filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the interim consolidated financial statements and the accompanying notes contained in this quarterly report. Unless otherwise stated, financial information is presented in millions of dollars, except for per share data. Except for net income, which includes the results of discontinued operations, financial information is presented on a continuing operations basis.
Comparisons of our results of operations and liquidity and capital resources are for the second quarter and first six months of fiscal years 2022 and 2021. The disclosures provided in this quarterly report are complementary to those made in our Annual Report on Form 10-K for the fiscal year ended 30 September 2021, which was filed with the SEC on 18 November 2021.
We reorganized our reporting segments effective 1 October 2021. Prior year segment information presented has been updated to conform with the fiscal year 2022 presentation. Refer to Note 19, Business Segment Information, to the consolidated financial statements for additional information.
The financial measures discussed below are presented in accordance with U.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on an "adjusted" or "non-GAAP" basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance. For each non-GAAP financial measure, including adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and capital expenditures, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of non-GAAP measures are presented under “Reconciliations of Non-GAAP Financial Measures” beginning on page 48.
For information concerning activity with our related parties, refer to Note 18, Supplemental Information, to the consolidated financial statements.
Russia's Invasion of Ukraine
The safety of our team members in areas affected by Russia's invasion of Ukraine remains our top priority.
Additionally, in March we announced our intent to divest our small industrial gas business in Russia, which had fiscal year 2021 sales of less than $25. The results of our business in Russia are reflected in the Europe segment. We do not intend to pursue any new business development activities in the country.
We also have operations in Ukraine that generated sales of less than $5 in fiscal year 2021, and we have suspended the construction of a plant.
Our results of operations for the periods covered by this report were not materially impacted by these events; however, given the dynamic nature of these circumstances, uncertainty remains related to how these events may affect our business, results of operations, and overall financial performance in future periods. For example, our ability to recover the carrying value of our assets in Russia and Ukraine as well as our ability to exit contracts in Russia could be impacted by sanctions imposed on Russia and potential Russian retaliatory measures.
SECOND QUARTER 2022 VS. SECOND QUARTER 2021
SECOND QUARTER 2022 IN SUMMARY
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Sales of $2,945.1 increased 18%, or $443.1, primarily due to higher volumes, positive pricing, and higher energy cost pass-through to customers. Merchant volumes and pricing improved across the regional segments, while our on-site business remained stable. Pricing actions were particularly successful in Europe, where our team was able to implement increases to offset unprecedented power and fuel costs.
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Operating income of $561.9 increased 2%, or $13.4, primarily due to higher volumes and pricing actions that more than offset higher costs. Operating margin of 19.1% decreased 280 basis points ("bp"), primarily due to the unfavorable costs and higher energy cost pass-through to customers, which increases sales but not operating income.
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Equity affiliates' income of $120.8 increased 73%, or $51.0, primarily driven by the Jazan Integrated Gasification and Power Company ("JIGPC") joint venture, which began contributing to our results in the Middle East and India segment in late October 2021.
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Net income of $536.8 increased 13%, or $59.7, while net income margin of 18.2% decreased 90 bp.
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Adjusted EBITDA of $1,018.6 increased 9%, or $84.6, while adjusted EBITDA margin of 34.6% decreased 270 bp.
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Diluted EPS of $2.38 increased 12%, or $0.25 per share, and adjusted diluted EPS of $2.38 increased 14%, or $0.30 per share. A summary table of changes in diluted EPS is presented below.
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We increased the quarterly dividend on our common stock to $1.62 per share, representing an 8% increase, or $0.12 per share, from the previous dividend of $1.50 per share. This is the 40th consecutive year we have increased our quarterly dividend, highlighting our commitment to creating shareholder value through capital deployment and rewarding our investors through dividends.
Changes in Diluted EPS Attributable to Air Products
The per share impacts presented in the tables below were calculated independently and do not sum to the total change in diluted EPS due to rounding.
| Three Months Ended | |||||||||||
| 31 March | Increase | ||||||||||
| 2022 | 2021 | (Decrease) | |||||||||
| Diluted EPS From Continuing Operations | $2.38 | $2.13 | $0.25 | ||||||||
| Operating Impacts | |||||||||||
| Underlying business | |||||||||||
| Volume | $0.18 | ||||||||||
| Price, net of variable costs | 0.14 | ||||||||||
| Other costs | (0.21) | ||||||||||
| Currency | (0.01) | ||||||||||
| Facility closure | 0.08 | ||||||||||
| Gain on exchange with joint venture partner | (0.12) | ||||||||||
| Total Operating Impacts | $0.06 | ||||||||||
| Other Impacts | |||||||||||
| Equity affiliates' income | $0.18 | ||||||||||
| Interest expense | 0.01 | ||||||||||
| Other non-operating income/expense, net | (0.03) | ||||||||||
| Change in effective tax rate | 0.05 | ||||||||||
| Noncontrolling interests | (0.01) | ||||||||||
| Total Other Impacts | $0.20 | ||||||||||
| Total Change in Diluted EPS From Continuing Operations | $0.25 |
| Three Months Ended | |||||||||||
| 31 March | Increase | ||||||||||
| 2022 | 2021 | (Decrease) | |||||||||
| Diluted EPS From Continuing Operations | $2.38 | $2.13 | $0.25 | ||||||||
| Facility closure | — | 0.08 | (0.08) | ||||||||
| Gain on exchange with joint venture partner | — | (0.12) | 0.12 | ||||||||
| Adjusted Diluted EPS From Continuing Operations | $2.38 | $2.08 | $0.30 |
SECOND QUARTER 2022 RESULTS OF OPERATIONS
Discussion of Consolidated Results
| Three Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | Change | |||||||||||||||||||||||
| GAAP Measures | ||||||||||||||||||||||||||
| Sales | $2,945.1 | $2,502.0 | $443.1 | 18 | % | |||||||||||||||||||||
| Operating income | 561.9 | 548.5 | 13.4 | 2 | % | |||||||||||||||||||||
| Operating margin | 19.1 | % | 21.9 | % | (280) | bp | ||||||||||||||||||||
| Equity affiliates’ income | $120.8 | $69.8 | $51.0 | 73 | % | |||||||||||||||||||||
| Net income | 536.8 | 477.1 | 59.7 | 13 | % | |||||||||||||||||||||
| Net income margin | 18.2 | % | 19.1 | % | (90) | bp | ||||||||||||||||||||
| Non-GAAP Measures | ||||||||||||||||||||||||||
| Adjusted EBITDA | $1,018.6 | $934.0 | $84.6 | 9 | % | |||||||||||||||||||||
| Adjusted EBITDA margin | 34.6 | % | 37.3 | % | (270) | bp |
| Sales % Change from Prior Year | |||||
| Volume | 8 | % | |||
| Price | 6 | % | |||
| Energy cost pass-through | 6 | % | |||
| Currency | (2 | %) | |||
| Total Consolidated Sales Change | 18 | % |
Sales of $2,945.1 increased 18%, or $443.1, due to higher volumes of 8%, positive pricing of 6%, and higher energy cost pass-through to customers of 6%, partially offset by unfavorable currency impacts of 2%. Volume growth was primarily driven by new assets, recovery in hydrogen, strong merchant demand, and higher activity in our sale of equipment businesses. Energy costs were significantly higher versus the prior year, particularly in Europe. Continued focus on pricing actions in our merchant businesses, including those intended to recover the escalating power and fuel costs, resulted in price improvement in our three largest segments. Contractual provisions associated with our on-site business, which represents approximately half our total company sales, allow us to pass the higher energy costs through to our customers. The unfavorable currency impact was primarily driven by the weakening of the Euro against the U.S. Dollar.
Cost of Sales and Gross Margin
Cost of sales of $2,151.6 increased 22%, or $382.9, from total cost of sales of $1,768.7 in the prior year, which included a $23.2 charge for a facility closure as discussed below. The increase was due to higher energy cost pass-through to customers of $151, higher costs associated with sales volumes of $149, and unfavorable costs of $147, partially offset by favorable currency impacts of $42. The unfavorable cost impact included higher operating and distribution costs that were driven by higher planned maintenance, supply chain challenges, costs for a helium storage cavern to support reliable helium supply to our customers globally, as well as costs for resources needed to support new project start-ups. Gross margin of 26.9% decreased 240 bp from 29.3% in the prior year, primarily due to unfavorable costs and higher energy cost pass-through to customers, partially offset by the positive impact of our pricing actions.
Facility Closure
During the second quarter of fiscal year 2021, we recorded a charge of $23.2 ($17.4 after-tax, or $0.08 per share) primarily for a noncash write-down of assets associated with a contract termination in the Americas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the three months ended 31 March 2021 and was not recorded in segment results.
