Air Products & Chemicals 10-Q 2022-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended 30 June 2022

or

For the transition period from to

Commission File Number 001-04534

AIR PRODUCTS AND CHEMICALS, INC.

(Exact name of registrant as specified in its charter)

1940 Air Products Boulevard

Allentown, Pennsylvania 18106-5500

(Address of principal executive offices and Zip Code)

610-481-4911

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock, par value $1 per share, outstanding at 30 June 2022 was 221,798,982.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended 30 June 2022

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This quarterly report contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can generally be identified by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” "future," “goal,” “intend,” “may,” “outlook,” “plan,” “positioned,” “possible,” “potential,” “project,” “should,” “target,” “will,” “would,” and similar expressions or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements. Forward-looking statements are based on management’s expectations and assumptions as of the date of this report and are not guarantees of future performance. You are cautioned not to place undue reliance on our forward-looking statements.

Forward-looking statements may relate to a number of matters, including expectations regarding revenue, margins, expenses, earnings, tax provisions, cash flows, pension obligations, share repurchases or other statements regarding economic conditions or our business outlook; statements regarding plans, projects, strategies and objectives for our future operations, including our ability to win new projects and execute the projects in our backlog; and statements regarding our expectations with respect to pending legal claims or disputes. While forward-looking statements are made in good faith and based on assumptions, expectations and projections that management believes are reasonable based on currently available information, actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors, including, without limitation:

• the duration and impacts of the ongoing COVID-19 global pandemic and efforts to contain its transmission, including the effect of these factors on our business, our customers, economic conditions and markets generally;

• changes in global or regional economic conditions, inflation and supply and demand dynamics in the market segments we serve, or in the financial markets that may affect the availability and terms on which we may obtain financing;

• the ability to implement price increases to offset cost increases;

• disruptions to our supply chain and related distribution delays and cost increases;

• risks associated with having extensive international operations, including political risks, risks associated with unanticipated government actions and risks of investing in developing markets;

• project delays, contract terminations, customer cancellations, or postponement of projects and sales;

• our ability to develop, operate, and manage costs of large scale and technically complex projects, including gasification and hydrogen projects;

• the future financial and operating performance of major customers, joint ventures, and equity affiliates;

• our ability to develop, implement, and operate new technologies;

• our ability to execute the projects in our backlog and refresh our pipeline of new projects;

• tariffs, economic sanctions and regulatory activities in jurisdictions in which we and our affiliates and joint ventures operate;

• the impact of environmental, tax, or other legislation, as well as regulations and other public policy initiatives affecting our business and the business of our affiliates and related compliance requirements, including legislation, regulations, or policies intended to address global climate change;

• changes in tax rates and other changes in tax law;

• the timing, impact, and other uncertainties relating to acquisitions and divestitures, including our ability to integrate acquisitions and separate divested businesses, respectively;

• risks relating to cybersecurity incidents, including risks from the interruption, failure or compromise of our information systems;

FORWARD-LOOKING STATEMENTS (CONTINUED)

• catastrophic events, such as natural disasters and extreme weather events, public health crises, acts of war, including Russia’s invasion of Ukraine and the ongoing civil war in Yemen, or terrorism;

• the impact on our business and customers of price fluctuations in oil and natural gas and disruptions in markets and the economy due to oil and natural gas price volatility;

• costs and outcomes of legal or regulatory proceedings and investigations;

• asset impairments due to economic conditions or specific events;

• significant fluctuations in inflation, interest rates and foreign currency exchange rates from those currently anticipated;

• damage to facilities, pipelines or delivery systems, including those we own or operate for third parties;

• availability and cost of electric power, natural gas, and other raw materials; and

• the success of productivity and operational improvement programs.

In addition to the foregoing factors, forward-looking statements contained herein are qualified with respect to the risks disclosed elsewhere in this document, including in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended 30 September 2021. Any of these factors, as well as those not currently anticipated by management, could cause our results of operations, financial condition or liquidity to differ materially from what is expressed or implied by any forward-looking statement. Except as required by law, we disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change in assumptions, beliefs, or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.

PART I—FINANCIAL INFORMATION

Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

*Earnings per share ("EPS") is calculated independently for each component and may not sum to total EPS due to rounding.

The accompanying notes are an integral part of these statements.

Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Unaudited)

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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 third quarter and first nine 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 49.

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.

In March 2022, 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 this business are reflected in the Europe segment. As of 30 June 2022, assets held for sale associated with the business had a carrying value of approximately $75.

We do not intend to pursue any new business development activities in the country.

We also suspended the construction of a plant in Ukraine with a carrying value of approximately $45 as of 30 June 2022. Sales generated from our business in Ukraine were less than $5 in fiscal year 2021.

