Air Products Chemicals Inc

Discussion of Consolidated Results

Sales

The table below summarizes the major factors that impacted consolidated sales for the periods presented:

Sales of $2,997.4 decreased 6%, or $177.3, as lower energy cost pass-through to customers of 11% was partially offset by higher volumes of 3%, higher pricing of 1%, and a favorable currency impact of 1%. Lower natural gas prices in the Americas and Europe segments drove the lower energy cost pass-through to our on-site customers. The volume improvement was primarily attributable to strong demand for hydrogen in our on-site business, which was partially offset by weaker demand for helium in our merchant business.

Cost of Sales and Gross Margin

Cost of sales of $2,067.2 decreased 9%, or $205.1, due to lower energy cost pass-through to customers of $340, partially offset by higher costs associated with sales volumes of $78, an unfavorable impact from currency of $30, and higher other costs of $27. The higher costs were driven by planned maintenance, higher depreciation expense, and inflation, partially offset by lower power costs in our merchant business across most regions. Gross margin of 31.0% increased 260 bp from 28.4% in the prior year primarily due to lower energy cost pass-through to customers, which favorably impacted margin by about 300 bp.

Selling and Administrative Expense

Selling and administrative expense of $238.4 increased 2%, or $4.0, primarily due to additional costs to support growth and labor inflation. Selling and administrative expense as a percentage of sales increased to 8.0% from 7.4% in the prior year.

Research and Development Expense

Research and development expense of $25.7 increased 5%, or $1.3. Research and development expense as a percentage of sales increased to 0.9% from 0.8% in the prior year.

Other Income (Expense), Net

Other income of $0.8 decreased 90%, or $7.6, primarily due to an unfavorable foreign exchange impact from the devaluation of the Argentine peso.

Operating Income and Operating Margin

Operating income of $666.9 increased 2%, or $14.9, as positive pricing, net of power and fuel costs, of $41 and higher volumes of $30 were partially offset by higher costs of $56. The higher costs were driven by planned maintenance, labor inflation, and higher depreciation expense. Operating margin of 22.2% increased 170 bp from 20.5% in the prior year primarily due to lower energy cost pass-through to customers, which positively impacted margin by about 200 basis points, as well as our pricing actions, partially offset by higher costs.

Equity Affiliates' Income

Equity affiliates' income of $158.4 increased 44%, or $48.4, primarily due to a higher contribution from the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023, as well as higher income from our affiliate in Mexico.

Interest Expense

Interest incurred increased 93%, or $52.3, driven by a higher debt balance, including borrowings on project financing for the NEOM Green Hydrogen Project as well as the multi-currency green bonds that were issued during the second quarter of fiscal year 2023 to finance projects that are expected to have environmental benefits as defined under our Green Finance Framework. Capitalized interest increased $40.0 due to a higher carrying value of projects under construction, including the NEOM Green Hydrogen Project.

Other Non-Operating Income (Expense), Net

Other non-operating expense of $14.8 increased $14.2, primarily due to higher non-service pension costs as well as lower interest income on cash and cash items. The lower interest income was attributable to a lower balance of time deposits and short-term treasury securities.

Net Income and Net Income Margin

Net income of $621.6 increased 6%, or $37.8, primarily due to higher equity affiliates' income, favorable pricing, and higher volumes, partially offset by higher costs. Net income margin of 20.7% increased 230 bp from 18.4% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 200 bp.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,174.5 increased 8%, or $91.0, primarily due to higher equity affiliates' income, higher volumes, and favorable pricing, partially offset by higher costs. Adjusted EBITDA margin of 39.2% increased 510 bp from 34.1% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 400 bp.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income before taxes. Equity affiliates' income is primarily included net of income taxes within income before taxes on our consolidated income statements.

Our effective tax rate was 17.9% and 18.9% for the three months ended 31 December 2023 and 2022, respectively. The current year rate was lower primarily due to earning a greater share of income in jurisdictions with lower tax rates and higher equity affiliates' income. Additionally, we released certain foreign unrecognized tax benefits during the first quarter of fiscal year 2024 upon expiration of the statute of limitations for uncertain tax positions taken in prior years. These impacts were partially offset by lower excess tax benefits on share-based compensation in the first quarter of fiscal year 2024.

Our adjusted effective tax rate, which excludes the impact of the non-service components of net periodic cost for our defined benefit pension plans, was 18.1% and 19.1% for the three months ended 31 December 2023 and 2022, respectively.

Discussion of Results by Business Segment

Americas

The table below summarizes the major factors that impacted sales in the Americas segment for the periods presented:

Sales of $1,252.1 decreased 10%, or $132.1, due to lower energy cost pass-through to customers of 15%, which was driven by lower natural gas prices, partially offset by higher volumes of 3% and higher pricing of 2%. The volume improvement was attributable to better demand for hydrogen in our on-site business.

Operating income of $354.4 increased 3%, or $11.4, primarily due to positive pricing, net of power and fuel costs, of $33 and favorable volumes of $12, partially offset by higher costs of $34, including higher costs for planned maintenance, higher depreciation expense, and labor inflation. Operating margin of 28.3% increased 350 bp from 24.8% in the prior year primarily due to lower energy cost pass-through to customers, which positively impacted margin by about 400 basis points, as well as our pricing actions, partially offset by higher costs.

Equity affiliates’ income of $37.1 increased $20.7 driven by an affiliate in Mexico.

Asia

The table below summarizes the major factors that impacted sales in the Asia segment for the periods presented:

Sales of $793.8 increased 2%, or $16.0, due to higher energy cost pass-through to customers of 2% and higher pricing of 1%, partially offset by an unfavorable impact from currency of 1%. Overall volumes were flat as higher volumes in our on-site business, including contributions from several new industrial gas plants, were offset by weak economic growth in China and lower demand for helium.

Operating income of $211.2 decreased 10%, or $24.7, primarily due to negative volume mix of $13 and higher costs of $7, including higher maintenance costs and labor inflation. Operating margin of 26.6% decreased 370 bp from 30.3% in the prior year.

Equity affiliates’ income of $4.2 decreased 43%, or $3.2, driven by higher maintenance expense for one of our affiliates in China.

Europe

The table below summarizes the major factors that impacted sales in the Europe segment for the periods presented:

Sales of $731.2 decreased 8%, or $60.7, due to lower energy cost pass-through to customers of 20%, which was driven by lower natural gas prices, and lower pricing of 2%. These impacts were partially offset by higher volumes of 9% and a favorable impact from currency of 5%. The volume improvement was driven by a facility in Uzbekistan that we acquired in the third quarter of fiscal year 2023. Currency positively impacted sales due to the weakening of the U.S. Dollar against the Euro.

Operating income of $197.6 increased 36%, or $51.8, primarily due to higher volumes of $51, a net pricing impact of $13 due to lower power costs, and favorable currency of $8, partially offset by higher costs of $20. The higher costs were driven by labor inflation and higher costs for planned maintenance. Operating margin of 27.0% increased 860 bp from 18.4% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 350 bp.

Equity affiliates’ income of $20.7 increased 17%, or $3.0, driven by affiliates in Italy and South Africa.

Middle East and India

Sales of $35.4 decreased 14%, or $6.0, and operating income of $3.9 decreased 42%, or $2.8, primarily due to lower volumes.

Equity affiliates' income of $92.9 increased 45%, or $28.8, primarily due to a higher contribution from the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023.

Corporate and other

Sales of $184.9 increased 3%, or $5.5, and reflected higher LNG sale of equipment activity. Despite higher sales, operating loss of $100.2 increased 26%, or $20.8, primarily due to higher costs for certain non-LNG sale of equipment projects.