Selling and Administrative
Selling and administrative expense of $227.0 increased 8%, or $16.7, primarily driven by increased headcount to support our growth strategy, costs associated with our new global headquarters, and inflation. Selling and administrative expense as a percentage of sales decreased to 7.7% from 8.4% in the prior year.
Research and Development
Research and development expense of $23.7 increased 12%, or $2.6. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.
Gain on Exchange with Joint Venture Partner
In the second quarter of fiscal year 2021, we recognized a gain of $36.8 ($27.3 after-tax, or $0.12 per share) on an exchange with the Tyczka Group, a former joint venture partner. As part of the exchange, we separated our 50/50 joint venture in Germany into two separate businesses so each party could acquire a portion of the business on a 100% basis. The gain included $12.7 from the revaluation of our previously held equity interest in the portion of the business that we retained and $24.1 from the sale of our interest in the remaining business. The gain is reflected as "Gain on exchange with joint venture partner" on our consolidated income statements for the three months ended 31 March 2021 and was not recorded in segment results for our Europe segment. Refer to Note 3, Acquisitions, to the consolidated financial statements for additional information.
Other Income (Expense), Net
Other income of $19.1 increased 95%, or $9.3, primarily due to income from the sale of assets.
Operating Income and Operating Margin
Operating income of $561.9 increased 2%, or $13.4, primarily due to higher volumes of $49 and positive pricing, net of power and fuel costs, of $40. These factors were partially offset by unfavorable costs of $59 that were driven by business development, higher planned maintenance, as well as various external factors, including inflation and supply chain challenges. In addition, the prior year included a charge of $23 associated with a facility closure, partially offset by a gain of $37 on an exchange with a joint venture partner.
Operating margin of 19.1% decreased 280 bp from 21.9% in the prior year, primarily due to the unfavorable costs and higher energy cost pass-through to customers, which increases sales but not operating income.
Equity Affiliates' Income
Equity affiliates' income of $120.8 increased 73%, or $51.0, primarily driven by the JIGPC joint venture, which began contributing to our results in the Middle East and India segment in late October 2021.
Interest Expense
| Three Months Ended | |||||||||||||||||
| 31 March | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Interest incurred | $40.4 | $42.6 | |||||||||||||||
| Less: Capitalized interest | 8.1 | 6.5 | |||||||||||||||
| Interest expense | $32.3 | $36.1 | |||||||||||||||
Interest incurred decreased 5%, or $2.2, primarily driven by a lower debt balance. Capitalized interest increased 25%, or $1.6, due to a higher carrying value of projects under construction.
Other Non-Operating Income (Expense), Net
Other non-operating income of $9.1 decreased 46%, or $7.7, driven mainly by lower pension income. Non-service pension income decreased in fiscal year 2022 primarily due to lower expected returns on plan assets for the U.S. salaried pension plan and the U.K. pension plan.
Net Income and Net Income Margin
Net income of $536.8 increased 13%, or $59.7, primarily due to higher volumes, pricing, and equity affiliates' income, partially offset by higher costs. Net income margin of 18.2% decreased 90 bp from 19.1% in the prior year. The margin decline included an unfavorable impact of approximately 100 bp from higher energy cost pass-through to customers, which increases sales but not net income.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA of $1,018.6 increased 9%, or $84.6, primarily due to higher volumes, pricing, and equity affiliates' income, partially offset by higher costs. Adjusted EBITDA margin of 34.6% decreased 270 bp from 37.3% in the prior year. The margin decline included an unfavorable impact of approximately 200 bp from higher energy cost pass-through to customers.
Effective Tax Rate
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Our effective tax rate was 18.6% and 20.4% for the three months ended 31 March 2022 and 2021, respectively. The current year rate was lower primarily due to higher equity affiliates' income that is primarily presented net of income taxes within income from continuing operations on our consolidated income statements. The current year rate also includes the impact of an agreement reached with foreign tax authorities that resolved uncertainties related to unrecognized tax benefits.
The adjusted effective tax rate was 18.6% and 20.2% for the three months ended 31 March 2022 and 2021, respectively.
Segment Analysis
Americas
| Three Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $1,186.6 | $1,056.1 | $130.5 | 12 | % | |||||||||||||||||||||
| Operating income | 275.5 | 263.4 | 12.1 | 5 | % | |||||||||||||||||||||
| Operating margin | 23.2 | % | 24.9 | % | (170) bp | |||||||||||||||||||||
| Equity affiliates’ income | $20.1 | $32.3 | ($12.2) | (38 | %) | |||||||||||||||||||||
| Adjusted EBITDA | 449.3 | 449.0 | 0.3 | — | % | |||||||||||||||||||||
| Adjusted EBITDA margin | 37.9 | % | 42.5 | % | (460) bp |
| Sales % Change from Prior Year | |||||
| Volume | 6 | % | |||
| Price | 5 | % | |||
| Energy cost pass-through | 2 | % | |||
| Currency | (1 | %) | |||
| Total Americas Sales Change | 12 | % |
Sales of $1,186.6 increased 12%, or $130.5, due to higher volumes of 6%, positive pricing of 5%, and higher energy cost pass-through to customers of 2%, partially offset by unfavorable currency of 1%. The volume improvement was primarily driven by a recovery in hydrogen and better demand for merchant products in North America. However, merchant volumes were weaker in South America due to lower demand for medical oxygen. Pricing improved across all major merchant product lines, which more than offset power cost increases in the region.
Operating income of $275.5 increased 5%, or $12.1, primarily from pricing, net of power and fuel costs, of $37 and favorable volumes of $6. These factors were partially offset by unfavorable costs of $30, which were primarily attributable to higher planned maintenance, inflation, and supply chain challenges, including driver shortages that are broadly impacting the industry. Operating margin of 23.2% decreased 170 bp from 24.9% in the prior year, as higher costs and negative volume mix were only partially offset by higher pricing.
Equity affiliates’ income of $20.1 decreased 38%, or $12.2, primarily driven by lower merchant volumes in our Mexico affiliate.
Asia
| Three Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $751.2 | $697.5 | $53.7 | 8 | % | |||||||||||||||||||||
| Operating income | 203.6 | 198.5 | 5.1 | 3 | % | |||||||||||||||||||||
| Operating margin | 27.1 | % | 28.5 | % | (140) bp | |||||||||||||||||||||
| Equity affiliates’ income | $6.2 | $7.1 | ($0.9) | (13 | %) | |||||||||||||||||||||
| Adjusted EBITDA | 321.6 | 315.3 | 6.3 | 2 | % | |||||||||||||||||||||
| Adjusted EBITDA margin | 42.8 | % | 45.2 | % | (240) bp |
| Sales % Change from Prior Year | |||||
| Volume | 6 | % | |||
| Price | 1 | % | |||
| Energy cost pass-through | 1 | % | |||
| Currency | — | % | |||
| Total Asia Sales Change | 8 | % |
Sales of $751.2 increased 8%, or $53.7, due to higher volumes of 6%, positive pricing of 1%, and higher energy cost pass-through to customers of 1%. The volume improvement was driven by several new traditional industrial gas plants in our on-site business; however, merchant demand was negatively impacted due to COVID-19 restrictions in certain parts of China. Currency was flat versus the prior year.
Operating income of $203.6 increased 3%, or $5.1. Higher volumes of $16 were partially offset by unfavorable operating costs of $6, which were primarily driven by inflation, resources needed to support new project start-ups, and higher distribution and product sourcing costs. Additionally, higher power and fuel costs exceeded our pricing actions by $5. We expect higher costs for planned maintenance activities in the second half of the year.
Operating margin of 27.1% decreased 140 bp from 28.5% in the prior year, as the positive volume impact was more than offset by higher energy and other costs.
Equity affiliates’ income of $6.2 decreased 13%, or $0.9.
