Reconciliations of Non-GAAP Financial Measures 36
Liquidity and Capital Resources 40
Pension Benefits 43
Critical Accounting Policies and Estimates 43
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 first quarter 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 17, 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 36 .
For information concerning activity with our related parties, refer to
Note 16, Supplemental Information, to the consolidated financial statements.
FIRST QUARTER 2022 VS. FIRST QUARTER 2021
FIRST QUARTER 2022 IN SUMMARY
•Sales of $2,994.2 increased 26%, or $619.0 , primarily due to higher energy and
natural gas cost pass-through to customers, higher volumes, and positive
pricing.
•Operating income of $523.0 decreased 3%, or $16.1 , as higher costs, primarily
driven by significant increases in energy and natural gas prices and related
supply chain disruptions, were only partially offset by higher volumes and
pricing actions. Operating margin of 17.5% decreased 520 basis points ("bp"),
primarily due to higher energy and natural gas cost pass-through to customers.
•Equity affiliates' income of $147.8 increased 113%, or $78.5 , primarily due to
contributions from the Jazan Integrated Gasification and Power Company ("JIGPC")
joint venture and events related to completion of the first phase of the
gasification and power project in late October 2021 .
•Net income of $549.6 increased 13%, or $62.9 , and net income margin of 18.4%
decreased 210 bp.
•Adjusted EBITDA of $1,003.1 increased 8%, or $71.0 , and adjusted EBITDA margin
of 33.5% decreased 570 bp.
•Diluted EPS of $2.52 increased 19%, or $0.40 per share. A summary table of
changes in diluted EPS is presented below. There were no non-GAAP adjustments to
diluted EPS in the first quarter of fiscal years 2022 or 2021.
29
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Changes in Diluted EPS Attributable to Air Products
The per share impacts presented in the table below were calculated independently
and may not sum to the total change in diluted EPS due to rounding.
Three Months Ended
31 December Increase
2021 2020 (Decrease)
Total Diluted EPS $2.52 $2.17 $0.35
Less: Diluted EPS from income from discontinued
operations - 0.05 (0.05)
Diluted EPS From Continuing Operations $2.52 $2.12 $0.40
Operating Impacts
Underlying business
Volume $0.19
Price, net of variable costs (0.04)
Other costs (0.21)
Total Operating Impacts ($0.06 )
Other Impacts
Equity affiliates' income $0.29
Interest expense 0.02
Other non-operating income (expense), net 0.01
Change in effective tax rate 0.07
Noncontrolling interests 0.07
Total Other Impacts $0.46
Total Change in Diluted EPS From Continuing Operations $0.40
Our diluted earnings per share was favorably impacted by contributions from the
new JIGPC joint venture and related events. Equity affiliates' income includes
two months of the ongoing contribution from our 55% interest in JIGPC, of which
4% is attributable to the non-controlling partner of Air Products Qudra. We also
began recognizing interest income on shareholder loans associated with the joint
venture that is reflected within "Other non-operating (income) expense, net."
Upon completion of the first phase of the gasification and power project, we
also recognized a net benefit from the recognition of previously deferred
profits, net of other project finalization costs, related to the existing Jazan
Gas Project Company joint venture within "Equity affiliates' income." Our
non-controlling partner's share of the project finalization costs favorably
impacted EPS within "Noncontrolling interests." The total net benefit from this
event was approximately $0.20 per share.
