Air Products Chemicals Inc

Discussion of Second Quarter Consolidated Results

Sales

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

Sales of $2,930.2 decreased 8%, or $269.9, as lower energy cost pass-through to customers of 6% driven by lower natural gas prices in the Americas and Europe segments, lower volumes of 2%, and an unfavorable impact from currency of 1% were partially offset by higher pricing of 1%. Volume was down overall primarily due to weaker merchant demand, which was partially offset by higher demand for hydrogen as well as contributions from new on-site assets.

Cost of Sales and Gross Margin

Cost of sales of $1,991.5 decreased 13%, or $291.3, due to lower energy cost pass-through to customers of $201, lower costs associated with sales volumes of $43, lower other costs of $28 driven by lower power costs in our merchant business, and a favorable impact from currency of $19. Gross margin of 32.0% increased 330 bp from 28.7% in the prior year primarily due to lower energy cost pass-through to customers, which favorably impacted margin by approximately 200 bp.

Selling and Administrative Expense

Selling and administrative expense of $240.6 decreased 4%, or $10.6, primarily due to lower incentive compensation. Selling and administrative expense as a percentage of sales increased to 8.2% from 7.8% in the prior year.

Research and Development Expense

Research and development expense of $25.4 decreased 7%, or $1.8. 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 three 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 $21.5 increased $15.0 primarily due to higher income from the sale of assets.

Operating Income and Operating Margin

Operating income of $637.2 increased 39%, or $177.4, as lower charges for business and asset actions of $129, positive pricing, net of power and fuel costs, of $45, and lower other costs of $32 were partially offset by lower volumes of $20 and an unfavorable impact from currency of $8. The lower costs included favorable non-recurring items such as sales of assets as well as lower incentive compensation and distribution costs, partially offset by the impact of labor inflation. Operating margin of 21.7% increased 730 bp from 14.4% in the prior year due to the factors 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 $143.3 decreased 14%, or $22.6, as lower contributions from affiliates in our Europe and Middle East and India segments were partially offset by higher income from affiliates in the Americas segment.

Interest Expense

Interest incurred increased 96%, or $61.4, 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 $42.4 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 $9.2 decreased 34%, or $4.7, as higher interest income on cash and cash items and short-term investments was partially offset by higher non-service pension costs.

Net Income and Net Income Margin

Net income of $580.9 increased 29%, or $131.0, primarily due to lower charges for business and asset actions, favorable pricing, and lower other costs, partially offset by lower equity affiliates' income, lower volumes, and higher interest expense. Net income margin of 19.8% increased 570 bp from 14.1% 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 approximately 150 bp.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,198.3 increased 4%, or $47.4, as higher pricing and lower costs were partially offset by lower equity affiliates' income. Adjusted EBITDA margin of 40.9% increased 490 bp from 36.0% 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 250 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 18.3% and 21.2% for the three 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 18.9% and 19.7% for the three months ended 31 March 2024 and 2023, respectively. The current quarter 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 Second Quarter Results by Business Segment

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

Sales of $1,245.8 decreased 9%, or $127.3, due to lower energy cost pass-through to customers of 12% driven by lower natural gas prices in North America and an unfavorable impact from currency of 1%, partially offset higher pricing of 3% and higher volumes of 1%. Volumes improved modestly as higher demand for hydrogen in our on-site business was partially offset by weaker merchant volume.

Operating income of $371.9 increased 15%, or $47.7, primarily due to positive pricing, net of power and fuel costs, of $37 and favorable volumes of $19, partially offset by higher costs of $7. Higher costs for labor inflation were partially offset by lower incentive compensation. Operating margin of 29.9% increased 630 bp from 23.6% 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 basis points.

Equity affiliates’ income of $44.2 increased 57%, or $16.1, driven by higher income from an affiliate in Mexico as well as recognition of our share of income from an asset sale.

Asia

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

Sales of $779.7 decreased 4%, or $34.2, due to an unfavorable impact from currency of 4% driven by strengthening of the U.S. Dollar against the Chinese Renminbi and lower volumes of 1%, partially offset by higher energy cost pass-through to customers of 1%. Volumes declined as weak economic growth in China and lower demand for merchant products more than offset higher on-site volumes, which included contributions from several new industrial gas plants. Pricing was flat versus the prior year.

Operating income of $203.6 decreased 13%, or $29.4, primarily due to lower volumes, including unfavorable business mix, of $21 and an unfavorable currency impact of $10, partially offset by lower costs of $5. Lower distribution costs were partially offset by labor inflation. Operating margin of 26.1% decreased 250 bp from 28.6% in the prior year.

Equity affiliates’ income of $8.3 increased 14%, or $1.0, driven 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 $667.9 decreased 11%, or $85.0, due to lower energy cost pass-through to customers of 6% driven by lower natural gas prices across the region, lower volumes of 6%, and lower pricing of 1%, partially offset by a favorable impact from currency of 2%. Volumes were lower due to weak merchant demand as well as a planned maintenance outage, which were partially offset by contributions from an on-site facility in Uzbekistan that we acquired in the third quarter of fiscal year 2023. Currency positively impacted sales primarily due to the weakening of the U.S. Dollar against the Euro and the British Pound Sterling.

Operating income of $201.0 increased 16%, or $27.8, primarily due to pricing, net of lower power and fuel costs, of $11, lower other costs of $10, and a favorable currency impact of $4. Other costs were favorable primarily due to higher income from the sale of assets as well as lower distribution costs, partially offset by higher costs for labor inflation. Operating margin of 30.1% increased 710 bp from 23.0% 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 200 bp, and favorable business mix.

Equity affiliates’ income of $11.7 decreased 60%, or $17.8, driven by prior year non-recurring items for our affiliate in Italy.

Sales of $35.7 decreased 20%, or $9.1, primarily due to lower volumes. Operating income of $5.6 increased $4.3 as lower costs, including planned maintenance, more than offset the lower volumes.

Equity affiliates' income of $73.9 decreased 25%, or $25.0, primarily due to higher interest and other operating costs related to the Jazan gasification and power project.

Sales of $201.1 decreased 7%, or $14.3, and operating loss of $87.9 increased 2%, or $1.6, primarily due to lower non-LNG sale of equipment activity. The negative impact to operating loss was partially offset by lower corporate costs.