Europe
| Three Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $738.6 | $558.4 | $180.2 | 32 | % | |||||||||||||||||||||
| Operating income | 116.4 | 132.9 | (16.5) | (12 | %) | |||||||||||||||||||||
| Operating margin | 15.8 | % | 23.8 | % | (800) | bp | ||||||||||||||||||||
| Equity affiliates’ income | $23.3 | $12.6 | $10.7 | 85 | % | |||||||||||||||||||||
| Adjusted EBITDA | 190.0 | 196.5 | (6.5) | (3 | %) | |||||||||||||||||||||
| Adjusted EBITDA margin | 25.7 | % | 35.2 | % | (950) | bp |
| Sales % Change from Prior Year | |||||
| Volume | 2 | % | |||
| Price | 14 | % | |||
| Energy cost pass-through | 24 | % | |||
| Currency | (8 | %) | |||
| Total Europe Sales Change | 32 | % |
Sales of $738.6 increased 32%, or $180.2, due to higher energy cost pass-through to customers of 24%, higher pricing of 14%, and higher volumes of 2%, partially offset by unfavorable currency impacts of 8%. Energy costs remained elevated in the second quarter of fiscal year 2022. In our on-site business, we are contractually able to pass these costs through to our customers. In our merchant business, we implemented pricing actions across all major product lines, which recovered the higher power and fuel costs experienced during the second quarter as well as a portion of higher costs from the first quarter. We remain focused on ongoing actions to continue recovering the higher power and fuel costs. Volumes improved primarily due to higher demand for merchant products. The unfavorable currency impacts were primarily driven by the weakening of the Euro against the U.S. Dollar.
Operating income of $116.4 decreased 12%, or $16.5. Unfavorable costs of $14 were primarily attributable to higher operating and distribution costs associated with energy-related supply chain challenges, inflation, and development of new projects. Operating income was also impacted by unfavorable volume mix of $7 and unfavorable currency of $6. These factors were partially offset by significant pricing actions in our merchant business, which more than offset the escalating power costs and increased operating income by $10. Operating margin of 15.8% decreased 800 bp from 23.8% in the prior year primarily due to higher energy cost pass-through to customers, which increases sales but not operating income and negatively impacted margin by approximately 450 basis points.
Equity affiliates’ income of $23.3 increased 85%, or $10.7, primarily driven by an affiliate in Italy.
Middle East and India
| Three Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $28.9 | $26.2 | $2.7 | 10 | % | |||||||||||||||||||||
| Operating income | 4.8 | 6.7 | (1.9) | (28 | %) | |||||||||||||||||||||
| Equity affiliates' income | 71.1 | 16.1 | 55.0 | 342 | % | |||||||||||||||||||||
| Adjusted EBITDA | 82.8 | 29.4 | 53.4 | 182 | % |
Sales of $28.9 increased 10%, or $2.7, primarily due to a new plant in India and a small acquisition. Operating income of $4.8 decreased 28%, or $1.9, primarily due to unfavorable volume mix. Equity affiliates' income of $71.1 increased $55.0 primarily driven by the JIGPC joint venture, which began contributing to our results in late October 2021.
Corporate and other
The Corporate and other segment includes sales of cryogenic and gas processing equipment for air separation as well as our liquefied natural gas ("LNG"), turbo machinery equipment and services, and distribution sale of equipment businesses. The results of this segment also include centralized global management costs and corporate support functions that benefit all segments as well as income and expense not directly associated with the other segments, such as foreign exchange gains and losses.
| Three Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $239.8 | $163.8 | $76.0 | 46 | % | |||||||||||||||||||||
| Operating loss | (38.4) | (66.6) | 28.2 | 42 | % | |||||||||||||||||||||
| Adjusted EBITDA | (25.1) | (56.2) | 31.1 | 55 | % |
Sales of $239.8 increased 46%, or $76.0, and operating loss of $38.4 decreased 42%, or $28.2, primarily due to higher sale of equipment project activity in air separation equipment and other non-LNG products.
FIRST SIX MONTHS 2022 VS. FIRST SIX MONTHS 2021
FIRST SIX MONTHS 2022 IN SUMMARY
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Sales of $5,939.3 increased 22%, or $1,062.1, primarily due to higher energy cost pass-through to customers, higher volumes, and positive pricing.
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Operating income of $1,084.9 was flat as higher volumes and pricing were offset by higher costs. Operating margin of 18.3% decreased 400 bp, primarily due to higher energy cost pass-through to customers, which increases our sales but not operating income.
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Equity affiliates' income of $268.6 increased 93%, or $129.5, primarily driven by the JIGPC joint venture, which began contributing to our results in the Middle East and India segment in late October 2021.
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Net income of $1,086.4 increased 13%, or $122.6, while net income margin of 18.3% decreased 150 bp.
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Adjusted EBITDA of $2,021.7 increased 8%, or $155.6, while adjusted EBITDA margin of 34.0% decreased 430 bp.
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Diluted EPS of $4.90 increased 15%, or $0.65 per share, and adjusted diluted EPS of $4.90 increased 17%, or $0.70 per share. A summary table of changes in diluted EPS is presented below.
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We increased the quarterly dividend on our common stock to $1.62 per share, representing an 8% increase, or $0.12 per share, from the previous dividend of $1.50 per share. This is the 40th consecutive year we have increased our quarterly dividend, highlighting our commitment to creating shareholder value through capital deployment and rewarding our investors through dividends.
Changes in Diluted EPS Attributable to Air Products
The per share impacts presented in the tables below were calculated independently and do not sum to the total change in diluted EPS due to rounding.
| Six Months Ended | |||||||||||
| 31 March | Increase | ||||||||||
| 2022 | 2021 | (Decrease) | |||||||||
| Total Diluted EPS | $4.90 | $4.29 | $0.61 | ||||||||
| Less: Diluted EPS from income from discontinued operations | — | 0.05 | (0.05) | ||||||||
| Diluted EPS From Continuing Operations | $4.90 | $4.25 | $0.65 | ||||||||
| Operating Impacts | |||||||||||
| Underlying business | |||||||||||
| Volume | $0.36 | ||||||||||
| Price, net of variable costs | 0.11 | ||||||||||
| Other costs | (0.42) | ||||||||||
| Currency | (0.01) | ||||||||||
| Facility closure | 0.08 | ||||||||||
| Gain on exchange with joint venture partner | (0.12) | ||||||||||
| Total Operating Impacts | $— | ||||||||||
| Other Impacts | |||||||||||
| Equity affiliates' income | 0.47 | ||||||||||
| Interest expense | 0.04 | ||||||||||
| Other non-operating income/expense, net | (0.02) | ||||||||||
| Change in effective tax rate | 0.11 | ||||||||||
| Noncontrolling interests | 0.06 | ||||||||||
| Total Other Impacts | $0.66 | ||||||||||
| Total Change in Diluted EPS From Continuing Operations | $0.65 |
| Six Months Ended | |||||||||||
| 31 March | Increase | ||||||||||
| 2022 | 2021 | (Decrease) | |||||||||
| Diluted EPS From Continuing Operations | $4.90 | $4.25 | $0.65 | ||||||||
| Facility closure | — | 0.08 | (0.08) | ||||||||
| Gain on exchange with joint venture partner | — | (0.12) | 0.12 | ||||||||
| Adjusted Diluted EPS From Continuing Operations | $4.90 | $4.20 | $0.70 |
Our diluted earnings per share for the first half of fiscal year 2022 reflects our 55% share of the JIGPC joint venture's results, of which 4% is attributable to the non-controlling partner of Air Products Qudra. Additionally, upon completion of the first phase of the gasification and power project in October 2021, we also recognized a net benefit within "Equity affiliates' income" from the recognition of previously deferred profits, net of other project finalization costs, related to the existing Jazan Gas Project Company joint venture. Our non-controlling partner's share of the project finalization costs favorably impacted EPS within "Noncontrolling interests." The total net benefit from this first quarter event was approximately $0.20 per share.
FIRST SIX MONTHS 2022 RESULTS OF OPERATIONS
Discussion of Consolidated Results
| Six Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | Change | |||||||||||||||||||||||
| GAAP Measures | ||||||||||||||||||||||||||
| Sales | $5,939.3 | $4,877.2 | $1,062.1 | 22 | % | |||||||||||||||||||||
| Operating income | 1,084.9 | 1,087.6 | (2.7) | — | % | |||||||||||||||||||||
| Operating margin | 18.3 | % | 22.3 | % | (400) | bp | ||||||||||||||||||||
| Equity affiliates’ income | 268.6 | 139.1 | 129.5 | 93 | % | |||||||||||||||||||||
| Net income | 1,086.4 | 963.8 | 122.6 | 13 | % | |||||||||||||||||||||
| Net income margin | 18.3 | % | 19.8 | % | (150) | bp | ||||||||||||||||||||
| Non-GAAP Measures | ||||||||||||||||||||||||||
| Adjusted EBITDA | 2,021.7 | 1,866.1 | 155.6 | 8 | % | |||||||||||||||||||||
| Adjusted EBITDA margin | 34.0 | % | 38.3 | % | (430) bp | |||||||||||||||||||||
| Sales % Change from Prior Year | |||||
| Volume | 8 | % | |||
| Price | 5 | % | |||
| Energy cost pass-through | 10 | % | |||
| Currency | (1 | %) | |||
| Total Consolidated Sales Change | 22 | % |
Sales of $5,939.3 increased 22%, or $1,062.1, due to higher energy cost pass-through to customers of 10%, higher volumes of 8%, and positive pricing of 5%, partially offset by unfavorable currency impacts of 1%. Energy costs were significantly higher versus the prior year, particularly in Europe and North America. Contractual provisions associated with our on-site business, which represents approximately half our total company sales, allow us to pass these costs through to our customers. Volume growth was primarily driven by recovery in hydrogen, strong merchant demand, higher activity in our sale of equipment businesses, and new assets. Continued focus on pricing actions in our merchant businesses, including those intended to recover the escalating power and fuel costs, resulted in price improvement in our three largest segments. The unfavorable currency impact was primarily driven by the weakening of the Euro against the U.S. Dollar.
