Air Products & Chemicals, Inc. — Fiscal 2023 Form 10-K Summary
Business context and reporting period
Air Products is a global industrial gases company serving refining, chemicals, metals, electronics, manufacturing, healthcare, and food customers. Its strategy combines expansion of the core industrial gases business with large-scale blue and green hydrogen projects. The company operates through Americas, Asia, Europe, Middle East and India, and Corporate and other segments.
This Form 10-K covers the fiscal year ended 30 September 2023. The filing is an annual report rather than a quarterly filing; the requested “2023 Q4” corresponds to the fiscal year-end quarter within the annual reporting period.
Financial performance and key metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Sales | $12.600 billion | $12.699 billion | Down 1% |
| Operating income | $2.495 billion | $2.339 billion | Up 7% |
| Operating margin | 19.8% | 18.4% | Up 140 bp |
| Equity affiliates’ income | $604.3 million | $481.5 million | Up 26% |
| Net income | $2.339 billion | $2.267 billion | Up 3% |
| Net income margin | 18.6% | 17.8% | Up 80 bp |
| Net income attributable to Air Products | $2.300 billion | $2.256 billion | Up 2% |
| Diluted EPS from continuing operations | $10.30 | $10.08 | Up 2% |
| Adjusted diluted EPS | $11.51 | $10.25 | Up 12% |
| Adjusted EBITDA | $4.702 billion | $4.247 billion | Up 11% |
| Adjusted EBITDA margin | 37.3% | 33.4% | Up 390 bp |
| Cash provided by operating activities | $3.206 billion | $3.171 billion | Up $35.1 million |
| Capital expenditures, company-defined | $5.224 billion | $4.650 billion | Up $574.4 million |
| Total debt | $10.306 billion | $7.645 billion | Up $2.661 billion |
| Cash and cash items | $1.617 billion | $2.711 billion | Down $1.094 billion |
Sales performance reflected higher volume of 3% and pricing of 5%, offset by a 6% reduction in energy cost pass-through and a 3% unfavorable currency impact. On-site sales represented approximately 49% of consolidated sales and are supported by long-term contracts with fixed charges, minimum purchase provisions, and price escalation mechanisms.
Gross margin increased to 29.9% from 26.5%, although lower energy pass-through contributed approximately 200 bp of the improvement. Selling and administrative expense rose 6% to $957.0 million, and research and development expense increased 3% to $105.6 million. The effective tax rate increased to 19.1% from 18.2%.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was $3.206 billion. Working capital was a net use of $424.8 million, including higher inventory and payments associated with accrued liabilities and taxes.
- Cash used in investing activities was $5.916 billion, primarily reflecting $4.626 billion of plant and equipment additions, $912.0 million invested in or advanced to equity affiliates, and $665.1 million of financing receivables.
- Capital expenditures increased because of low- and zero-carbon hydrogen projects, maintenance spending, and other growth investments.
- Total debt increased to $10.306 billion. The increase was driven primarily by NEOM project financing, new green bonds, and higher commercial paper and foreign facility borrowings.
- The company had no borrowings under its $2.75 billion revolving credit agreement at year-end. Foreign credit facilities totaled $1.597 billion, of which $1.041 billion was outstanding.
- Debt to total capitalization was 36.6%, and the company reported compliance with all debt covenants.
- NEOM Green Hydrogen Company secured approximately $6.1 billion of non-recourse project financing and approximately $500 million of additional credit facilities. Approximately $1.4 billion had been drawn at year-end.
- Dividends paid were $1.497 billion. The quarterly dividend increased to $1.75 per share, and the company reported 41 consecutive years of dividend increases. No shares were repurchased during fiscal 2023; $485.3 million remained under the authorization.
Material changes versus the prior comparable period
- Operating performance improved despite lower sales, primarily because of pricing discipline, higher volumes, and lower energy costs passed through to customers.
- Equity affiliates’ income benefited from the second phase of the Jazan gasification and power project and improved results from affiliates in Italy and Mexico.