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, there is uncertainty regarding our ability to recover the carrying value of our assets in Russia and Ukraine.

THIRD QUARTER 2022 VS. THIRD QUARTER 2021

THIRD QUARTER 2022 IN SUMMARY

• Sales of $3,189.3 increased 22%, or $584.6, due to higher energy cost pass-through to customers of 15%, higher pricing of 7%, and higher volumes of 5%, partially offset by unfavorable currency of 5%. Significantly higher energy costs increased contractual cost pass-through to our on-site customers. In our merchant business, we successfully implemented pricing actions across the regional segments, particularly in Europe, to offset increased power and fuel costs. Volume growth was primarily driven by new assets, recovery in hydrogen in the Americas segment, better merchant demand, and higher sale of equipment project activity. The unfavorable currency impact was primarily attributable to the weakening of all major European currencies, the Chinese Renminbi, and the South Korean Won against the U.S. Dollar.

• Operating income of $627.4 increased 9%, or $50.3, as our pricing actions and higher volumes overcame unfavorable costs due to higher planned maintenance as well as various external factors, including inflation and ongoing supply chain challenges, and unfavorable currency. Operating margin of 19.7% decreased 250 basis points ("bp"), primarily due to the higher energy cost pass-through to customers, which increases sales but not operating income.

• Equity affiliates' income of $116.1 increased 84%, or $52.9, 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.

• Net income of $587.1 increased 10%, or $54.8, primarily due to higher pricing, net of power and fuel costs, higher equity affiliates' income, and higher volumes, partially offset by higher costs attributable to planned maintenance, inflation, and supply chain costs, as well as unfavorable currency resulting from the strengthening of the U.S. Dollar. Net income margin of 18.4% decreased 200 bp, primarily due to higher energy cost pass-through to customers.

• Adjusted EBITDA of $1,080.7 increased 11%, or $104.7, while adjusted EBITDA margin of 33.9% decreased 360 bp.

• Diluted EPS of $2.62 increased 11%, or $0.26 per share, and adjusted diluted EPS of $2.62 increased 13%, or $0.31 per share. A summary table of changes in diluted EPS is presented below.

Changes in Diluted EPS Attributable to Air Products

The per share impacts presented in the tables below were calculated independently and may not sum to the total change in diluted EPS due to rounding.

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Information on our utilization of financial instruments and an analysis of the sensitivity of these instruments to selected changes in market rates and prices is included in our 2021 Form 10-K.

Our net financial instrument position decreased from a liability of $7,850.3 at 30 September 2021 to a liability of $6,774.0 at 30 June 2022. The decrease was primarily due to the effect of higher interest rates on the fair value of U.S. Dollar- and Euro-denominated fixed-rate debt and the effect of a stronger U.S. Dollar on foreign currency-denominated debt.

Interest Rate Risk

Our debt portfolio as of 30 June 2022, including the effect of currency and interest rate swap agreements, was composed of 80% fixed-rate debt and 20% variable-rate debt. Our debt portfolio as of 30 September 2021, including the effect of currency and interest rate swap agreements, was composed of 89% fixed-rate debt and 11% variable-rate debt. The increase in variable-rate debt is the result of a $600 million increase in the outstanding notional of fixed-to-variable interest rate swaps.

The sensitivity analysis related to the interest rate risk on the fixed portion of our debt portfolio assumes an instantaneous 100 bp move in interest rates from the level at 30 June 2022, with all other variables held constant. A 100 bp increase in market interest rates would result in a decrease of $407 and $587 in the net liability position of financial instruments at 30 June 2022 and 30 September 2021, respectively. A 100 bp decrease in market interest rates would result in an increase of $479 and $692 in the net liability position of financial instruments at 30 June 2022 and 30 September 2021, respectively.

There were no material changes to the sensitivity analysis related to the variable portion of our debt portfolio since 30 September 2021.

Foreign Currency Exchange Rate Risk

The sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in foreign currency exchange rates from their levels at 30 June 2022, with all other variable held constant. A 10% strengthening or weakening of the functional currency of an entity versus all other currencies would result in a decrease or increase, respectively, of $156 and $343 in the net liability position of financial instruments at 30 June 2022 and 30 September 2021, respectively. The lower decrease or increase from a 10% strengthening or weakening, respectively, was primarily due to the origination of project cost hedges that generate losses and increase the net liability position when the functional currency strengthens or generate gains and decrease the net liability position when the functional currency weakens.

Disclosure Controls and Procedures

We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Under the supervision of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures as of 30 June 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of 30 June 2022, our disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended 30 June 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

(a) Exhibits required by Item 601 of Regulation S-K

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.