Cost of Sales and Gross Margin
Cost of sales of $4,375.2 increased 29%, or $974.1, from total cost of sales of $3,401.1 in the prior year, which included a $23.2 charge for a facility closure as discussed below. The increase was due to higher energy cost pass-through to customers of $471, higher costs associated with sales volumes of $298, and unfavorable costs of $288, partially offset by favorable currency impacts of $60. The unfavorable cost impact included higher operating and distribution costs driven by supply chain challenges as well as costs for a helium storage cavern to support reliable helium supply to our customers globally. Gross margin of 26.3% decreased 400 bp from 30.3% in the prior year, primarily due to unfavorable costs and higher energy cost pass-through to customers, partially offset by the positive impact of our pricing actions.
Facility Closure
During the second quarter of fiscal year 2021, we recorded a charge of $23.2 ($17.4 after-tax, or $0.08 per share) primarily for a noncash write-down of assets associated with a contract termination in the Americas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the six months ended 31 March 2021 and was not recorded in segment results.
Selling and Administrative Expense
Selling and administrative expense of $459.8 increased 11%, or $46.8, primarily driven by increased headcount to support our growth strategy, costs associated with our new global headquarters, inflation, and higher incentive compensation. Selling and administrative expense as a percentage of sales decreased to 7.7% from 8.5% in the prior year.
Research and Development
Research and development expense of $47.0 increased 5%, or $2.4. Research and development expense as a percentage of sales decreased to 0.8% from 0.9% in the prior year.
Gain on Exchange with Joint Venture Partner
In the second quarter of fiscal year 2021, we recognized a gain of $36.8 ($27.3 after-tax, or $0.12 per share) on an exchange with the Tyczka Group, a former joint venture partner. As part of the exchange, we separated our 50/50 joint venture in Germany into two separate businesses so each party could acquire a portion of the business on a 100% basis. The gain included $12.7 from the revaluation of our previously held equity interest in the portion of the business that we retained and $24.1 from the sale of our interest in the remaining business. The gain is reflected as "Gain on exchange with joint venture partner" on our consolidated income statements for the six months ended 31 March 2021 and was not recorded in segment results for our Europe segment. Refer to Note 3, Acquisitions, to the consolidated financial statements for additional information.
Other Income (Expense), Net
Other income of $27.6 decreased 15%, or $4.7, as income from the sale of assets in the first half of fiscal year 2022 was more than offset by a prior year settlement of a supply contract.
Operating Income and Operating Margin
Operating income of $1,084.9 was flat, primarily due to higher volumes of $101 and positive pricing, net of power and fuel costs, of $30. These factors were offset by unfavorable costs of $117 driven by business development, higher planned maintenance, as well as various external factors, including inflation and supply chain challenges. In addition, the prior year included a charge of $23 associated with a facility closure, partially offset by a gain of $37 on an exchange with a joint venture partner.
Operating margin of 18.3% decreased 400 bp from 22.3% in the prior year, primarily due to the unfavorable costs and higher energy cost pass-through to customers, which increases sales but not operating income.
Equity Affiliates' Income
Equity affiliates' income of $268.6 increased 93%, or $129.5, primarily driven by the JIGPC joint venture, which began contributing to our results in the Middle East and India segment in late October 2021. Additionally, in the first quarter, we recognized the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs. Refer to Note 7, Equity Affiliates, to the consolidated financial statements for additional information.
Interest Expense
| Six Months Ended | |||||||||||||||||
| 31 March | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Interest incurred | $81.4 | $84.9 | |||||||||||||||
| Less: capitalized interest | 18.6 | 12.1 | |||||||||||||||
| Interest expense | $62.8 | $72.8 | |||||||||||||||
Interest incurred decreased 4%, or $3.5, primarily driven by a lower debt balance. Capitalized interest increased 54%, or $6.5, due to a higher carrying value of projects under construction.
Other Non-Operating Income (Expense), net
Other non-operating income of $31.7 decreased 10%, or $3.7, driven mainly by lower pension income. Non-service pension income decreased in fiscal year 2022 primarily due to lower expected returns on plan assets for the U.S. salaried pension plan and the U.K. pension plan.
Discontinued Operations
In the first quarter of fiscal year 2021, we recorded a tax benefit of $10.3 ($0.05 per share) primarily from the settlement of a state tax appeal related to the gain on the sale of our former Performance Materials Division in fiscal year 2017. The benefit is reflected within "Income from discontinued operations, net of tax" on our consolidated income statement for the six months ended 31 March 2021.
Net Income and Net Income Margin
Net income of $1,086.4 increased 13%, or $122.6, primarily due to higher equity affiliates' income and higher volumes, partially offset by higher costs. Additionally, the prior year included net income from discontinued operations of $10.3. Net income margin of 18.3% decreased 150 bp from 19.8% in the prior year. The margin decline included an unfavorable impact of approximately 150 bp from higher energy cost pass-through to customers, which increases sales but not net income.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA of $2,021.7 increased 8%, or $155.6, primarily due to higher volumes and higher equity affiliates' income, partially offset by higher costs. Adjusted EBITDA margin of 34.0% decreased 430 bp from 38.3% in the prior year. The margin decline included an unfavorable impact of approximately 300 bp from higher energy cost pass-through to customers.
Effective Tax Rate
Our effective tax rate was 17.8% and 19.8% for the six months ended 31 March 2022 and 2021, respectively. The current year rate was lower primarily due to higher equity affiliates' income that is primarily presented net of income taxes within income from continuing operations on our consolidated income statements.
Our results for the first half of the year include higher tax benefits from share-based compensation vesting and stock option exercises. Because many of our share-based compensation grants vest in December, the tax benefits from these awards typically have a larger impact on our first quarter effective tax rate compared to other periods.
The adjusted effective tax rate was 17.8% and 19.7% for the six months ended 31 March 2022 and 2021, respectively.
Segment Analysis
Americas
| Six Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $2,410.7 | $1,989.1 | $421.6 | 21 | % | |||||||||||||||||||||
| Operating income | 542.7 | 489.2 | 53.5 | 11 | % | |||||||||||||||||||||
| Operating margin | 22.5 | % | 24.6 | % | (210) bp | |||||||||||||||||||||
| Equity affiliates’ income | 54.3 | 54.6 | (0.3) | (1 | %) | |||||||||||||||||||||
| Adjusted EBITDA | 906.0 | 848.9 | 57.1 | 7 | % | |||||||||||||||||||||
| Adjusted EBITDA margin | 37.6 | % | 42.7 | % | (510) bp |
| Sales % Change from Prior Year | |||||
| Volume | 7 | % | |||
| Price | 4 | % | |||
| Energy cost pass-through | 10 | % | |||
| Currency | — | % | |||
| Total Americas Sales Change | 21 | % |
Sales of $2,410.7 increased 21%, or $421.6, due to higher energy cost pass through to customers of 10%, higher volumes of 7%, and positive pricing of 4%. Energy cost pass-through to customers was higher primarily due to elevated natural gas prices, which we are contractually able to pass through to our on-site customers. The volume improvement was primarily driven by a recovery in hydrogen and better demand for merchant products in North America. Pricing improved across all major merchant product lines, which more than offset power cost increases in the region. Currency was flat versus the prior year.
Operating income of $542.7 increased 11%, or $53.5, primarily from pricing, net of power and fuel costs, of $46 and favorable volumes of $33. These factors were partially offset by unfavorable costs of $24, which were primarily attributable to higher planned maintenance, inflation, and supply chain challenges, including driver shortages that are broadly impacting the industry. Operating margin of 22.5% decreased 210 bp from 24.6% in the prior year, as higher energy cost pass-through to customers and higher costs were only partially offset by higher pricing.
Equity affiliates’ income of $54.3 decreased 1%, or $0.3.
