Air Products & Chemicals, Inc. — Fiscal Q1 2022 Form 10-Q
Reporting period: Three months ended 31 December 2021, compared with the three months ended 31 December 2020. The filing reorganized reporting segments into Americas, Asia, Europe, Middle East and India, and Corporate and other; prior-period data was recast accordingly. Air Products primarily supplies industrial gases through on-site and merchant modes and sells related equipment.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $2,994.2 million | $2,375.2 million | +26% |
| Operating income | $523.0 million | $539.1 million | -3% |
| Operating margin | 17.5% | 22.7% | -520 bp |
| Net income | $549.6 million | $486.7 million | +13% |
| Net income attributable to Air Products | $560.4 million | $482.0 million | +16% |
| Diluted EPS | $2.52 | $2.17 | +$0.35 |
| Adjusted EBITDA | $1,003.1 million | $932.1 million | +8% |
| Adjusted EBITDA margin | 33.5% | 39.2% | -570 bp |
| Cash provided by operations | $785.2 million | $774.7 million | +$10.5 million |
| Capital expenditures, as defined by the company | $2,331.1 million | $684.2 million | +$1,646.9 million |
Sales growth reflected higher energy and natural-gas pass-through of 14%, volume growth of 8%, positive pricing of 5%, and unfavorable currency effects of 1%. Energy and natural-gas pass-through increased revenue but did not provide a comparable increase in operating profit, contributing materially to margin compression.
Equity affiliates’ income increased 113% to $147.8 million, primarily due to the new Jazan Integrated Gasification and Power Company joint venture and related Jazan project events. The effective tax rate declined to 17.1% from 19.3%.
Liquidity, Debt, and Balance Sheet
- Cash and cash items were $2,953.7 million at 31 December 2021, down from $4,468.9 million at 30 September 2021. Short-term investments were $728.6 million.
- Total debt was $7,378.0 million, down from $7,637.2 million, primarily after repayment of a $400.0 million 3.0% senior note. Total debt included $370.1 million of related-party debt.
- Total debt represented 33.9% of total capitalization, compared with 35.2% at 30 September 2021. The company was in compliance with its debt covenants.
- No borrowings were outstanding under the $2.5 billion revolving credit agreement. Foreign subsidiary credit facilities totaled $297.8 million, of which $222.1 million was outstanding.
- Operating cash flow covered routine capital spending, but the $1.6 billion initial JIGPC investment drove substantial investing cash outflows and a $1,515.2 million decline in cash during the quarter.
Material Changes and Unusual Items
- On 27 October 2021, Air Products made an initial investment of approximately $1.6 billion in JIGPC, representing a 55% interest, with approximately $130 million attributable to a noncontrolling partner. The company expects an additional investment of approximately $1 billion in 2023.
- JIGPC completed the first phase of a $12 billion project acquisition and began a 25-year agreement to supply electricity, steam, hydrogen, and utilities to an Aramco refinery and terminal complex.
- Air Products recognized remaining deferred profit related to the termination of the existing Jazan Gas Project Company supply agreement and sale of air separation units. Management stated that the total net benefit from the related project-finalization event was approximately $0.20 per diluted share.
- Prior-year results included a $10.3 million tax benefit from discontinued operations; no comparable benefit was recorded in Q1 2022.
- Europe was the principal operating weakness: sales rose 37%, but operating income fell 28% and operating margin declined 1,200 bp to 13.3% because power, fuel, and supply-chain costs exceeded pricing benefits.
Outlook, Commentary, and Risks
- Management expected fiscal 2022 capital expenditures of approximately $4.5 billion to $5.0 billion, including major project investments.
- The company expected an additional approximately $1 billion JIGPC investment in 2023.
- Management expected fiscal 2022 pension contributions of approximately $40 million to $50 million and pension settlement losses of approximately $5 million to $10 million.
- On 3 February 2022, the board declared a quarterly dividend of $1.62 per share, an 8% increase from $1.50. The company stated that it expected to continue paying dividends at comparable or increased levels.
- Key risks include COVID-19 effects, inflation and energy costs, supply-chain disruptions, the ability to recover costs through pricing, execution of technically complex hydrogen and gasification projects, project delays or cancellations, foreign exchange and interest-rate volatility, regulatory and climate-related changes, cybersecurity, environmental liabilities, litigation, and catastrophic events.
- The company remains involved in litigation concerning Winter Storm Uri-related Texas energy management services. Potential losses were considered reasonably possible but could not be estimated from the information available.
- Environmental accruals totaled $75.6 million, with estimated exposure ranging from $74 million to a reasonably possible upper exposure of $88 million across 32 sites.
Investor Verification Points
- Verify whether energy and natural-gas pass-throughs, pricing actions, and supply-chain costs are improving operating margins, particularly in Europe.
- Assess the cash-flow and return implications of the JIGPC investment, the planned 2023 funding, and the broader $4.5 billion–$5.0 billion fiscal 2022 capital program.
- Review the sustainability of equity-affiliate income, including the recurring contribution from JIGPC versus one-time Jazan project-related benefits.
- Monitor leverage, cash balances, commercial paper and foreign subsidiary borrowings, and availability under the revolving credit facility.
- Evaluate exposure to Winter Storm Uri litigation, environmental remediation, energy-price volatility, foreign exchange, interest rates, and execution risks in large-scale hydrogen and gasification projects.