30
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FIRST QUARTER 2022 RESULTS OF OPERATIONS
Discussion of Consolidated Results
Three Months Ended
31 December
2021 2020 $ Change Change
GAAP Measures
Sales $2,994.2 $2,375.2 $619.0 26 %
Operating income 523.0 539.1 (16.1) (3 %)
Operating margin 17.5 % 22.7 % (520) bp
Equity affiliates' income $147.8 $69.3 $78.5 113 %
Net income 549.6 486.7 62.9 13 %
Net income margin 18.4 % 20.5 % (210) bp
Non-GAAP Measures
Adjusted EBITDA $1,003.1 $932.1 $71.0 8 %
Adjusted EBITDA margin 33.5 % 39.2 % (570) bp
Sales % Change from Prior Year
Volume 8 %
Price 5 %
Pass-through of energy and natural gas costs 14% Currency
(1 %) Total Consolidated Sales Change 26 % Sales of$2,994.2 increased 26%, or$619.0 , due to higher energy and natural gas cost pass-through to customers of 14%, higher volumes of 8%, and positive pricing of 5%, partially offset by unfavorable currency impacts of 1%. Energy and natural gas 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 driven by new assets, higher demand for hydrogen and merchant products, and higher activity in our sale of equipment businesses. Continued focus on pricing actions in our merchant businesses, including those intended to recover the escalating energy costs, resulted in price improvement in our three largest segments,Americas ,Asia , andEurope , and in most major product lines. The unfavorable currency impact was primarily driven by weakening of the Euro against theU.S. Dollar. Cost of Sales and Gross Margin Cost of sales of$2,223.6 increased 36%, or$591.2 , due to higher energy and natural gas cost pass-through to customers of$320 , higher costs associated with sales volumes of$149 , and unfavorable costs of$140 , partially offset by favorable currency impacts of$18 . The unfavorable cost impact included higher operating and distribution costs driven by energy-related supply chain challenges. Gross margin of 25.7% decreased 560 bp from 31.3% in the prior year, primarily due to higher energy and natural gas cost pass-through to customers and unfavorable costs, partially offset by the positive impact of our pricing actions. Selling and Administrative Selling and administrative expense of$232.8 increased 15%, or$30.1 , primarily driven by higher spending for business development resources to support our growth strategy and higher incentive compensation. Selling and administrative expense as a percentage of sales decreased to 7.8% from 8.5% in the prior year. Research and Development Research and development expense of$23.3 decreased 1%, or$0.2 . Research and development expense as a percentage of sales decreased to 0.8% from 1.0% in the prior year. 31 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense), Net Other income of$8.5 decreased 62%, or$14.0 , primarily due to the settlement of a supply contract in the prior year. Operating Income and Operating Margin Operating income of$523.0 decreased 3%, or$16.1 . Unfavorable costs of$58 were primarily attributable to higher operating and distribution costs associated with energy-related supply chain challenges and the prior year settlement of a supply contract. Price, net of power and fuel costs, reduced operating income by$10 as the escalating power costs were largely offset by our pricing actions. These factors were partially offset by higher volumes of$51 . Operating margin of 17.5% decreased 520 bp from 22.7% in the prior year, primarily due to higher energy and natural gas cost pass-through to customers, which increases sales but not operating income, and higher operating costs. Equity Affiliates' Income Equity affiliates' income of$147.8 increased 113%, or$78.5 , and included the first two months of results from our new investment in the JIGPC joint venture. Additionally, 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 6, Equity Affiliates, to the consolidated financial statements for additional information. Interest Expense Three Months Ended 31 December 2021 2020 Interest incurred$41.0 $42.3 Less: Capitalized interest 10.5 5.6 Interest expense$30.5 $36.7 Interest incurred decreased 3%, or$1.3 , primarily driven by a lower debt balance. Capitalized interest increased 88%, or$4.9 , due to a higher carrying value of projects under construction. Other Non-Operating Income (Expense), Net Other non-operating income of$22.6 increased 22.0%, or$4.0 . In fiscal year 2022, we recorded interest income on shareholder loans associated with the new JIGPC joint venture. This impact was partially offset by lower