Air Products Chemicals Inc

Discussion of Third Quarter Consolidated Results

Sales

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

Sales of $2,985.5 decreased 2%, or $48.4, due to an unfavorable impact from currency of 2% and lower energy cost pass-through to customers of 1%, which were partially offset by higher pricing of 1% driven by our Americas segment. Volume was flat versus the prior year as higher demand for hydrogen in the Americas as well as contributions from new on-site assets in Europe and Asia were offset by weaker merchant demand.

Cost of Sales and Gross Margin

Cost of sales of $2,005.6 decreased 3%, or $65.1, primarily due to lower energy cost pass-through to customers of $42 and favorable currency of $31, partially offset by higher costs of $11. 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 32.8% increased 110 bp from 31.7% in the prior year primarily due to favorable pricing.

Selling and Administrative Expense

Selling and administrative expense of $235.4 decreased 1%, or $3.3, primarily due to our productivity improvements, which were partially offset by labor inflation. Selling and administrative expense as a percentage of sales of 7.9% was flat versus the prior year.

Research and Development Expense

Research and development expense of $27.0 decreased 8%, or $2.3. Research and development expense as a percentage of sales decreased to 0.9% from 1.0% in the prior year.

Business and Asset Actions

Our consolidated income statement for the three months ended 30 June 2023 reflected a charge of $59.0 ($51.2 after tax, or $0.23 per share) for strategic business and asset actions intended to optimize costs and focus resources on our growth projects. This charge, which was not recorded in segment results, included a noncash charge of $32.0 to write off assets related to our exit from certain projects previously under construction in our Asia segment as well as an expense of $27.0 for severance and other benefits payable to employees identified under a global cost reduction plan that originated during the third quarter of fiscal year 2023.

Other Income (Expense), Net

Other income of $20.1 increased $12.1 primarily due to the favorable settlement of a legal dispute regarding energy management charges related to an extreme weather event in 2021 in our Americas segment. Refer to Note 12, Commitments and Contingencies, to the consolidated financial statements for additional information.

Operating Income and Operating Margin

Operating income of $737.6 increased 14%, or $93.4, as a prior year charge for business and asset actions of $59, positive pricing, net of power and fuel costs, of $44, and favorable business mix of $12 were partially offset by an unfavorable impact from currency of $11 and higher costs of $10. Higher costs were driven by labor inflation and planned maintenance activities, which were partially offset by productivity improvements as well as the favorable settlement of a legal dispute in the Americas segment. Operating margin of 24.7% increased 350 bp from 21.2% in the prior year primarily due to the business and asset actions and favorable pricing.

Equity Affiliates' Income

Equity affiliates' income of $168.9 increased 2%, or $3.9, primarily due to higher income from an affiliate in the Americas, which was partially offset by lower contributions from affiliates in the Middle East.

Interest Expense

Interest incurred increased 72%, or $55.9, primarily due to a higher debt balance from senior notes issued in 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 $47.6 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 $1.3 decreased 89%, or $10.4, primarily due to an unrealized gain of $11.2 ($3.0 attributable to Air Products after tax, or $0.01 per share) that was recorded 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.

Net Income and Net Income Margin

Net income of $708.9 increased 16%, or $98.4, due to higher pricing, net of power and fuel costs, and favorable business mix. Additionally, the prior year included a charge of $59.0 for business and asset actions intended to optimize costs and focus resources on our growth projects. These strategic actions resulted in productivity improvements across our organization, which partially offset higher costs driven by planned maintenance and inflation. Net income margin of 23.7% increased 360 bp from 20.1% in the prior year, primarily due to the prior year charge for business and asset actions and higher pricing.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,266.8 increased 5%, or $58.7, as higher pricing, net of power and fuel costs, favorable business mix, and improvements from our strategic productivity actions were partially offset by higher maintenance costs and inflation. Adjusted EBITDA margin of 42.4% increased 260 bp from 39.8% in the prior year.

