Air Products Chemicals Inc

Discussion of First Six Months Consolidated Results

Sales

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

Sales of $5,927.6 decreased 7%, or $447.2, as lower energy cost pass-through to customers of 9% driven by lower natural gas prices in the Americas and Europe segments was partially offset by higher volumes of 1% and higher pricing of 1%. Volumes improved modestly as strong demand for hydrogen and contributions from new assets in our on-site business were partially offset by weaker merchant demand. Currency was flat versus the prior year.

Cost of Sales and Gross Margin

Cost of sales of $4,058.7 decreased 11%, or $496.4, due to lower energy cost pass-through to customers of $542, partially offset by higher costs associated with sales volumes of $35 and an unfavorable impact from currency of $11. Other costs were flat as lower power costs in our merchant business across most regions offset labor inflation and higher planned maintenance. Gross margin of 31.5% increased 300 bp from 28.5% in the prior year primarily due to lower energy cost pass-through to customers, which favorably impacted margin by approximately 250 bp.

Selling and Administrative Expense

Selling and administrative expense of $479.0 decreased 1%, or $6.6, as lower incentive compensation was mostly offset by labor inflation. Selling and administrative expense as a percentage of sales increased to 8.1% from 7.6% in the prior year.

Research and Development Expense

Research and development expense of $51.1 decreased 1%, or $0.5. Research and development expense as a percentage of sales increased to 0.9% from 0.8% in the prior year.

Business and Asset Actions

Our consolidated income statements for the six months ended 31 March 2024 and 2023 include charges of $57.0 ($43.8 after tax, or $0.20 per share) and $185.6 ($153.7 attributable to Air Products after tax, or $0.69 per share), respectively, for strategic business and asset actions intended to optimize costs and focus resources on our growth projects. Charges for business and asset actions are not recorded in segment results.

The current year charge of $57.0 was for severance and other postemployment benefits payable to employees identified under a global cost reduction plan that was initiated in June 2023. The prior year charge of $185.6 resulted from the noncash write-off of assets related to our withdrawal from projects in Indonesia and Ukraine.

Other Income (Expense), Net

Other income of $22.3 increased 50%, or $7.4, as higher income from the sale of assets was partially offset by an unfavorable foreign exchange impact from the devaluation of the Argentine peso during the first quarter.

Operating Income and Operating Margin

Operating income of $1,304.1 increased 17%, or $192.3, as lower charges for business and asset actions of $129, positive pricing, net of power and fuel costs, of $86, and higher volumes of $11 were partially offset by higher other costs of $25 and an unfavorable impact from currency of $8. The higher other costs were driven by labor inflation and higher planned maintenance, partially offset by lower incentive compensation as well as higher income from the sale of assets. Operating margin of 22.0% increased 460 bp from 17.4% 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 approximately 150 basis points.

Equity Affiliates' Income

Equity affiliates' income of $301.7 increased 9%, or $25.8, primarily due to higher income from our affiliate in Mexico.

Interest Expense

Interest incurred increased 94%, or $113.7, primarily due to a higher debt balance from senior notes that were issued in March 2023 and February 2024 to fund projects under our Green Finance Framework as well as borrowings on financing available for the NEOM Green Hydrogen Project. Capitalized interest increased $82.4 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 $24.0 increased 66%, or $9.5, as higher non-service pension costs were partially offset by higher interest income on cash and cash items and short-term investments.

Net Income and Net Income Margin

Net income of $1,202.5 increased 16%, or $168.8, primarily due to lower charges for business and asset actions, favorable pricing, and higher equity affiliates' income, partially offset by higher interest expense and higher other costs. Net income margin of 20.3% increased 410 bp from 16.2% in the prior year due to these factors as well as lower energy cost pass-through to customers, which positively impacted margin by approximately 150 bp.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $2,372.8 increased 6%, or $138.4, as higher pricing, volumes, and equity affiliates' income were partially offset by higher costs. Adjusted EBITDA margin of 40.0% increased 490 bp from 35.1% in the prior year due to these factors as well as lower energy cost pass-through to customers, which positively impacted margin by approximately 300 bp.

Effective Tax Rate

Our effective tax rate was 18.1% and 19.9% for the six months ended 31 March 2024 and 2023, respectively. Our current quarter rate was lower primarily due to a discrete tax impact recorded in the prior year from business and asset actions further discussed below as well as earning a greater share of income in jurisdictions with lower tax rates and the impact from equity affiliates' income.