non-service pension income recorded in the current year, primarily due to lower expected return 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) as a component of discontinued operations. This benefit primarily resulted 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 three months ended31 December 2020 . Net Income and Net Income Margin Net income of$549.6 increased 13%, or$62.9 , primarily due to higher equity affiliates' income and favorable volumes. These factors were partially offset by higher costs, including energy costs that were only partially recovered by our pricing actions and the prior year settlement of a supply contract. Additionally, the prior year included net income from discontinued operations of$10.3 . Net income margin of 18.4% decreased 210 bp from 20.5% in the prior year, primarily due to higher energy and natural gas cost pass-through to customers, which decreased margin by approximately 200 bp. Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA of$1,003.1 increased 8%, or$71.0 , primarily due to higher equity affiliates' income and favorable volumes. These factors were partially offset by higher costs, including energy costs that were only partially recovered by our pricing actions and the prior year settlement of a supply contract. Adjusted EBITDA margin of 33.5% decreased 570 bp from 39.2% in the prior year, primarily due to higher energy and natural gas cost pass-through to customers, which decreased margin by approximately 450 bp. 32 -------------------------------------------------------------------------------- Table of Contents 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 17.1% and 19.3% for the three months ended31 December 2021 and 2020, respectively. The current year rate was lower primarily due to higher equity affiliates' income, which includes the results from the new JIGPC joint venture 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. Refer to Note 6, Equity Affiliates, to the consolidated financial statements for additional information. Equity affiliates' income is included net of income taxes within income from continuing operations on our consolidated income statements. Our first quarter results include higher tax benefits from share-based compensation exercises and vesting. 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. Segment Analysis Americas Three Months Ended 31 December 2021 2020 $ Change % Change Sales$1,224.1 $933.0 $291.1 31 % Operating income 267.2 225.8 41.4 18 % Operating margin 21.8 % 24.2 % (240) bp Equity affiliates' income$34.2 $22.3 $11.9 53 % Adjusted EBITDA 456.7 399.9 56.8 14 % Adjusted EBITDA margin 37.3 % 42.9 % (560) bp Sales % Change from Prior Year Volume 8 % Price 3 % Energy and natural gas cost pass-through 20 % Currency - % Total Americas Sales Change 31 % Sales of$1,224.1 increased 31%, or$291.1 , due to higher energy and natural gas cost pass-through to customers of 20%, favorable volumes of 8%, and positive pricing of 3%. Energy and natural gas cost pass through to customers was higher primarily due to natural gas prices. Favorable volumes were driven by higher demand for hydrogen and merchant products. The pricing improvement was attributable to pricing actions in our merchant business, which more than offset power cost increases in the region. Currency was flat versus the prior year. Operating income of$267.2 increased 18%, or$41.4 , due to higher volumes of$27 , positive pricing, net of power and fuel costs, of$9 , and favorable operating costs of$5 , primarily driven by lower maintenance activities. We expect maintenance activities to increase in future quarters. Operating margin of 21.8% decreased 240 bp from 24.2% in the prior year primarily due to higher energy and natural gas cost pass-through to our on-site customers, which negatively impacted margin by approximately 350 basis points, partially offset by a favorable impact from volumes of approximately 100 bp. Equity affiliates' income of$34.2 increased 53%, or$11.9 , primarily driven by higher income from affiliates inMexico . 33 --------------------------------------------------------------------------------
