes, partially offset by $40 million of unfavorable currency effects and $30 million of higher costs.
- Equity affiliates’ income declined 26% to $110.0 million. The prior-year period included a significant benefit from recognizing deferred profit related to the Jazan Gas Project Company transaction.
- Corporate and other sales declined 19% to $179.4 million and the operating loss increased to $79.4 million because of lower equipment-project activity and higher corporate support costs.
- Europe delivered the largest margin improvement, with operating margin rising to 18.4% from 13.3%, primarily due to pricing and energy-cost recovery despite lower volumes.
- Asia sales were essentially flat because volume and pricing gains were offset by a 10% currency headwind. Americas sales increased 13%, while Middle East and India sales increased 75%, partly due to an acquisition.
- Q1 FY2022 capital expenditures included the initial $1.6 billion investment in the Jazan Integrated Gasification and Power Company joint venture; this investment did not recur in Q1 FY2023.
Guidance, outlook, commentary, risks, and unusual items
- Management expects fiscal 2023 capital expenditures of approximately $5.0 billion to $5.5 billion.
- On 19 January 2023, the company invested an additional $908 million in the second phase of the Jazan gasification and power project, including $73 million from a noncontrolling partner. A remaining investment of approximately $115 million is expected later in calendar 2023.
- The Jazan project is expected to contribute more significantly following completion of its second phase; final commissioning items are expected later in calendar 2023.
- The NEOM green hydrogen project remains under construction and is expected to be on stream in 2026. Air Products consolidates the project and is its exclusive green-ammonia offtaker under a long-term agreement.
- Remaining performance obligations were approximately $23 billion at 31 December 2022, with approximately half expected to be recognized over the next five years and the balance thereafter.
- Management declared a quarterly dividend of $1.75 per share on 26 January 2023, an 8% increase from $1.62. The company stated that this was its 41st consecutive annual increase in the quarterly dividend.
- Project cost-estimate changes unfavorably affected operating income by approximately $25 million in Q1 FY2023.
- Key risks include inflation, energy and raw-material costs, supply-chain disruption, foreign currency movements, higher interest rates, project delays or cancellations, execution of large technically complex projects, geopolitical events including the Russia-Ukraine conflict, cybersecurity incidents, environmental and regulatory liabilities, and legal proceedings.
- Environmental liabilities totaled $70.4 million, with a reasonably possible exposure range of $70 million to $83 million. The filing states that current litigation is not reasonably expected to have a material impact, although a Brazilian antitrust matter remains pending and carries a possible maximum loss of approximately $34 million plus interest.
- Non-service pension cost was $19.5 million in Q1 FY2023 versus a $12.0 million benefit in the prior year, reflecting higher interest costs and lower expected asset returns. Fiscal 2023 pension contributions are expected to be approximately $25 million to $35 million.
Most important facts for investors to verify
- Whether pricing and energy-cost pass-through continue to offset inflation, maintenance, power, and other operating costs.
- The timing, remaining investment requirements, commissioning status, and earnings contribution of the Jazan and NEOM projects.
- Execution of the $5.0 billion to $5.5 billion fiscal 2023 capital-expenditure plan and its effect on leverage and free cash flow.
- Foreign-exchange sensitivity, particularly in Asia and Europe, and exposure to variable-rate debt.
- The sustainability of the improved operating margins and the effect of lower equipment-project activity in Corporate and other.
- Potential changes in environmental, litigation, pension, and geopolitical exposures, including the pending Brazilian antitrust matter.