Asia
| Six Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $1,531.6 | $1,415.0 | $116.6 | 8 | % | |||||||||||||||||||||
| Operating income | 424.7 | 413.3 | 11.4 | 3 | % | |||||||||||||||||||||
| Operating margin | 27.7 | % | 29.2 | % | (150) bp | |||||||||||||||||||||
| Equity affiliates’ income | 12.8 | 15.9 | (3.1) | (19 | %) | |||||||||||||||||||||
| Adjusted EBITDA | 660.1 | 646.8 | 13.3 | 2 | % | |||||||||||||||||||||
| Adjusted EBITDA margin | 43.1 | % | 45.7 | % | (260) bp |
| Sales % Change from Prior Year | |||||
| Volume | 5 | % | |||
| Price | 2 | % | |||
| Energy cost pass-through | — | % | |||
| Currency | 1 | % | |||
| Total Asia Sales Change | 8 | % |
Sales of $1,531.6 increased 8%, or $116.6, due to higher volumes of 5%, positive pricing of 2%, and favorable currency impacts of 1%. Higher volumes were primarily attributable to new on-site plants across the region. Energy cost pass-through to customers was flat versus the prior year.
Operating income of $424.7 increased 3%, or $11.4. Higher volumes of $36 and favorable currency impacts of $3 were partially offset by unfavorable operating costs of $27, which were primarily driven by higher distribution and product sourcing costs, inflation, and resources needed to support new project start-ups. Additionally, higher power and fuel costs were largely recovered by pricing actions, resulting in a net decrease to operating income of $1. We expect higher costs for planned maintenance activities in the second half of the year. Operating margin of 27.7% decreased 150 bp from 29.2% in the prior year as the positive volume impact was more than offset by higher energy and other costs.
Equity affiliates’ income of $12.8 decreased 19%, or $3.1, primarily due to lower income from affiliates in Thailand.
Europe
| Six Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $1,482.8 | $1,101.9 | $380.9 | 35 | % | |||||||||||||||||||||
| Operating income | 215.6 | 270.4 | (54.8) | (20 | %) | |||||||||||||||||||||
| Operating margin | 14.5 | % | 24.5 | % | (1,000) | bp | ||||||||||||||||||||
| Equity affiliates’ income | 37.2 | 27.5 | 9.7 | 35 | % | |||||||||||||||||||||
| Adjusted EBITDA | 352.9 | 398.2 | (45.3) | (11 | %) | |||||||||||||||||||||
| Adjusted EBITDA margin | 23.8 | % | 36.1 | % | (1,230) | bp |
| Sales % Change from Prior Year | |||||
| Volume | 4 | % | |||
| Price | 12 | % | |||
| Energy cost pass-through | 25 | % | |||
| Currency | (6 | %) | |||
| Total Europe Sales Change | 35 | % |
Sales of $1,482.8 increased 35%, or $380.9, due to higher energy cost pass-through to customers of 25%, higher pricing of 12%, and higher volumes of 4%, partially offset by unfavorable currency impacts of 6%. Energy costs remained elevated in the first half of fiscal year 2022. In our on-site business, we are contractually able to pass these costs through to our customers. In our merchant business, we implemented pricing actions across all major product lines, which recovered the higher power and fuel costs experienced during the second quarter as well as a portion of higher costs from the first quarter. We remain focused on ongoing actions to continue recovering the higher power and fuel costs. Volumes improved primarily due to higher demand for merchant products. The unfavorable currency impacts were primarily driven by the weakening of the Euro against the U.S. Dollar.
Operating income of $215.6 decreased 20%, or $54.8. Unfavorable costs of $29 were primarily attributable to higher operating and distribution costs associated with energy-related supply chain challenges, inflation, and development of new projects. Operating income was also impacted by unfavorable volume mix of $10, higher power and fuel costs that exceeded our pricing actions by $10, and unfavorable currency of $6. Operating margin of 14.5% decreased 1,000 bp from 24.5% in the prior year primarily due to higher energy cost pass-through to customers, which increases sales but not operating income and accounted for approximately half the margin decline.
Equity affiliates’ income of $37.2 increased 35%, or $9.7, primarily driven by an affiliate in Italy.
Middle East and India
| Six Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $52.6 | $45.7 | $6.9 | 15 | % | |||||||||||||||||||||
| Operating income | 9.6 | 10.7 | (1.1) | (10 | %) | |||||||||||||||||||||
| Equity affiliates' income | 163.4 | 37.3 | 126.1 | 338 | % | |||||||||||||||||||||
| Adjusted EBITDA | 186.0 | 60.7 | 125.3 | 206 | % |
Sales of $52.6 increased 15%, or $6.9, and operating income of $9.6 decreased 10%, or $1.1, primarily due to a new plant in India and a small acquisition. Equity affiliates' income of $163.4 increased $126.1 primarily driven by the JIGPC joint venture, which began contributing to our results in late October 2021, as well as recognition of the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs, in the first quarter.
Corporate and other
| Six Months Ended | ||||||||||||||||||||||||||
| 31 March | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
| Sales | $461.6 | $325.5 | $136.1 | 42 | % | |||||||||||||||||||||
| Operating loss | (107.7) | (109.6) | 1.9 | 2 | % | |||||||||||||||||||||
| Adjusted EBITDA | (83.3) | (88.5) | 5.2 | 6 | % |
Sales of $461.6 increased 42%, or $136.1, and operating loss of $107.7 decreased 2%, or $1.9, primarily due to higher non-LNG sale of equipment project activity. The favorable impact of sale of equipment activity on operating income was partially offset by a prior year benefit from the settlement of a supply contract.
RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
(Millions of dollars unless otherwise indicated, except for per share data)
We present certain financial measures, other than in accordance with U.S. generally accepted accounting principles ("GAAP"), on an "adjusted" or "non-GAAP" basis. On a consolidated basis, these measures include adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and capital expenditures. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, we also present certain supplemental non-GAAP financial measures to help the reader understand the impact that certain disclosed items, or "non-GAAP adjustments," have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP.
Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable measure calculated in accordance with GAAP. We believe these non-GAAP financial measures provide investors, potential investors, securities analysts, and others with useful information to evaluate the performance of our business because such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.
In many cases, non-GAAP financial measures are determined by adjusting the most directly comparable GAAP measure to exclude non-GAAP adjustments that we believe are not representative of our underlying business performance. For example, we previously excluded certain expenses associated with cost reduction actions, impairment charges, and gains on disclosed transactions. The reader should be aware that we may recognize similar losses or gains in the future. Readers should also consider the limitations associated with these non-GAAP financial measures, including the potential lack of comparability of these measures from one company to another.
When applicable, the tax impact of our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax impact of our non-GAAP adjustments. These tax impacts are primarily driven by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.
ADJUSTED DILUTED EPS
There were no non-GAAP adjustments in the first six months of fiscal year 2022 that impacted diluted EPS.
The table below provides a reconciliation to the most directly comparable GAAP measure for each of the major components used to calculate adjusted diluted EPS from continuing operations, which we view as a key performance metric. In periods that we have non-GAAP adjustments, we believe it is important for the reader to understand the per share impact of each such adjustment because management does not consider these impacts when evaluating underlying business performance. Per share impacts are calculated independently and may not sum to total diluted EPS and total adjusted diluted EPS due to rounding.
