AIR PRODUCTS & CHEMICALS, INC.
Second Quarter 2022 in Summary 35
Second Quarter 2022 Results of Operations 36
First Six Months 2022 in Summary 41
First Six Months 2022 Results of Operations 43
Reconciliations of Non-GAAP Financial Measures 48
Liquidity and Capital Resources 54
Pension Benefits 57
Critical Accounting Policies and Estimates 57
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
The financial measures discussed below are presented in accordance withU.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.
The safety of our team members in areas affected by
Additionally, in March we announced our intent to divest our small industrial gas business inRussia , which had fiscal year 2021 sales of less than$25 . The results of our business inRussia are reflected in theEurope segment. We do not intend to pursue any new business development activities in the country.
We also have operations in
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 inRussia andUkraine as well as our ability to exit contracts inRussia could be impacted by sanctions imposed onRussia and potential Russian retaliatory measures. 34
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SECOND QUARTER 2022 VS. SECOND QUARTER 2021SECOND QUARTER 2022 IN SUMMARY
•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 inEurope , where our team was able to implement increases to offset unprecedented power and fuel costs. •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. •Equity affiliates' income of$120.8 increased 73%, or$51.0 , primarily driven by theJazan Integrated Gasification and Power Company ("JIGPC") joint venture, which began contributing to our results in theMiddle East andIndia segment in lateOctober 2021 .
•Net income of
•Adjusted EBITDA of
•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. •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
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Three Months Ended
31 March Increase
2022 2021 (Decrease)
Diluted EPS From Continuing Operations $2.38 $2.13 Facility closure - 0.08
(0.08)
Gain on exchange with joint venture partner - (0.12)
0.12
Adjusted Diluted EPS From Continuing Operations
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 inEurope . 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 theU.S. Dollar. 36
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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 theAmericas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the three months ended31 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 theTyczka Group , a former joint venture partner. As part of the exchange, we separated our 50/50 joint venture inGermany 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 ended31 March 2021 and was not recorded in segment results for ourEurope segment. Refer to Note 3, Acquisitions, to the consolidated financial statements for additional information. Other Income (Expense), Net
Other income of
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 theMiddle East andIndia segment in lateOctober 2021 . 37
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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
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 theU.S. salaried pension plan and theU.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 ended31 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
Segment AnalysisAmericas 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 38
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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 inNorth America . However, merchant volumes were weaker inSouth 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
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 ofChina . 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
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Table of ContentsEurope 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 theU.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 inItaly .Middle East andIndia 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 inIndia 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 lateOctober 2021 . 40
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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 2021FIRST SIX MONTHS 2022 IN SUMMARY
•Sales of
•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.
•Equity affiliates' income of
•Net income of
•Adjusted EBITDA of
•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. •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. 41
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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 Facility closure - 0.08
(0.08)
Gain on exchange with joint venture partner - (0.12)
0.12
Adjusted Diluted EPS From Continuing Operations
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 inOctober 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 existingJazan 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. 42
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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 inEurope andNorth 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 theU.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 theAmericas segment. This charge is reflected as "Facility closure" on our consolidated income statements for the six months ended31 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. 43
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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 theTyczka Group , a former joint venture partner. As part of the exchange, we separated our 50/50 joint venture inGermany 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 ended31 March 2021 and was not recorded in segment results for ourEurope segment. Refer to Note 3, Acquisitions, to the consolidated financial statements for additional information.
Other Income (Expense), Net
Other income of
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 theMiddle East andIndia segment in lateOctober 2021 . Additionally, in the first quarter, we recognized the remaining deferred profit associated with air separation units previously sold toJazan 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
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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 theU.S. salaried pension plan and theU.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 ended31 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 ended31 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
Segment AnalysisAmericas 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 % 45
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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 inNorth 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
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
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
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Table of ContentsEurope 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 theU.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 inItaly .Middle East andIndia 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 inIndia 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 lateOctober 2021 , as well as recognition of the remaining deferred profit associated with air separation units previously sold toJazan Gas Project Company , net of other project finalization costs, in the first quarter. 47
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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.
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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
Equity Net Income
Operating Affiliates' Income Tax Attributable to Diluted
Q2 2022 vs. Q2 2021 Income Income Provision Air Products 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
Equity Net Income
Operating Affiliates' Income Tax Attributable to Diluted
2022 vs. 2021 Income Income Provision Air Products 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 %
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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 2022
vs. vs.
Q2 2021 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
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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
Middle East Corporate
Sales Americas Asia Europe and India 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
Middle East Corporate
Americas Asia Europe and India 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
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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
Middle East Corporate
Sales Americas Asia Europe and India 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
Middle East Corporate
Americas Asia Europe and India 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 52
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ADJUSTED EFFECTIVE TAX RATE
The effective tax rate equals the income tax provision divided by income from continuing operations before taxes.
Three Months Ended Six Months Ended
31 March 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
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
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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 of31 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 toU.S. income tax upon repatriation to theU.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 theU.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 theU.S.
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