Air Products & Chemicals, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended 31 December 2023, compared with the three months ended 31 December 2022. The interim financial statements are unaudited. Air Products is a global industrial gases company with reportable segments in the Americas, Asia, Europe, Middle East and India, and Corporate and other.
Key Financial Metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Sales | $2,997.4 million | $3,174.7 million | Down 6% |
| Operating income | $666.9 million | $652.0 million | Up 2% |
| Operating margin | 22.2% | 20.5% | Up 170 bp |
| Net income | $621.6 million | $583.8 million | Up 6% |
| Net income attributable to Air Products | $609.3 million | $572.2 million | Up 6% |
| Diluted EPS | $2.73 | $2.57 | Up 6% |
| Adjusted diluted EPS | $2.82 | $2.64 | Up 7% |
| Adjusted EBITDA | $1,174.5 million | $1,083.5 million | Up 8% |
| Adjusted EBITDA margin | 39.2% | 34.1% | Up 510 bp |
| Cash provided by operating activities | $626.6 million | $719.3 million | Down $92.7 million |
Business Performance and Material Changes
- Sales declined primarily because energy cost pass-through to customers decreased 11%, reflecting lower natural gas prices. This was partly offset by 3% higher volumes, 1% higher pricing, and a 1% favorable currency effect.
- Operating income and margins improved despite lower sales. Pricing and volume contributed approximately $71 million, while higher costs of approximately $56 million reflected planned maintenance, labor inflation, and higher depreciation.
- Equity affiliates’ income increased 44% to $158.4 million, primarily due to higher income from the Jazan Integrated Gasification and Power Company joint venture and an affiliate in Mexico.
- Interest expense increased to $53.5 million from $41.2 million because of higher debt balances, including NEOM project financing and prior green bond borrowings. Capitalized interest increased to $55.1 million from $15.1 million due to larger projects under construction.
- Asia was the principal weak segment: operating income fell 10% and operating margin declined to 26.6% from 30.3%, reflecting unfavorable volume mix, maintenance costs, labor inflation, weak Chinese economic growth, and lower helium demand.
- Europe operating income increased 36% and margin rose to 27.0%, supported by higher volumes, including the Uzbekistan facility, favorable currency, and lower power costs.
- Corporate and other operating loss increased to $100.2 million from $79.4 million, primarily due to higher costs on certain non-LNG sale-of-equipment projects.
Cash Flow, Capital Spending, Debt and Liquidity
- Operating cash flow was $626.6 million, affected by a $369.6 million working-capital use, including payments of incentive compensation, reduced customer advances, accrued utility liabilities, value-added taxes on project construction, and helium purchases.
- Cash used in investing activities was $1.666 billion, including $1.446 billion of additions to plant and equipment and $301.8 million invested in financing receivables.
- Reported capital expenditures were $1.386 billion, compared with $724.5 million in the prior-year quarter. Management expects fiscal 2024 capital expenditures of approximately $5.0 billion to $5.5 billion.
- Financing activities provided $1.363 billion, primarily from a $1.021 billion increase in commercial paper and short-term borrowings and $810.4 million of long-term debt proceeds. Shareholder dividends paid were $388.9 million.
- Cash and cash items were $1.963 billion at 31 December 2023, including $1.852 billion held outside the United States. Short-term investments were $271.8 million.
- Total debt increased to $12.108 billion from $10.306 billion at 30 September 2023. The company classified approximately $1.3 billion of commercial paper and a $400 million note maturing in July 2024 as long-term debt because it expects to refinance them.
- The company had no borrowings under its $2.75 billion revolving credit facility, which matures in March 2026, and was in compliance with all debt covenants. Total debt to total capitalization was 38.7% at 31 December 2023, versus 36.6% at fiscal year-end.
- NGHC, the NEOM Green Hydrogen Company joint venture, is consolidated as a variable interest entity. Its non-recourse project financing borrowings were $2.129 billion at quarter-end. Creditors do not have recourse to Air Products’ general credit.
Outlook, Unusual Items and Risks
- Management continues to expect fiscal 2024 capital expenditures of approximately $5.0 billion to $5.5 billion. The filing does not provide a consolidated earnings or revenue guidance range in the supplied text.
- Management recorded an approximately $30 million unfavorable cumulative adjustment to operating income from revised cost estimates on certain sale-of-equipment projects.
- Adjusted EPS excludes $24.9 million of net non-service pension costs, resulting in a $0.08 per-share adjustment. The effective tax rate was 17.9%, compared with 18.9% in the prior-year quarter.
- The company acquired sustainable aviation fuel assets from World Energy and accounts for the transaction as a financing arrangement. Its maximum exposure to loss related to World Energy was approximately $1.9 billion, including project spending, open purchase commitments, and financing receivables.
- Remaining performance obligations were approximately $27 billion at quarter-end; approximately half is expected to be recognized over the next five years and the balance thereafter, subject to contract changes and other uncertainties.
- Key risks include project delays or cost escalation, execution of large technically complex projects, energy and raw-material costs, interest rates, foreign exchange, inflation, supply-chain disruption, geopolitical conflicts, tariffs and sanctions, environmental and climate regulation, cybersecurity, safety incidents, litigation, and demand weakness in industrial gases and helium.
- Environmental accruals totaled $63.3 million, with estimated exposure ranging from $63 million to a reasonably possible upper exposure of $77 million. The company does not currently believe its legal proceedings are reasonably likely to have a material financial impact.
- The board increased the quarterly dividend from $1.75 to $1.77 per share in January 2024, representing the company’s 42nd consecutive year of dividend increases.
Important Facts for Investors to Verify
- Whether lower energy pass-through continues to depress reported sales despite underlying volume and pricing gains.
- The pace, funding requirements, operating milestones, and potential cost or execution risks of the NEOM Green Hydrogen Project.
- Refinancing plans and terms for approximately $1.3 billion of commercial paper and the $400 million note due July 2024.
- Whether fiscal 2024 capital expenditures remain within the $5.0 billion–$5.5 billion outlook and the resulting effect on free cash flow and leverage.
- The financial exposure and construction progress associated with the World Energy sustainable aviation fuel expansion and Uzbekistan financing arrangements.
- Recovery in Asia, including Chinese demand and helium volumes, and the sustainability of margin improvements in the Americas and Europe.
- Reconciliation of adjusted EPS and adjusted EBITDA to GAAP results, particularly the treatment of recurring non-service pension costs and other exclusions.