Table of ContentsAsia Three Months Ended 31 December 2021 2020 $ Change % Change Sales$780.4 $717.5 $62.9 9 % Operating income 221.1 214.8 6.3 3 % Operating margin 28.3 % 29.9 % (160) bp Equity affiliates' income$6.6 $8.8 ($2.2 ) (25 %) Adjusted EBITDA 338.5 331.5 7.0 2 % Adjusted EBITDA margin 43.4 % 46.2 % (280) bp Sales % Change from Prior Year Volume 4 % Price 3 % Energy and natural gas cost pass-through - % Currency 2 % Total Asia Sales Change 9 % Sales of$780.4 increased 9%, or$62.9 , due to higher volumes of 4%, positive pricing of 3%, and favorable currency of 2%. Higher volumes were primarily attributable to new on-site plants across the region. The favorable currency impact was primarily attributable to the appreciation of the Chinese Renminbi against theU.S. Dollar. Energy and natural gas cost pass-through to customers was flat versus the prior year. Operating income of$221.1 increased 3%, or$6.3 , due to higher volumes of$20 , positive pricing, net of power and fuel costs, of$4 , and favorable currency of$3 , partially offset by higher operating costs of$21 , including inflation and higher supply chain costs. Operating margin of 28.3% decreased 160 bp from 29.9% in the prior year, primarily due to the higher operating costs, partially offset by favorable volumes. Equity affiliates' income of$6.6 decreased 25%, or$2.2 , primarily due to lower income from affiliates inThailand . Europe Three Months Ended 31 December 2021 2020 $ Change % Change Sales$744.2 $543.5 $200.7 37 % Operating income 99.2 137.5 (38.3) (28 %) Operating margin 13.3 % 25.3 % (1,200) bp Equity affiliates' income$13.9 $14.9 ($1.0 ) (7 %) Adjusted EBITDA 162.9 201.7 (38.8) (19 %) Adjusted EBITDA margin 21.9 % 37.1 % (1,520) bp Sales % Change from Prior Year Volume 5 % Price 9 % Energy and natural gas cost pass-through 27 % Currency (4 %) Total Europe Sales Change 37 % 34
-------------------------------------------------------------------------------- Table of Contents Sales of$744.2 increased 37%, or$200.7 , due to higher energy and natural gas cost pass-through to customers of 27%, higher pricing of 9%, and higher volumes of 5%, partially offset by unfavorable currency impacts of 4%. Energy and natural gas cost pass-through to customers was significantly higher due to continued energy cost escalation throughout the quarter, which we are contractually able to pass through to our on-site customers. We improved pricing across all major merchant product lines, including ongoing actions to recover the higher energy costs. Volumes improved primarily due to higher demand for hydrogen and merchant products. The unfavorable currency impacts were primarily driven by the weakening of the Euro against theU.S. Dollar. Operating income of$99.2 decreased 28%, or$38.3 , primarily due to higher power and fuel costs that exceeded our pricing actions by$19 and unfavorable operating costs of$16 , including energy-related supply chain challenges that increased costs for plant operations and distribution. Operating margin of 13.3% decreased 1,200 bp from 25.3% in the prior year. Higher energy and natural gas cost pass-through to our on-site customers negatively impacted margin by approximately 500 bp. Higher power costs that were not fully offset by pricing actions in our merchant business negatively impacted margin by approximately 400 bp. Equity affiliates' income of$13.9 decreased 7%, or$1.0 , primarily due to lower income from an affiliate inItaly .Middle East andIndia Three Months Ended 31 December 2021 2020 $ Change % Change Sales$23.7 $19.5 $4.2 22 % Operating income 4.8 4.0 0.8 20 % Equity affiliates' income 92.3 21.2 71.1 335 % Adjusted EBITDA 103.2 31.3 71.9 230 % Sales of$23.7 increased 22%, or$4.2 , and operating income of$4.8 increased 20%, or$0.8 , primarily due to a new plant inIndia . Equity affiliates' income of$92.3 increased$71.1 , primarily due to income associated with the new JIGPC joint venture 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. 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 December 2021 2020 $ Change % Change Sales$221.8 $161.7 $60.1 37 % Operating loss (69.3) (43.0) (26.3) (61 %) Adjusted EBITDA (58.2) (32.3) (25.9) (80 %) Sales of$221.8 increased 37%, or$60.1 , primarily due to higher sale of equipment project activity. Despite higher sales, operating loss of$69.3 increased 61%, or$26.3 , as higher corporate support costs and the prior year benefit from the settlement of a supply contract were only partially offset by the higher sale of equipment activity. 35 -------------------------------------------------------------------------------- Table of Contents 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 withU.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 quarter of fiscal years 2022 or 2021 that impacted diluted EPS. When applicable, 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.
