Air Products & Chemicals, Inc. — Fiscal Q3 2022 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended 30 June 2022. Air Products supplies industrial gases through on-site and merchant channels and sells air separation, liquefied natural gas, and other equipment. Reporting segments are Americas, Asia, Europe, Middle East and India, and Corporate and other. Prior-period segment data was recast following the October 2021 reorganization.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Sales | $3,189.3 million | $2,604.7 million | +22% |
| Operating income | $627.4 million | $577.1 million | +9% |
| Operating margin | 19.7% | 22.2% | (250) bp |
| Net income | $587.1 million | $532.3 million | +10% |
| Net income margin | 18.4% | 20.4% | (200) bp |
| Diluted EPS attributable to Air Products | $2.62 | $2.40 | +$0.22 |
| Adjusted EBITDA | $1,080.7 million | $976.0 million | +11% |
| Adjusted EBITDA margin | 33.9% | 37.5% | (360) bp |
For the first nine months, sales were $9,128.6 million, operating income was $1,712.3 million, net income was $1,673.5 million, and diluted EPS was $7.52, compared with $7,481.9 million, $1,664.7 million, $1,496.1 million, and $6.69, respectively, in the prior-year period. Nine-month adjusted EBITDA was $3,102.4 million versus $2,842.1 million.
Q3 sales growth reflected 15% energy-cost pass-through, 7% pricing, and 5% volume growth, partly offset by 5% unfavorable currency. Higher pass-through increased reported sales but did not increase operating income, weighing on margins. Cost of sales rose 30%, driven by energy pass-through, planned maintenance, inflation, supply-chain challenges, and growth-related costs.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow for the first nine months was $2,213.2 million, down from $2,508.9 million. Working capital used $291.3 million, mainly because of higher receivables and inventory.
- Cash used in investing was $2,844.1 million. Defined capital expenditures were $3,855.1 million, including $2,139.1 million for plant and equipment and $1,650.9 million invested in or advanced to unconsolidated affiliates.
- Management expects fiscal-year 2022 capital expenditures to exceed $4.5 billion and expects an additional approximately $1 billion investment in JIGPC in 2023.
- Cash and cash items were $2,957.4 million at 30 June 2022, compared with $4,468.9 million at 30 September 2021. Short-term investments were $357.6 million.
- Total debt was $7,586.2 million, including $620.6 million of related-party debt, compared with $7,637.2 million at 30 September 2021. Debt was 34.8% of total capitalization.
- 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 that facility; foreign subsidiary facilities had $439.0 million outstanding.
- Dividends paid during the first nine months were $1,023.9 million. The quarterly dividend was increased 8% to $1.62 per share, and management stated that dividends are expected to continue at comparable or higher levels.
Material changes versus the prior comparable period
- Equity affiliates’ income increased 84% in Q3 and 90% for the first nine months, primarily because the Jazan Integrated Gasification and Power Company joint venture began contributing in late October 2021.
- Middle East and India equity-affiliate income increased to $67.2 million in Q3 and $230.6 million for the first nine months, compared with $17.1 million and $54.4 million, respectively.
- Europe sales increased substantially, but nine-month operating income fell 13% and operating margin declined 790 bp because of energy pass-through, unfavorable volume mix, higher costs, and currency effects.
- Corporate and other equipment sales increased 48% in Q3 and 44% for the first nine months, reducing the segment operating loss.
- Prior-year results included a $23.2 million facility-closure charge, a $36.8 million gain on exchange with a joint venture partner, and tax benefits from releases of uncertain-tax-position reserves. There were no comparable non-GAAP adjustments in 2022.
- The NEOM Green Hydrogen Project was consolidated beginning in Q3 2022. At 30 June 2022, consolidation included $258 million of cash, $144 million of plant and equipment, $270 million of related-party debt, and $29 million of noncontrolling interests. The project is expected to be onstream in 2026.
Outlook, risks, contingencies, and unusual items
- Management expects fiscal-year 2022 capital expenditures above $4.5 billion. Remaining performance obligations were approximately $24 billion at 30 June 2022, with approximately half expected to be recognized over the next five years.
- Key operating risks include inflation, energy and raw-material costs, supply-chain disruption, planned maintenance, foreign-exchange volatility, COVID-19 restrictions, project execution, and the ability to recover cost increases through pricing.
- Air Products intends to divest its small industrial gas business in Russia. Assets held for sale had a carrying value of approximately $75 million. A suspended Ukraine project had approximately $45 million of plant and equipment; recovery of these assets remains uncertain.
- Unconditional helium and rare-gas purchase obligations declined to approximately $6.9 billion from $8.3 billion at 30 September 2021, with most obligations occurring after fiscal 2027.
- Environmental accruals totaled $72.3 million, with estimated exposure ranging from $71 million to a reasonably possible upper exposure of $85 million. The company is involved at 32 environmental sites.
- A Brazilian antitrust fine of approximately $34 million plus interest remains pending on appeal; management believes an adverse final judgment is possible but not probable and has recorded no provision.
- Litigation related to the February 2021 Winter Storm Uri remains unresolved, and potential losses cannot currently be estimated.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting.
Investor verification checklist
- Verify whether pricing actions continue to offset energy, inflation, maintenance, and supply-chain costs, particularly in Europe.
- Track cash conversion, receivables, working capital, and the effect of planned capital spending on liquidity.
- Confirm the timing, funding, and returns of the JIGPC second-phase investment and the NEOM project.
- Assess the sustainability of earnings growth attributable to equity affiliates and one-time Jazan project benefits.
- Monitor the Russia and Ukraine asset recoverability, Winter Storm Uri litigation, Brazilian antitrust matter, and environmental exposures.
- Reconcile adjusted EBITDA and adjusted EPS with GAAP results and account for margin pressure caused by energy-cost pass-through.