- Fiscal 2023 included $244.6 million of business and asset action charges, including $217.6 million of noncash write-offs related to exited projects and $27.0 million of severance and restructuring costs affecting approximately 450 employees. Fiscal 2022 included a $73.7 million charge associated largely with the divestiture of the Russian industrial gases business.
- Interest expense increased to $177.5 million from $128.0 million, reflecting higher interest rates and higher debt balances. Capitalized interest increased to $115.4 million because of greater construction activity.
- Net periodic pension cost increased to $110.9 million from a $3.6 million benefit, primarily because of higher interest costs and lower expected returns on plan assets.
- Corporate and other operating loss increased to $287.3 million from $184.7 million, reflecting lower equipment-business contributions and higher corporate costs supporting the growth strategy.
- Segment operating income increased strongly in the Americas and Europe, was broadly stable in Asia, declined in Middle East and India despite higher sales, and deteriorated in Corporate and other.
Guidance, outlook, risks, and unusual items
Management expects fiscal 2024 results to benefit from new on-site projects, including the Uzbekistan natural gas-to-syngas facility, additional LNG equipment projects, continued merchant pricing discipline, and cost improvements from strategic actions. Management expects fiscal 2024 capital expenditures of approximately $5.0 billion to $5.5 billion, funded through cash, operating cash flow, and additional financing.
The company had committed approximately $15 billion to energy-transition projects as of fiscal year-end. Management expects future benefits from U.S. Inflation Reduction Act incentives for carbon sequestration and clean hydrogen once related projects become operational.
- Large-scale hydrogen, carbon capture, gasification, and sustainable aviation fuel projects involve significant construction, financing, permitting, technology, offtake, execution, and cost-overrun risks.
- As of 30 September 2023, the company had approximately $16.118 billion of unconditional purchase obligations, including approximately $8.8 billion for plant and equipment and approximately $6.4 billion for helium and rare gases. Approximately $5 billion of the plant and equipment commitments related to NEOM.
- The company issued performance guarantees related to NEOM that could require payments of up to approximately $1.2 billion in the event of nonperformance as EPC contractor. It also reported maximum potential payments of $244.5 million under bank guarantees for the Jazan project.
- Environmental exposure covered 27 sites. The recorded environmental accrual was $64.5 million, with a reasonably possible exposure range of approximately $64 million to $78 million.
- A Brazilian antitrust fine of R$179.2 million, approximately $36 million at year-end exchange rates plus accrued interest, remains pending on appeal. No provision was recorded because an adverse final judgment was not considered probable.
- Key operating risks include inflation, energy and raw-material costs, foreign exchange, weak demand in China and electronics, geopolitical events, sanctions, supply-chain interruptions, safety incidents, cybersecurity, environmental regulation, tax changes, and litigation.
- The company reported no triggering events requiring impairment testing for asset groups, goodwill, indefinite-lived intangibles, or equity affiliates, and annual goodwill and intangible-asset tests indicated that fair values exceeded carrying values.
Most important facts for investors to verify
- Whether pricing and volume gains can continue to offset inflation, currency pressure, lower energy pass-through, and maintenance and project-development costs.
- The timing, final cost, financing structure, offtake arrangements, commercial returns, and execution status of NEOM and other clean hydrogen projects.
- The effect of increased leverage, variable-rate debt, green-bond financing, foreign credit facilities, and non-recourse project financing on future interest expense and liquidity.
- Whether fiscal 2024 capital spending of $5.0 billion to $5.5 billion remains achievable without materially increasing corporate debt or reducing shareholder distributions.
- Changes in the company’s remaining performance obligations of approximately $25 billion and the assumptions underlying long-term on-site contracts.
- Potential cash exposure from the Brazilian antitrust matter, environmental remediation, project guarantees, purchase commitments, and other legal or regulatory contingencies.
- The sustainability of the reported margin expansion, particularly the contribution from lower energy cost pass-through and non-GAAP adjustments.