Quarter ended December 31
Equity Net Income
Operating Affiliates' Income Tax Attributable to Diluted
Q1 2022 vs. Q1 2021 Income Income Provision Air Products EPS
2022 GAAP $523.0 $147.8 $113.3 $560.4 $2.52
No non-GAAP adjustments - - - - -
2022 Non-GAAP ("Adjusted") $523.0 $147.8 $113.3 $560.4 $2.52
2021 GAAP $539.1 $69.3 $113.9 $471.7 $2.12
No non-GAAP adjustments - - - - -
2021 Non-GAAP ("Adjusted") $539.1 $69.3 $113.9 $471.7 $2.12
Change GAAP and Non-GAAP ("Adjusted") $0.40
% Change GAAP and Non-GAAP ("Adjusted") 19 %
36
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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
31 December
2021 2020
$ Margin $ Margin
Sales $2,994.2 $2,375.2
Net income and net income margin $549.6 18.4 % $486.7 20.5 %
Less: Income from discontinued operations, net of tax - - % 10.3 0.4 %
Add: Interest expense 30.5 1.0 % 36.7 1.5 %
Less: Other non-operating income (expense), net 22.6 0.8 % 18.6 0.8 %
Add: Income tax provision 113.3 3.8 % 113.9 4.8 %
Add: Depreciation and amortization 332.3 11.1 % 323.7 13.6 %
Adjusted EBITDA and adjusted EBITDA margin $1,003.1 33.5 % $932.1 39.2 %
Q1 2022
vs.
Q1 2021
Change GAAP
Net income $ change $62.9
Net income % change 13%
Net income margin change (210) bp
Change Non-GAAP
Adjusted EBITDA $ change $71.0
Adjusted EBITDA % change 8%
Adjusted EBITDA margin change (570) bp
37
-------------------------------------------------------------------------------- Table of Contents 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 ended31 December 2021 and 2020: Middle East Corporate Sales Americas Asia Europe and India and other Total Q1 2022$1,224.1 $780.4 $744.2 $23.7 $221.8 $2,994.2 Q1 2021 933.0 717.5 543.5 19.5 161.7 2,375.2 Middle East Corporate Americas Asia Europe and India and other Total Q1 2022 GAAP Operating income (loss)$267.2 $221.1 $99.2 $4.8 ($69.3 )$523.0 Operating margin 21.8 % 28.3 % 13.3 % Q1 2021 GAAP Operating income (loss)$225.8 $214.8 $137.5 $4.0 ($43.0 )$539.1 Operating margin 24.2 % 29.9 % 25.3 % Q1 2022 vs. Q1 2021 Change GAAP Operating income/loss $ change$41.4 $6.3 ($38.3 )$0.8 ($26.3 ) Operating income/loss % change 18 % 3 % (28 %) 20 % (61 %) Operating margin change (240) bp (160) bp (1,200) bp Q1 2022 Non-GAAP Operating income (loss)$267.2 $221.1 $99.2 $4.8 ($69.3 )$523.0 Add: Depreciation and amortization 155.3 110.8 49.8 6.1 10.3 332.3 Add: Equity affiliates' income 34.2 6.6 13.9 92.3 0.8 147.8 Adjusted EBITDA$456.7 $338.5 $162.9 $103.2 ($58.2 )$1,003.1 Adjusted EBITDA margin 37.3 % 43.4 % 21.9 % Q1 2021 Non-GAAP Operating income (loss)$225.8 $214.8 $137.5 $4.0 ($43.0 )$539.1 Add: Depreciation and amortization 151.8 107.9 49.3 6.1 8.6 323.7 Add: Equity affiliates' income 22.3 8.8 14.9 21.2 2.1 69.3 Adjusted EBITDA$399.9 $331.5 $201.7 $31.3 ($32.3 )$932.1 Adjusted EBITDA margin 42.9 % 46.2 % 37.1 % Q1 2022 vs. Q1 2021 Change Non-GAAP Adjusted EBITDA $ change$56.8 $7.0 ($38.8 )$71.9 ($25.9 ) Adjusted EBITDA % change 14 % 2 % (19 %) 230 % (80 %) Adjusted EBITDA margin change (560) bp (280) bp (1,520) bp 38
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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. There were no non-GAAP adjustments in the
first quarter of fiscal years 2022 or 2021 that impacted our effective tax rate.