| Three Months Ended 31 March | ||||||||||||||||||||
| Q2 2022 vs. Q2 2021 | Operating Income | Equity Affiliates' Income | Income Tax Provision | Net Income Attributable to Air Products | Diluted EPS | |||||||||||||||
| 2022 GAAP | $561.9 | $120.8 | $122.7 | $530.5 | $2.38 | |||||||||||||||
| 2021 GAAP | 548.5 | 69.8 | 121.9 | 473.1 | 2.13 | |||||||||||||||
| Change GAAP | $0.25 | |||||||||||||||||||
| % Change GAAP | 12 | % | ||||||||||||||||||
| 2022 GAAP | $561.9 | $120.8 | $122.7 | $530.5 | $2.38 | |||||||||||||||
| No non-GAAP adjustments | — | — | — | — | — | |||||||||||||||
| 2022 Non-GAAP ("Adjusted") | $561.9 | $120.8 | $122.7 | $530.5 | $2.38 | |||||||||||||||
| 2021 GAAP | $548.5 | $69.8 | $121.9 | $473.1 | $2.13 | |||||||||||||||
| Facility closure | 23.2 | — | 5.8 | 17.4 | 0.08 | |||||||||||||||
| Gain on exchange with joint venture partner | (36.8) | — | (9.5) | (27.3) | (0.12) | |||||||||||||||
| 2021 Non-GAAP ("Adjusted") | $534.9 | $69.8 | $118.2 | $463.2 | $2.08 | |||||||||||||||
| Change Non-GAAP ("Adjusted") | $0.30 | |||||||||||||||||||
| % Change Non-GAAP ("Adjusted") | 14 | % |
| Six Months Ended 31 March | ||||||||||||||||||||
| 2022 vs. 2021 | Operating Income | Equity Affiliates' Income | Income Tax Provision | Net Income Attributable to Air Products | Diluted EPS | |||||||||||||||
| 2022 GAAP | $1,084.9 | $268.6 | $236.0 | $1,090.9 | $4.90 | |||||||||||||||
| 2021 GAAP | 1,087.6 | 139.1 | 235.8 | 944.8 | 4.25 | |||||||||||||||
| Change GAAP | $0.65 | |||||||||||||||||||
| % Change GAAP | 15 | % | ||||||||||||||||||
| 2022 GAAP | $1,084.9 | $268.6 | $236.0 | $1,090.9 | $4.90 | |||||||||||||||
| No non-GAAP adjustments | — | — | — | — | — | |||||||||||||||
| 2022 Non-GAAP ("Adjusted") | $1,084.9 | $268.6 | $236.0 | $1,090.9 | $4.90 | |||||||||||||||
| 2021 GAAP | $1,087.6 | $139.1 | $235.8 | $944.8 | $4.25 | |||||||||||||||
| Facility closure | 23.2 | — | 5.8 | 17.4 | 0.08 | |||||||||||||||
| Gain on exchange with joint venture partner | (36.8) | — | (9.5) | (27.3) | (0.12) | |||||||||||||||
| 2021 Non-GAAP ("Adjusted") | $1,074.0 | $139.1 | $232.1 | $934.9 | $4.20 | |||||||||||||||
| Change Non-GAAP ("Adjusted") | $0.70 | |||||||||||||||||||
| % Change Non-GAAP ("Adjusted") | 17 | % | ||||||||||||||||||
ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN
We define adjusted EBITDA as net income less income (loss) from discontinued operations, net of tax, and excluding non-GAAP adjustments, which we do not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA and adjusted EBITDA margin provide useful metrics for management to assess operating performance. Margins are calculated independently for each period by dividing each line item by consolidated sales for the respective period and may not sum to total margin due to rounding.
The table below presents consolidated sales and a reconciliation of net income on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to adjusted EBITDA margin:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| 31 March | 31 March | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
| $ | Margin | $ | Margin | $ | Margin | $ | Margin | ||||||||||||||||||||||||||||
| Sales | $2,945.1 | $2,502.0 | $5,939.3 | $4,877.2 | |||||||||||||||||||||||||||||||
| Net income and net income margin | $536.8 | 18.2 | % | $477.1 | 19.1 | % | $1,086.4 | 18.3 | % | $963.8 | 19.8 | % | |||||||||||||||||||||||
| Less: Income from discontinued operations, net of tax | — | — | % | — | — | % | — | — | % | 10.3 | 0.2 | % | |||||||||||||||||||||||
| Add: Interest expense | 32.3 | 1.1 | % | 36.1 | 1.4 | % | 62.8 | 1.1 | % | 72.8 | 1.5 | % | |||||||||||||||||||||||
| Less: Other non-operating income (expense), net | 9.1 | 0.3 | % | 16.8 | 0.7 | % | 31.7 | 0.5 | % | 35.4 | 0.7 | % | |||||||||||||||||||||||
| Add: Income tax provision | 122.7 | 4.2 | % | 121.9 | 4.9 | % | 236.0 | 4.0 | % | 235.8 | 4.8 | % | |||||||||||||||||||||||
| Add: Depreciation and amortization | 335.9 | 11.4 | % | 329.3 | 13.2 | % | 668.2 | 11.3 | % | 653.0 | 13.4 | % | |||||||||||||||||||||||
| Add: Facility closure | — | — | % | 23.2 | 0.9 | % | — | — | % | 23.2 | 0.5 | % | |||||||||||||||||||||||
| Less: Gain on exchange with joint venture partner | — | — | % | 36.8 | 1.5 | % | — | — | % | 36.8 | 0.8 | % | |||||||||||||||||||||||
| Adjusted EBITDA and adjusted EBITDA margin | $1,018.6 | 34.6 | % | $934.0 | 37.3 | % | $2,021.7 | 34.0 | % | $1,866.1 | 38.3 | % | |||||||||||||||||||||||
| Q2 2022 vs. Q2 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||||||
| Change GAAP | |||||||||||||||||||||||||||||||||||
| Net income $ change | $59.7 | $122.6 | |||||||||||||||||||||||||||||||||
| Net income % change | 13% | 13% | |||||||||||||||||||||||||||||||||
| Net income margin change | (90) bp | (150) bp | |||||||||||||||||||||||||||||||||
| Change Non-GAAP | |||||||||||||||||||||||||||||||||||
| Adjusted EBITDA $ change | $84.6 | $155.6 | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA % change | 9% | 8% | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA margin change | (270) bp | (430) bp |
The tables below present sales and a reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin by segment for the three months ended 31 March 2022 and 2021:
| Sales | Americas | Asia | Europe | Middle East and India | Corporate and other | ||||||||||||||||||
| Q2 2022 | $1,186.6 | $751.2 | $738.6 | $28.9 | $239.8 | ||||||||||||||||||
| Q2 2021 | 1,056.1 | 697.5 | 558.4 | 26.2 | 163.8 |
| Americas | Asia | Europe | Middle East and India | Corporate and other | |||||||||||||||||||
| Q2 2022 GAAP | |||||||||||||||||||||||
| Operating income (loss) | $275.5 | $203.6 | $116.4 | $4.8 | ($38.4) | ||||||||||||||||||
| Operating margin | 23.2 | % | 27.1 | % | 15.8 | % | |||||||||||||||||
| Q2 2021 GAAP | |||||||||||||||||||||||
| Operating income (loss) | $263.4 | $198.5 | $132.9 | $6.7 | ($66.6) | ||||||||||||||||||
| Operating margin | 24.9 | % | 28.5 | % | 23.8 | % | |||||||||||||||||
| Q2 2022 vs. Q2 2021 Change GAAP | |||||||||||||||||||||||
| Operating income/loss $ change | $12.1 | $5.1 | ($16.5) | ($1.9) | $28.2 | ||||||||||||||||||
| Operating income/loss % change | 5 | % | 3 | % | (12 | %) | (28 | %) | 42 | % | |||||||||||||
| Operating margin change | (170) bp | (140) bp | (800) | bp | |||||||||||||||||||
| Q2 2022 Non-GAAP | |||||||||||||||||||||||
| Operating income (loss) | $275.5 | $203.6 | $116.4 | $4.8 | ($38.4) | ||||||||||||||||||
| Add: Depreciation and amortization | 153.7 | 111.8 | 50.3 | 6.9 | 13.2 | ||||||||||||||||||
| Add: Equity affiliates' income | 20.1 | 6.2 | 23.3 | 71.1 | 0.1 | ||||||||||||||||||
| Adjusted EBITDA | $449.3 | $321.6 | $190.0 | $82.8 | ($25.1) | ||||||||||||||||||
| Adjusted EBITDA margin | 37.9 | % | 42.8 | % | 25.7 | % | |||||||||||||||||
| Q2 2021 Non-GAAP | |||||||||||||||||||||||
| Operating income (loss) | $263.4 | $198.5 | $132.9 | $6.7 | ($66.6) | ||||||||||||||||||
| Add: Depreciation and amortization | 153.3 | 109.7 | 51.0 | 6.6 | 8.7 | ||||||||||||||||||
| Add: Equity affiliates' income | 32.3 | 7.1 | 12.6 | 16.1 | 1.7 | ||||||||||||||||||
| Adjusted EBITDA | $449.0 | $315.3 | $196.5 | $29.4 | ($56.2) | ||||||||||||||||||
| Adjusted EBITDA margin | 42.5 | % | 45.2 | % | 35.2 | % | |||||||||||||||||
| Q2 2022 vs. Q2 2021 Change Non-GAAP | |||||||||||||||||||||||
| Adjusted EBITDA $ change | $0.3 | $6.3 | ($6.5) | $53.4 | $31.1 | ||||||||||||||||||
| Adjusted EBITDA % change | — | % | 2 | % | (3 | %) | 182 | % | 55 | % | |||||||||||||
| Adjusted EBITDA margin change | (460) bp | (240) bp | (950) | bp |
The tables below present sales and a reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin by segment for the six months ended 31 March 2022 and 2021:
| Sales | Americas | Asia | Europe | Middle East and India | Corporate and other | ||||||||||||||||||
| 2022 | $2,410.7 | $1,531.6 | $1,482.8 | $52.6 | $461.6 | ||||||||||||||||||
| 2021 | 1,989.1 | 1,415.0 | 1,101.9 | 45.7 | 325.5 |
| Americas | Asia | Europe | Middle East and India | Corporate and other | |||||||||||||||||||
| 2022 GAAP | |||||||||||||||||||||||
| Operating income (loss) | $542.7 | $424.7 | $215.6 | $9.6 | ($107.7) | ||||||||||||||||||
| Operating margin | 22.5 | % | 27.7 | % | 14.5 | % | |||||||||||||||||
| 2021 GAAP | |||||||||||||||||||||||
| Operating income (loss) | $489.2 | $413.3 | $270.4 | $10.7 | ($109.6) | ||||||||||||||||||
| Operating margin | 24.6 | % | 29.2 | % | 24.5 | % | |||||||||||||||||
| 2022 vs. 2021 Change GAAP | |||||||||||||||||||||||
| Operating income/loss $ change | $53.5 | $11.4 | ($54.8) | ($1.1) | $1.9 | ||||||||||||||||||
| Operating income/loss % change | 11 | % | 3 | % | (20 | %) | (10 | %) | 2 | % | |||||||||||||
| Operating margin change | (210) bp | (150) bp | (1,000) | bp | |||||||||||||||||||
| 2022 Non-GAAP | |||||||||||||||||||||||
| Operating income (loss) | $542.7 | $424.7 | $215.6 | $9.6 | ($107.7) | ||||||||||||||||||
| Add: Depreciation and amortization | 309.0 | 222.6 | 100.1 | 13.0 | 23.5 | ||||||||||||||||||
| Add: Equity affiliates' income | 54.3 | 12.8 | 37.2 | 163.4 | 0.9 | ||||||||||||||||||
| Adjusted EBITDA | $906.0 | $660.1 | $352.9 | $186.0 | ($83.3) | ||||||||||||||||||
| Adjusted EBITDA margin | 37.6 | % | 43.1 | % | 23.8 | % | |||||||||||||||||
| 2021 Non-GAAP | |||||||||||||||||||||||
| Operating income (loss) | $489.2 | $413.3 | $270.4 | $10.7 | ($109.6) | ||||||||||||||||||
| Add: Depreciation and amortization | 305.1 | 217.6 | 100.3 | 12.7 | 17.3 | ||||||||||||||||||
| Add: Equity affiliates' income | 54.6 | 15.9 | 27.5 | 37.3 | 3.8 | ||||||||||||||||||
| Adjusted EBITDA | $848.9 | $646.8 | $398.2 | $60.7 | ($88.5) | ||||||||||||||||||
| Adjusted EBITDA margin | 42.7 | % | 45.7 | % | 36.1 | % | |||||||||||||||||
| 2022 vs. 2021 Change Non-GAAP | |||||||||||||||||||||||
| Adjusted EBITDA $ change | $57.1 | $13.3 | ($45.3) | $125.3 | $5.2 | ||||||||||||||||||
| Adjusted EBITDA % change | 7 | % | 2 | % | (11 | %) | 206 | % | 6 | % | |||||||||||||
| Adjusted EBITDA margin change | (510) bp | (260) bp | (1,230) | bp |
ADJUSTED EFFECTIVE TAX RATE
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes.
| Three Months Ended 31 March | Six Months Ended 31 March | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||
| Income tax provision | $122.7 | $121.9 | $236.0 | $235.8 | ||||||||||
| Income from continuing operations before taxes | 659.5 | 599.0 | 1,322.4 | 1,189.3 | ||||||||||
| Effective tax rate | 18.6 | % | 20.4 | % | 17.8 | % | 19.8 | % | ||||||
| Income tax provision | $122.7 | $121.9 | $236.0 | $235.8 | ||||||||||
| Facility closure | — | 5.8 | — | 5.8 | ||||||||||
| Gain on exchange with joint venture partner | — | (9.5) | — | (9.5) | ||||||||||
| Adjusted income tax provision | $122.7 | $118.2 | $236.0 | $232.1 | ||||||||||
| Income from continuing operations before taxes | $659.5 | $599.0 | $1,322.4 | $1,189.3 | ||||||||||
| Facility closure | — | 23.2 | — | 23.2 | ||||||||||
| Gain on exchange with joint venture partner | — | (36.8) | — | (36.8) | ||||||||||
| Adjusted income from continuing operations before taxes | $659.5 | $585.4 | $1,322.4 | $1,175.7 | ||||||||||
| Adjusted effective tax rate | 18.6 | % | 20.2 | % | 17.8 | % | 19.7 | % |
CAPITAL EXPENDITURES
We define capital expenditures as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:
| Six Months Ended | |||||||||||
| 31 March | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash used for (provided by) investing activities | $2,635.8 | $583.2 | |||||||||
| Proceeds from sale of assets and investments | 25.3 | 14.8 | |||||||||
| Purchases of investments | (909.4) | (569.0) | |||||||||
| Proceeds from investments | 1,391.4 | 1,265.5 | |||||||||
| Other investing activities | 6.5 | 3.1 | |||||||||
| Capital expenditures | $3,149.6 | $1,297.6 |
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance and cash flows from operations are our primary sources of liquidity and are generally sufficient to meet our liquidity needs. In addition, we have the flexibility to access capital through a variety of financing activities, including accessing the capital markets, drawing upon our credit facility, or alternatively, accessing the commercial paper markets. At this time, we have not utilized, nor do we expect to access, our credit facility for additional liquidity.
As of 31 March 2022, we had $1,626.7 of foreign cash and cash items compared to total cash and cash items of $2,348.7. We do not expect that a significant portion of the earnings of our foreign subsidiaries and affiliates will be subject to U.S. income tax upon repatriation to the U.S. Depending on the country in which the subsidiaries and affiliates reside, the repatriation of these earnings may be subject to foreign withholding and other taxes. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items that would be subject to additional taxes outside the U.S.
Cash Flows From Operations
| Six Months Ended 31 March | 2022 | 2021 | ||||||
| Income from continuing operations attributable to Air Products | $1,090.9 | $944.8 | ||||||
| Adjustments to reconcile income to cash provided by operating activities: | ||||||||
| Depreciation and amortization | 668.2 | 653.0 | ||||||
| Deferred income taxes | 51.3 | 76.1 | ||||||
| Facility closure | — | 23.2 | ||||||
| Undistributed earnings of equity method investments | (200.8) | (58.7) | ||||||
| Gain on sale of assets and investments | (11.8) | (26.2) | ||||||
| Share-based compensation | 26.5 | 22.4 | ||||||
| Noncurrent lease receivables | 43.9 | 43.4 | ||||||
| Other adjustments | (101.0) | (6.5) | ||||||
| Changes in working capital accounts | (262.2) | (91.2) | ||||||
| Cash Provided by Operating Activities | $1,305.0 | $1,580.3 |
For the first six months of fiscal year 2022, cash provided by operating activities was $1,305.0. The working capital accounts were a use of cash of $262.2, primarily driven by a use of cash of $203.1 from trade receivables, less allowances, $138.7 from other working capital, and $57.3 from inventory partially offset by a source of cash of $123.1 from payables and accrued liabilities. The source of cash within payables and accrued liabilities primarily resulted from customer advances for sale of equipment projects and higher natural gas costs, which also impacted the use of cash within trade receivables as we contractually passed through these higher costs to customers. The use of cash within other working capital primarily relates to contract fulfillment costs and the timing of income tax payments.
For the first six months of fiscal year 2021, cash provided by operating activities was $1,580.3. The working capital accounts were a use of cash of $91.2, primarily driven by $142.4 from other working capital and $74.8 from trade receivables, less allowances partially offset by a $135.7 source of cash from payables and accrued liabilities. The use within "other working capital" was primarily due to higher tax payments and contract fulfillment costs related to sale of equipment projects. The use of cash within trade receivables, less allowances primarily resulted from increased sale of equipment project activity. The source within payables and accrued liabilities was primarily due to customer advances on sale of equipment projects and an increase in accrued utilities due to higher costs associated with Winter Storm Uri, a severe weather storm in the U.S. Gulf Coast.
