Air Products & Chemicals, Inc. — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended 30 September 2021. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter information is included within full-year results. Continuing-operations figures are presented unless otherwise noted.
Business context
Air Products is a global industrial-gases, equipment, and services company operating in more than 50 countries. Its products include atmospheric, process, specialty, and hydrogen gases, as well as air-separation, LNG, helium, hydrogen, gasification, and carbon-capture equipment and technologies. Fiscal 2021 reporting segments were Industrial Gases–Americas, Industrial Gases–EMEA, Industrial Gases–Asia, Industrial Gases–Global, and Corporate and other.
Sales were diversified across refining, chemicals, metals, electronics, manufacturing, food and beverage, and energy markets. No customer represented more than 10% of consolidated revenue. Approximately 60% of sales were generated outside the United States.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Sales | $10,323.0 million | $8,856.3 million | Up 17% |
| Operating income | $2,281.4 million | $2,237.6 million | Up 2% |
| Operating margin | 22.1% | 25.3% | Down 320 bp |
| Net income | $2,114.9 million | $1,931.1 million | Up 10% |
| Net income attributable to Air Products | $2,099.1 million | $1,886.7 million | Up 11% |
| Net income margin | 20.5% | 21.8% | Down 130 bp |
| Diluted EPS from continuing operations | $9.12 | $8.55 | Up $0.57, or 7% |
| Adjusted diluted EPS | $9.02 | $8.38 | Up $0.64, or 8% |
| Adjusted EBITDA | $3,883.2 million | $3,619.8 million | Up 7% |
| Adjusted EBITDA margin | 37.6% | 40.9% | Down 330 bp |
| Cash flow from operations | $3,335.2 million | $3,264.7 million | Up $70.5 million |
| Capital expenditures | $2,550.7 million | $2,716.7 million | Down $166.0 million |
| Total debt | $7,637.2 million | $7,907.8 million | Down $270.6 million |
Liquidity and balance sheet: Cash and cash items were $4,468.9 million, and short-term investments were $1,331.9 million at 30 September 2021. Total assets were $26,859.2 million and total equity was $14,088.0 million. The company had no borrowings under its $2.5 billion revolving credit facility and was in compliance with debt covenants. Total debt represented 35.2% of total capitalization, compared with 38.9% in the prior year.
Shareholder returns: The quarterly dividend increased to $1.50 per share, and fiscal-year dividends totaled $5.84 per share versus $5.18 in fiscal 2020. This represented the 39th consecutive year of dividend increases. No shares were repurchased during fiscal 2021; $485.3 million remained under the authorization.
Material changes versus fiscal 2020
- Sales growth reflected 5% higher volumes, 2% positive pricing, 6% energy and natural-gas cost pass-through, and 4% favorable currency effects.
- Margins contracted because pass-through revenue increased sales without a corresponding increase in operating income, while power, natural-gas, maintenance, inflation, and business-development costs increased.
- Merchant-gas demand generally recovered toward pre-pandemic levels in the second half of fiscal 2021.
- Industrial Gases–Americas sales increased 15% and operating income increased 5%; EMEA sales increased 27% and operating income increased 18%; Asia sales increased 8%, but operating income decreased 4%, primarily because of reduced Lu’An contributions and higher costs.
- Equipment sales increased 40% in Industrial Gases–Global and 28% in Corporate and other, but operating losses widened in both areas because of higher project, product-development, business-development, and corporate-support costs.
- A $23.2 million facility-closure charge was recorded, primarily for a noncash asset write-down following a contract termination.
- A $36.8 million pretax gain resulted from exchanging interests with the former Tyczka Group joint-venture partner.
- Fiscal 2020 included a $33.8 million headquarters-relocation gain and a $33.8 million equity-affiliate benefit related to the India Finance Act; these items did not recur in fiscal 2021.
- Fiscal 2021 discontinued operations generated $70.3 million of after-tax income, largely from tax-reserve releases related to previously divested businesses; fiscal 2020 had a $14.3 million loss.
Guidance, outlook, and unusual items
- Management expects fiscal 2022 capital expenditures of approximately $4.5 billion to $5.0 billion, compared with $2.55 billion in fiscal 2021.
- Air Products invested $1.6 billion in Jazan Integrated Gasification and Power Company in October 2021 and expects an additional investment of approximately $1.0 billion in 2023. Jazan is expected to contribute to results beginning in the first quarter of fiscal 2022.
- Management expects higher fiscal 2022 maintenance costs and higher pension expense, while the Lu’An facility is expected to operate under an interim agreement through fiscal 2022.
- The company intends to pursue gasification, carbon-capture, hydrogen, and other energy-transition projects, while using pricing actions and contractual pass-through provisions to address energy-cost inflation.
- On 4 November 2021, the company announced a segment reorganization effective 1 October 2021. Fiscal 2022 reporting will separate Europe and the Middle East and move Industrial Gases–Global activities into Corporate and other.
- Principal risks include COVID-19 and related demand or operational disruptions, inflation and energy-price volatility, supply-chain constraints, foreign currency exposure, complex-project execution, customer or project cancellations, regulatory and climate-related costs, cybersecurity incidents, environmental obligations, litigation, and geopolitical risks.
- The company is involved in 31 environmental sites where remediation or investigation remains unresolved. Environmental exposure was estimated at $76 million to a reasonably possible upper exposure of $90 million, with $76.7 million accrued.
- The Brazilian competition matter remains pending. No provision was recorded; the maximum potential loss was estimated at approximately $33 million plus interest.
- Winter Storm Uri-related litigation and potential Texas power and energy-management costs were considered reasonably possible but could not be estimated at the filing date.
Important facts for investors to verify
- Reconcile fiscal 2022 results to the new segment structure and assess the underlying performance of Europe, the Middle East, and the former Industrial Gases–Global activities.
- Evaluate whether pricing and contractual energy pass-throughs offset sustained power, natural-gas, labor, maintenance, and supply-chain inflation without further margin deterioration.
- Monitor execution, funding, returns, and accounting treatment for the Jazan project, including the planned additional investment of approximately $1.0 billion.
- Separate recurring operating earnings from the $70.3 million discontinued-operations benefit, the $36.8 million joint-venture gain, and the $23.2 million facility-closure charge.
- Assess Lu’An’s interim pricing agreement and its effect on fiscal 2022 revenue, operating income, and margins.
- Review debt maturities, including approximately $484.0 million due in fiscal 2022, and the company’s ability to fund substantially higher planned capital expenditures from cash and operating cash flow.
- Track the Brazilian competition appeal, Winter Storm Uri disputes, environmental remediation obligations, guarantees, and approximately $9.982 billion of unconditional purchase obligations, including substantial helium commitments.
- Consider foreign-currency sensitivity: management estimates that a 10% reduction in the Chinese renminbi or euro versus the U.S. dollar would lower annual operating income by approximately $45 million or $25 million, respectively.