Air Products Chemicals Inc

Discussion of First Nine Months Consolidated Results

Sales

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

Sales of $8,913.1 decreased 5%, or $495.6, due to lower energy cost pass-through to customers of 6%, driven by lower natural gas prices in North America and Europe, partially offset by higher pricing of 1%. Volumes were flat as weaker merchant demand offset improvements in our on-site business, which included higher demand for hydrogen in the Americas as well as contributions from new assets in Europe and Asia. Currency was also stable versus the prior year.

Cost of Sales and Gross Margin

Cost of sales of $6,064.3 decreased 8%, or $561.5, due to lower energy cost pass-through to customers of $584 and a favorable impact from currency of $20, partially offset by higher costs associated with sales volumes of $32 and higher costs of $10. Higher costs resulting from inflation and planned maintenance activities were partially offset by lower power costs in our merchant business as well as improvements from strategic productivity actions. Gross margin of 32.0% increased 240 bp from 29.6% in the prior year primarily due to lower energy cost pass-through to customers.

Selling and Administrative Expense

Selling and administrative expense of $714.4 decreased 1%, or $9.9, primarily due to lower incentive compensation and productivity improvements, partially offset by labor inflation. Selling and administrative expense as a percentage of sales increased to 8.0% from 7.7% in the prior year.

Research and Development Expense

Research and development expense of $78.1 decreased 3%, or $2.8. Research and development expense as a percentage of sales of 0.9% was flat versus the prior year.

Business and Asset Actions

Our consolidated income statements for the nine months ended 30 June 2024 and 2023 include charges of $57.0 ($43.8 after tax, or $0.20 per share) and $244.6 ($204.9 attributable to Air Products after tax, or $0.92 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 originated during the third quarter of fiscal year 2023, which resulted in an initial charge of $27.0. The prior year also included a noncash charge of $217.6 to write off assets associated with exited projects that were previously under construction in our Asia and Europe segments. The assets written off included those related to our withdrawal from coal gasification in Indonesia as well as a project in Ukraine that was permanently suspended due to Russia's invasion of the country.

Other Income (Expense), Net

Other income of $42.4 increased 85%, or $19.5, primarily due to higher income from the sale of assets as well as the favorable settlement of a legal dispute. Refer to Note 12, Commitments and Contingencies, to the consolidated financial statements for additional information. These items were partially offset by an unfavorable foreign exchange impact from the devaluation of the Argentine peso during the first quarter of fiscal year 2024.

Operating Income and Operating Margin

Operating income of $2,041.7 increased 16%, or $285.7, as lower charges for business and asset actions of $188, positive pricing, net of power and fuel costs, of $130, and favorable business mix of $22 were partially offset by higher costs of $35 and an unfavorable impact from currency of $19. The higher costs were driven by labor inflation and higher planned maintenance, partially offset by lower incentive compensation, productivity improvements, as well as favorable non-recurring items such as sales of assets and the favorable settlement of a legal dispute in our Americas segment. Operating margin of 22.9% increased 420 bp from 18.7% in the prior year primarily due to lower charges for business and asset actions, favorable pricing, and lower energy cost pass-through to customers. Of the 420 bp improvement, lower energy cost pass-through to customers contributed approximately 150 bp.

Equity Affiliates' Income

Equity affiliates' income of $470.6 increased 7%, or $29.7, as higher income from affiliates in the Americas segment, which included recognition of our share of income from an asset sale, was partially offset by a lower contribution from an affiliate in Europe.

Interest Expense

Interest incurred increased 86%, or $169.6, primarily due to a higher debt balance from senior notes 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 $130.0 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 $25.3 decreased 3%, or $0.9. During the third quarter of fiscal year 2024, we recorded an unrealized gain of $11.2 ($3.0 attributable to Air Products after tax, or $0.01 per share) upon de-designation of certain interest rate swaps associated with the financing for the NEOM Green Hydrogen Project. Refer to Note 3, Variable Interest Entities, and Note 8, Financial Instruments, to the consolidated financial statements for additional information. Additionally, we recognized higher interest income on cash and cash items and short-term investments during the first nine months of fiscal year 2024. These favorable items were partially offset by higher non-service pension costs.

Net Income and Net Income Margin

Net income of $1,911.4 increased 16%, or $267.2, due to higher pricing, net of power and fuel costs, and favorable business mix. Additionally, strategic business and asset actions for which we incurred higher charges in the prior year resulted in productivity improvements across our organization, which partially offset higher costs driven by inflation and planned maintenance. Higher costs were partially offset by lower incentive compensation and favorable non-recurring operating items.

Net income margin of 21.4% increased 390 bp from 17.5% in the prior year primarily due to the lower charges for business and asset actions, higher pricing, and lower energy cost pass-through to customers. Of the 390 bp improvement, lower energy cost pass-through to customers contributed approximately 150 bp.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $3,639.6 increased 6%, or $197.1, due to higher pricing, net of power and fuel costs, and favorable business mix, partially offset by higher costs. Higher costs driven by inflation and planned maintenance costs were partially offset by lower incentive compensation, favorable non-recurring operating items, and productivity improvements. Adjusted EBITDA margin of 40.8% increased 420 bp from 36.6% in the prior year primarily due to lower energy cost pass-through to customers and higher pricing. Of the 420 bp improvement, lower energy cost pass-through to customers contributed approximately 250 bp.