Three Months Ended
31 December
2021 2020
Income tax provision $113.3 $113.9
No impact from non-GAAP adjustments - -
Adjusted income tax provision $113.3 $113.9
Income from continuing operations before taxes $662.9 $590.3
No impact from non-GAAP adjustments - -
Adjusted income from continuing operations before taxes $662.9 $590.3
Effective and adjusted effective tax rate 17.1 % 19.3 %
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:
Three Months Ended
31 December
2021 2020
Cash used for (provided by) investing activities
1.1 2.6 Purchases of investments (727.4) (158.5) Proceeds from investments 1,331.9 855.0 Other investing activities 6.4 3.3 Capital expenditures$2,331.1 $684.2 39
-------------------------------------------------------------------------------- Table of Contents 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 December 2021 , we had$1,656.1 of foreign cash and cash items compared to total cash and cash items of$2,953.7 . 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. Cash Flows From Operations Three Months Ended 31 December
2021 2020
Income from continuing operations attributable to Air Products$560.4 $471.7 Adjustments to reconcile income to cash provided by operating activities: Depreciation and amortization 332.3 323.7 Deferred income taxes 15.7 47.6 Undistributed earnings of equity method investments (117.3) (10.8) Gain on sale of assets and investments (0.8) (1.1) Share-based compensation 15.8 9.8 Noncurrent lease receivables 21.8 21.9 Other adjustments (49.4) 19.3 Changes in working capital accounts
6.7 (107.4)
Cash Provided by Operating Activities
For the first three months of fiscal year 2022, cash provided by operating activities was$785.2 . The working capital accounts were a source of cash of$6.7 , primarily driven by a source of cash of$167.6 from payables and accrued liabilities, partially offset by a use of cash of$132.7 from trade receivables, less allowances. 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 drove the use of cash within trade receivables as we contractually passed through these higher costs to customers. For the first three months of fiscal year 2021, cash provided by operating activities was$774.7 . The working capital accounts were a use of cash of$107.4 , primarily driven by$47.5 from other working capital and$44.1 from trade receivables, less allowances. The use within other working capital was primarily due to 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 activity. 40 -------------------------------------------------------------------------------- Table of Contents Cash Flows From Investing Activities Three Months Ended 31 December 2021 2020 Additions to plant and equipment, including long-term deposits ($663.8 ) ($664.2 ) Acquisitions, less cash acquired (34.6) - Investment in and advances to unconsolidated affiliates (1,632.7) (20.0) Proceeds from sale of assets and investments 1.1 2.6 Purchases of investments (727.4) (158.5) Proceeds from investments 1,331.9 855.0 Other investing activities 6.4 3.3 Cash (Used for) Provided by Investing Activities
(
For the first three months of fiscal year 2022, cash used for investing activities was$1,719.1 . Capital expenditures primarily included$1,632.7 for investment in and advances to unconsolidated affiliates. Refer to the Capital Expenditures section below for further detail. Proceeds from investments of$1,331.9 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$727.4 . For the first three months of fiscal year 2021, cash provided by investing activities was$18.2 . Capital expenditures for plant and equipment were$664.2 . Proceeds from investments of$855.0 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$158.5 . 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 39 . Three Months Ended 31 December 2021 2020 Additions to plant and equipment, including long-term deposits$663.8 $664.2 Acquisitions, less cash acquired 34.6 - Investment in and advances to unconsolidated affiliates(A) 1,632.7 20.0 Capital Expenditures$2,331.1 $684.2 (A)Includes contributions from noncontrolling partners in consolidated subsidiaries as discussed below. Capital expenditures for the first three months of fiscal year 2022 totaled$2,331.1 compared to$684.2 for the first three months of fiscal year 2021. The increase of$1,646.9 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 also includes contribution from our non-controlling partner, for the second phase of the project in 2023. Refer to Note 6, 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. 41 -------------------------------------------------------------------------------- Table of Contents Cash Flows From Financing Activities Three Months Ended 31 December 2022 2021 Long-term debt proceeds$51.6 $- Payments on long-term debt (400.0) (1.1)