In the prior year, we recognized a charge of $185.6 ($153.7 attributable to Air Products after tax) related to various business and asset actions. Refer to Note 4, Business and Asset Actions, for additional information. This charge included certain losses for which we could not recognize an income tax benefit. Therefore, we recorded a valuation allowance of $31.7 against deferred tax assets resulting from the charge. Partially offsetting the valuation allowance cost was a $15.9 income tax benefit from a tax election related to a non-U.S. subsidiary.

Our adjusted effective tax rate, which excludes the impact of the business and asset actions discussed above as well as the non-service components of net periodic cost for our defined benefit pension plans, was 18.5% and 19.4% for the six months ended 31 March 2024 and 2023, respectively. The current year rate was lower due to the higher income in jurisdictions with lower tax rates as well as the impact from equity affiliates' income.

Discussion of First Six Months Results by Business Segment

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

Sales of $2,497.9 decreased 9%, or $259.4, as lower energy cost pass-through to customers of 13% driven by lower natural gas prices in North America was partially offset by higher volumes of 2% and higher pricing of 2%. Volumes improved modestly as higher demand for hydrogen in our on-site business was partially offset by weaker merchant volume. Currency was flat versus the prior year.

Operating income of $726.3 increased 9%, or $59.1, primarily due to positive pricing, net of power and fuel costs, of $70 and favorable volumes of $31, partially offset by higher costs of $41. The higher costs were driven by higher planned maintenance and labor inflation, partially offset by lower incentive compensation. Operating margin of 29.1% increased 490 bp from 24.2% in the prior year due to these factors as well as lower energy cost pass-through to customers, which positively impacted margin by about 350 basis points.

Equity affiliates’ income of $81.3 increased 83%, or $36.8, driven by higher income from 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 $1,573.5 decreased 1%, or $18.2, due to an unfavorable currency impact of 3% driven by strengthening of the U.S. Dollar against the Chinese Renminbi, partially offset by higher pricing of 1% and higher energy cost pass-through to customers 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 merchant products.

Operating income of $414.8 decreased 12%, or $54.1, primarily due to unfavorable business mix of $34, an unfavorable currency impact of $12, and lower pricing, net of power and fuel costs, of $6. The cost impact was relatively flat as lower incentive compensation and distribution costs were mostly offset by labor inflation and higher planned maintenance. Operating margin of 26.4% decreased 310 bp from 29.5% in the prior year primarily due to unfavorable business mix.

Equity affiliates’ income of $12.5 decreased 15%, or $2.2, as higher maintenance expense for one of our affiliates in China was partially offset by higher income from an affiliate in Thailand.

Europe

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

Sales of $1,399.1 decreased 9%, or $145.7, due to lower energy cost pass-through to customers of 13% driven by lower natural gas prices across the region and lower pricing of 2%, partially offset by a favorable impact from currency of 4% and higher volumes of 2%. Currency positively impacted sales primarily due to the weakening of the U.S. Dollar against the Euro. The volume improvement was driven by contribution from an on-site facility in Uzbekistan that we acquired in the third quarter of fiscal year 2023, which was partially offset by lower merchant demand.

Operating income of $398.6 increased 25%, or $79.6, due to higher volumes of $53, pricing, net of lower power and fuel costs, of $24, and a favorable impact from currency of $13, partially offset by higher costs of $10. The higher costs were driven by labor inflation and higher planned maintenance, partially offset by income from the sale of assets and lower distribution costs. Operating margin of 28.5% increased 790 bp from 20.6% 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 300 bp.

Equity affiliates’ income of $32.4 decreased 31%, or $14.8, driven by prior year non-recurring items for our affiliate in Italy.

Sales of $71.1 decreased 18%, or $15.1, primarily due to lower volumes. Despite lower sales, operating income of $9.5 increased 19%, or $1.5, primarily due to lower costs, including planned maintenance.

Equity affiliates' income of $166.8 increased 2%, or $3.8, as a higher contribution from JIGPC's completion of the second phase of the asset purchase in January 2023 was partially offset by higher interest and other operating costs related to the Jazan gasification and power project.

Sales of $386.0 decreased 2%, or $8.8, and operating loss of $188.1 increased 14%, or $22.4, primarily due to lower non-LNG sale of equipment activity. The negative impact to operating loss was partially offset by lower corporate costs.