Effective Tax Rate

Our effective tax rate was 17.5% and 19.4% for the nine months ended 30 June 2024 and 2023, respectively. Our current year effective tax rate was lower due to earning a greater share of income in jurisdictions with lower tax rates, higher equity affiliates' income, the tax benefit from a tax election related to a non-U.S. subsidiary, and the release of certain unrecognized tax benefits upon expiration of the statute of limitations for uncertain tax positions taken in prior years. In addition, during the first nine months of fiscal year 2023, we recorded a charge for business and asset actions of $244.6 ($204.9 attributable to Air Products after tax) that included certain losses for which we could not recognize an income tax benefit and were subject to a valuation allowance of $36.0. Partially offsetting the valuation allowance cost was a $15.9 income tax benefit from a tax election related to a non-U.S. subsidiary. For additional information on the charge for business and asset actions, refer to Note 4, Business and Asset Actions, to the consolidated financial statements.

Our adjusted effective tax rate, which excludes the impact of the business and asset actions discussed above as well as other adjustments described in the "Reconciliations of Non-GAAP Financial Measures" section, was 17.9% and 19.1% for the nine months ended 30 June 2024 and 2023, respectively.

Discussion of First Nine 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 $3,732.6 decreased 7%, or $285.4, as lower energy cost pass-through to customers of 10% driven by lower natural gas prices in North America and an unfavorable currency impact of 1% were partially offset by higher pricing of 3% and higher volumes of 1%. Pricing was favorable across all merchant product lines. Volumes improved modestly as higher demand for hydrogen in our on-site business was partially offset by weaker merchant volume.

Operating income of $1,117.4 increased 7%, or $75.4, due to positive pricing, net of power and fuel costs, of $102 and favorable volumes of $28, partially offset by higher costs of $50 and unfavorable currency of $5. The higher costs were driven by higher planned maintenance and labor inflation, partially offset by lower incentive compensation as well as the favorable settlement of a legal dispute during the third quarter. Operating margin of 29.9% increased 400 bp from 25.9% in the prior year primarily due to lower energy cost pass-through to customers and favorable pricing, which were partially offset by the impact of higher costs. Of the 400 bp improvement, lower energy cost pass-through to customers contributed approximately 250 bp.

Equity affiliates’ income of $118.8 increased 60%, or $44.4, due to 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 $2,363.1 decreased 2%, or $51.5, due to an unfavorable currency impact of 3%, partially offset by higher energy cost pass-through to customers of 1%. Despite higher volumes from new industrial gas on-site plants across the region, overall volumes were flat primarily due to lower demand for merchant products. Pricing was flat versus the prior year.

Operating income of $614.9 decreased 13%, or $94.8, primarily due to unfavorable business mix of $59, an unfavorable currency impact of $21, lower pricing, net of power and fuel costs, of $9, and higher costs of $6. Higher costs for labor inflation and higher planned maintenance were partially offset by lower distribution costs. Operating margin of 26.0% decreased 340 bp from 29.4% in the prior year primarily due to unfavorable business mix.

Equity affiliates’ income of $21.2 decreased 5%, or $1.0, 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 $2,092.5 decreased 7%, or $158.9, due to lower energy cost pass-through to customers of 10% and lower pricing of 1%, partially offset by a favorable impact from currency of 3% and higher volumes of 1%. Currency positively impacted sales primarily due to the weakening of the U.S. Dollar against the Euro. Volumes improved modestly as contributions from a new facility in Uzbekistan were partially offset by weaker merchant demand.

Operating income of $603.3 increased 22%, or $108.2, due to higher volumes of $72, pricing, net of lower power and fuel costs, of $42, and a favorable impact from currency of $12, partially offset by higher costs of $18. Higher costs driven by labor inflation were partially offset by productivity improvements as well as income from the sale of assets. Operating margin of 28.8% increased 680 bp from 22.0% in the prior year due to favorable volumes and pricing as well as lower energy cost pass-through to customers. Of the 680 bp improvement, lower energy cost pass-through to customers contributed approximately 200 bp.

Equity affiliates’ income of $58.7 decreased 23%, or $17.3, driven by prior year non-recurring items for our affiliate in Italy.

Sales of $103.9 decreased 17%, or $22.0, and operating income of $8.1 decreased 41%, or $5.7, in each case primarily due to lower merchant volumes and pricing.

Equity affiliates' income of $256.0 decreased 1%, or $2.5, driven by higher costs in Saudi Arabia.

Sales of $621.0 increased 4%, or $22.2, and operating loss of $245.0 decreased 6%, or $15.0, in each case primarily due to higher LNG sales. Our operating results also benefited from lower incentive compensation, favorable non-recurring items, and productivity improvements.