Cash Flows From Investing Activities
| Six Months Ended 31 March | 2022 | 2021 | ||||||
| Additions to plant and equipment, including long-term deposits | ($1,433.6) | ($1,227.8) | ||||||
| Acquisitions, less cash acquired | (65.1) | — | ||||||
| Investment in and advances to unconsolidated affiliates | (1,650.9) | (69.8) | ||||||
| Proceeds from sale of assets and investments | 25.3 | 14.8 | ||||||
| Purchases of investments | (909.4) | (569.0) | ||||||
| Proceeds from investments | 1,391.4 | 1,265.5 | ||||||
| Other investing activities | 6.5 | 3.1 | ||||||
| Cash Used for Investing Activities | ($2,635.8) | ($583.2) |
For the first six months of fiscal year 2022, cash used for investing activities was $2,635.8. Capital expenditures primarily included $1,650.9 for investment in and advances to unconsolidated affiliates and $1,433.6 for additions to plant and equipment, including long-term deposits. Refer to the Capital Expenditures section below for further detail. Proceeds from investments of $1,391.4 resulted from maturities of time deposits and treasury securities with terms greater than three months but less than one year and exceeded purchases of investments of $909.4.
For the first six months of fiscal year 2021, cash used by investing activities was $583.2. Capital expenditures for plant and equipment, including long-term deposits, were $1,227.8. Proceeds from investments of $1,265.5 resulted from maturities of time deposits and treasury securities with terms greater than three months and less than one year and exceeded purchases of investments of $569.0.
Capital Expenditures
Capital expenditures is a non-GAAP financial measure that we define as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. The components of our capital expenditures are detailed in the table below. We present a reconciliation of our capital expenditures to cash used for investing activities on page 53.
| Six Months Ended | |||||||||||
| 31 March | |||||||||||
| 2022 | 2021 | ||||||||||
| Additions to plant and equipment, including long-term deposits | $1,433.6 | $1,227.8 | |||||||||
| Acquisitions, less cash acquired | 65.1 | — | |||||||||
| Investment in and advances to unconsolidated affiliates(A) | 1,650.9 | 69.8 | |||||||||
| Capital Expenditures | $3,149.6 | $1,297.6 | |||||||||
(A)Includes contributions from noncontrolling partners in consolidated subsidiaries as discussed below.
Capital expenditures for the first six months of fiscal year 2022 totaled $3,149.6 compared to $1,297.6 for the first six months of fiscal year 2021. The increase of $1,852.0 was primarily driven by our initial investment of $1.6 billion in the new JIGPC joint venture, which included approximately $130 from a non-controlling partner in one of our subsidiaries. We expect to make an additional investment of approximately $1 billion, which will also include a contribution from our non-controlling partner, for the second phase of the project in 2023. Refer to Note 7, Equity Affiliates, to the consolidated financial statements for additional information.
Outlook for Investing Activities
We expect capital expenditures for fiscal year 2022 to be approximately $4.5 to $5 billion.
It is not possible, without unreasonable efforts, to reconcile our forecasted capital expenditures to future cash used for investing activities because we are unable to identify the timing or occurrence of our future investment activity, which is driven by our assessment of competing opportunities at the time we enter into transactions. These decisions, either individually or in the aggregate, could have a significant effect on our cash used for investing activities.
Cash Flows From Financing Activities
| Six Months Ended 31 March | 2022 | 2021 | ||||||
| Long-term debt proceeds | $87.5 | $92.8 | ||||||
| Payments on long-term debt | (400.0) | (15.9) | ||||||
| Net increase in commercial paper and short-term borrowings | 210.9 | 33.6 | ||||||
| Dividends paid to shareholders | (664.7) | (592.7) | ||||||
| Proceeds from stock option exercises | 14.4 | 4.7 | ||||||
| Other financing activities | (33.7) | (25.7) | ||||||
| Cash Used for Financing Activities | ($785.6) | ($503.2) |
For the first six months of fiscal year 2022, cash used for financing activities was $785.6. The use of cash was primarily driven by dividend payments to shareholders of $664.7 and payments on long-term debt of $400.0 for the repayment of a 3.0% Senior Note. These uses of cash were partially offset by short-term borrowings and long-term debt proceeds of $210.9 and $87.5, respectively.
For the first six months of fiscal year 2021, cash used for financing activities was $503.2 and primarily included dividend payments to shareholders of $592.7, partially offset by long-term debt proceeds of $92.8.
Financing and Capital Structure
Debt
Capital needs in the first six months of fiscal year 2022 were satisfied with our cash balance and cash from operations. Total debt decreased from $7,637.2 as of 30 September 2021 to $7,441.5 as of 31 March 2022, primarily due to repayment of the 3.0% Senior Note of $400.0, partially offset by proceeds from short-term notes and long-term borrowings on our foreign commitments. Total debt includes related party debt of $371.1 and $358.4 as of 31 March 2022 and 30 September 2021, respectively, primarily associated with the Lu'An joint venture.
Various debt agreements to which we are a party include financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. As of 31 March 2022, we are in compliance with all of the financial and other covenants under our debt agreements.
Credit Facilities
On 31 March 2021, we entered into a five-year $2,500 revolving credit agreement maturing 31 March 2026 with a syndicate of banks (the “2021 Credit Agreement”), under which senior unsecured debt is available to us and certain of our subsidiaries. On 31 March 2022, we amended the 2021 Credit Agreement to exercise our option to increase the maximum borrowing capacity to $2,750 and transition the benchmark rate from LIBOR to SOFR. All other terms remain unchanged from the original agreement.
The only financial covenant in the 2021 Credit Agreement is a maximum ratio of total debt to total capitalization (equal to total debt plus total equity) not to exceed 70%. Total debt as of 31 March 2022 and 30 September 2021, expressed as a percentage of total capitalization, was 33.9% and 35.2%, respectively. No borrowings were outstanding under the 2021 Credit Agreement as of 31 March 2022.
We also have credit facilities available to certain of our foreign subsidiaries totaling $486.5, of which $446.9 was borrowed and outstanding as of 31 March 2022. The amount borrowed and outstanding as of 30 September 2021 was $176.2.
Equity Securities
On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. We did not purchase any of our outstanding shares for the first six months of fiscal years 2022 or 2021. As of 31 March 2022, $485.3 in share repurchase authorization remained.
Dividends
Cash dividends on our common stock are paid quarterly, usually during the sixth week after the close of the fiscal quarter. We expect to continue to pay cash dividends in the future at comparable or increased levels.
The Board of Directors determines whether to declare dividends and the timing and amount based on financial condition and other factors it deems relevant. On 3 February 2022, the Board of Directors declared a quarterly dividend of $1.62 per share, representing an 8% increase, or $0.12 per share, from the previous dividend of $1.50 per share. This is the 40th consecutive year we have increased our quarterly dividend. The dividend is payable on 9 May 2022 to shareholders of record at the close of business on 1 April 2022.
PENSION BENEFITS
For the six months ended 31 March 2022 and 2021, net periodic pension benefit was $2.5 and $19.5, respectively. These periods included service-related costs of $21.4 and $22.8, respectively, which are reflected on our consolidated income statements within "Operating income." The amount of service costs capitalized in the first six months of fiscal years 2022 and 2021 were not material. Non-service related benefits were $23.9 and $42.3 for the six months ended 31 March 2022 and 2021, respectively. The decrease in fiscal year 2022 primarily resulted from lower expected returns on assets due to the increased percentage of fixed income investments within the plan asset portfolios and higher interest cost, partially offset by lower actuarial loss amortization. Non-service related benefits are reflected within "Other non-operating income (expense), net" on our consolidated income statements.
For the six months ended 31 March 2022, we recognized pension settlement losses of $2.0 to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss primarily associated with the U.S. supplementary pension plan. These losses are included within "Other non-operating income (expense), net" on our consolidated income statements. We expect total pension settlement losses of approximately $10 in fiscal year 2022, of which approximately $5.0 is expected in the third quarter of fiscal year 2022 in our U.S. supplementary pension plan.
Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. For the six months ended 31 March 2022 and 2021, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were $16.1 and $27.7, respectively. Total contributions for fiscal year 2022 are expected to be approximately $40 to $50. During fiscal year 2021, total contributions were $44.6.
For additional information, refer to Note 12, Retirement Benefits, to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of our financial condition and results of operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates reflect our best judgment about current and/or future economic and market conditions and their effect based on information available as of the date of our consolidated financial statements. If conditions change, actual results may differ materially from these estimates.
Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. However, application of policies that management has identified as critical places significant importance on management’s judgment, often as the result of the need to make estimates about the effects of matters that are inherently uncertain. A description of our major accounting policies, including those that we consider to be the most critical to understanding our financial statements, is included in our 2021 Form 10-K.
In March 2022, we announced our intent to divest our small industrial gas business in Russia due to Russia's invasion of Ukraine. As a result, we reclassified assets meeting the held for sale criteria to "Other receivables and current assets" on our consolidated balance sheet as of 31 March 2022. Refer to Note 1, Basis of Presentation and Major Accounting Policies, to the consolidated financial statements for additional information.
There have been no changes to our accounting policies or estimates during the first six months of fiscal year 2022 that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.
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