Net increase in commercial paper and short-term financial debt 113.1
4.5
Dividends paid to shareholders (332.1)
(296.2)
Proceeds from stock option exercises 13.3
1.6
Other financing activities (31.0)
(15.9)
Cash Used for Financing Activities ($585.1 )
(
For the first three months of fiscal year 2022, cash used for financing activities was$585.1 . The use of cash was primarily driven by payments on long-term debt of$400.0 for the repayment of a 3.0% Senior Note and dividend payments to shareholders of$332.1 . These uses of cash were partially offset by short-term borrowings and long-term debt proceeds of$113.1 and$51.6 , respectively. For the first three months of fiscal year 2021, cash used for financing activities was$307.1 and primarily included dividend payments to shareholders of$296.2 . Financing and Capital Structure Debt Capital needs in the first three months of fiscal year 2022 were satisfied with our cash balance and cash from operations. Total debt decreased from$7,637.2 as of30 September 2021 to$7,378.0 as of31 December 2021 , primarily due to repayment of the 3.0% Senior Note, partially offset by proceeds from short-term notes and long-term borrowings on our foreign commitments. Total debt includes related party debt of$370.1 and$358.4 as of31 December 2021 and30 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 of31 December 2021 , we are in compliance with all of the financial and other covenants under our debt agreements. Credit Facilities On31 March 2021 , we entered into a five-year$2,500 revolving credit agreement with a syndicate of banks (the "2021 Credit Agreement"), under which senior unsecured debt is available to us and certain of our subsidiaries. The 2021 Credit Agreement provides a source of liquidity and supports our commercial paper program. 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 of31 December 2021 and30 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 of31 December 2021 . We have credit facilities available to certain of our foreign subsidiaries totaling$297.8 , of which$222.1 was borrowed and outstanding as of31 December 2021 . The amount borrowed and outstanding as of30 September 2021 was$176.2 .Equity Securities On15 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 three months of fiscal years 2022 or 2021. As of31 December 2021 ,$485.3 in share repurchase authorization remained. 42 -------------------------------------------------------------------------------- Table of Contents 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. On3 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 on9 May 2022 to shareholders of record at the close of business on1 April 2022 . PENSION BENEFITS For the three months ended31 December 2021 and 2020, net periodic pension benefit was$1.0 and$9.5 , respectively. These periods included service-related costs of$11.0 and$11.4 , respectively, which are reflected on our consolidated income statements within "Operating income." The amount of service costs capitalized in the first three months of fiscal years 2022 and 2021 were not material. Non-service related benefits were$12.0 and$20.9 for the three months ended31 December 2021 and 2020, respectively. The decrease in fiscal year 2022 primarily resulted from lower expected return 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 three months ended31 December 2021 , we recognized pension settlement losses of$0.9 to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss associated with theU.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$5 to$10 in fiscal year 2022. Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. For the three months ended31 December 2021 and 2020, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were$9.1 and$21.2 , 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 10, 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. There have been no changes to our accounting policies or estimates during the first three months of fiscal year 2022 that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations. 43
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