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 16.6% and 18.6% for the three months ended 30 June 2024 and 2023, respectively. Our current quarter 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, higher excess tax benefits on share-based compensation, and the release of certain unrecognized tax benefits upon expiration of the statute of limitations for uncertain tax positions taken in prior years.

Additionally, during the third quarter of fiscal year 2023, we recognized a charge of $59.0 ($51.2 attributable to Air Products after tax) related to various business and asset actions that are described in Note 4, Business and Asset Actions, to the consolidated financial statements. This charge included certain losses for which we could not recognize an income tax benefit.

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 16.9% and 18.4% for the three months ended 30 June 2024 and 2023, respectively.

Discussion of Third 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 $1,234.7 decreased 2%, or $26.0, as lower energy cost pass-through to customers of 3%, lower volumes of 1%, and an unfavorable impact from currency of 1% were partially offset by higher pricing of 3%. Pricing was favorable across all merchant product lines. Volumes declined modestly primarily due to weaker merchant volume, which was partially offset by higher demand for hydrogen in our on-site business.

Operating income of $391.1 increased 4%, or $16.3, as positive pricing, net of power and fuel costs, of $32 was partially offset by higher costs of $9, unfavorable currency of $4, and lower volumes of $3. Higher costs for planned maintenance and labor inflation were partially offset by productivity improvements as well as other income recognized for the favorable settlement of a legal dispute. Operating margin of 31.7% increased 200 bp from 29.7% in the prior year primarily due to favorable pricing and lower energy cost pass-through to customers, partially offset by the impact of higher costs. Of the 200 bp improvement, lower energy cost pass-through to customers contributed approximately 100 bp.

Equity affiliates’ income of $37.5 increased 25%, or $7.6, 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 $789.6 decreased 4%, or $33.3, as an unfavorable impact from currency of 4% driven by strengthening of the U.S. Dollar against most major currencies and lower volumes of 1% were partially offset by higher energy cost pass-through to customers of 1%. Volumes declined modestly overall primarily due to lower demand for merchant products and planned maintenance outages, which were partially offset by contributions from new industrial gas on-site plants across the region. Pricing was flat versus the prior year.

Operating income of $200.1 decreased 17%, or $40.7, due to lower volumes of $26, unfavorable currency of $8, lower pricing, net of power and fuel costs, of $4, and higher costs of $3. Volume and costs were unfavorable primarily due to planned maintenance outages. Operating margin of 25.3% decreased 400 bp from 29.3% in the prior year primarily due to the planned maintenance outages.

Equity affiliates’ income of $8.7 increased 16%, or $1.2, 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 $693.4 decreased 2%, or $13.2, due to lower energy cost pass-through to customers of 2% and an unfavorable impact from currency of 1%, partially offset by higher volumes of 1%. Volumes improved modestly as contributions from a new facility in Uzbekistan were partially offset by weaker merchant demand. Pricing was flat versus the prior year.

Operating income of $204.7 increased 16%, or $28.6, primarily due to higher volumes of $19 and pricing, net of lower power and fuel costs, of $17, partially offset by higher costs of $7. Higher costs driven by labor inflation were partially offset by productivity improvements. Operating margin of 29.5% increased 460 bp from 24.9% in the prior year.

Equity affiliates’ income of $26.3 decreased 9%, or $2.5, driven by lower income from our affiliate in Italy.

Sales of $32.8 decreased 17%, or $6.9, and operating loss of $1.4 decreased $7.2 from income of $5.8 in the prior year, in each case primarily due to lower merchant volumes and pricing.

Equity affiliates' income of $89.2 decreased 7%, or $6.3, driven by higher costs across our affiliates.

Sales of $235.0 increased 15%, or $31.0, and operating loss of $56.9 decreased 40%, or $37.4, primarily due to higher LNG and other equipment sales. Our operating results also benefited from lower costs driven by productivity improvements.