Air Products Chemicals Inc

RESULTS OF OPERATIONS

DISCUSSION OF CONSOLIDATED RESULTS

Sales

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

Sales of $12.1 billion decreased 4%, or $499.4, primarily due to 5% lower energy cost pass-through driven by lower natural gas prices in North America and Europe. Sales in our on-site business, which typically represent approximately half our total company sales, fluctuate with power and fuel prices due to contract provisions that allow us to pass through changes in energy costs to our customers. The lower sales due to energy cost pass-through were partially offset by a modest 1% total company price improvement, which equates to a 2% improvement for the merchant business. The pricing improvement was attributable to our Americas and Europe segments. Volumes were flat on a total company basis as weaker global merchant demand and lower sales of equipment offset improvements in our on-site business, which were driven by new assets in Europe and Asia as well as higher demand for hydrogen in the U.S. Additionally, favorable on-site volumes in our Americas segment included a one-time asset sale associated with an early contract termination at the request of a customer. Currency was stable versus the prior year.

Cost of Sales and Gross Margin

Cost of sales of $8.2 billion decreased 8%, or $664.3, due to lower energy cost pass-through to customers of $646, a favorable impact from currency of $20, and lower other costs of $10, partially offset by higher costs associated with sales volumes of $12. Higher costs due to labor inflation and planned maintenance activities were partially offset by lower power costs in our merchant business in Europe and the Americas as well as improvements from strategic productivity actions. Gross margin of 32.5% increased 260 bp from 29.9% in the prior year. Approximately half of the margin improvement was attributable to lower energy cost pass-through to customers.

Selling and Administrative Expense

Selling and administrative expense of $942.4 decreased 2%, or $14.6, primarily due to lower incentive compensation and strategic productivity actions, partially offset by labor inflation. Selling and administrative expense as a percentage of sales increased to 7.8% from 7.6% in the prior year.

Research and Development Expense

Research and development expense of $100.2 decreased 5%, or $5.4. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.

Gain on Sale of Business

On 30 September 2024, we completed the sale of our LNG business to Honeywell International Inc. As a result of the transaction, we recorded a gain of $1,575.6 during the fourth quarter of fiscal year 2024 that is reflected within "Gain on sale of business" on our consolidated income statements ($1,198.4 after tax, or $5.38 per share). This gain was not recorded in segment results. Prior to the divestiture, the results of the LNG business were reflected within the Corporate and other segment. Refer to Note 4, Gain on Sale of Business, to the consolidated financial statements for additional information.

Business and Asset Actions

Our consolidated income statements for the fiscal years ended 30 September 2024 and 2023 reflect 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 fiscal year 2024 charge of $57.0 was for severance and other postemployment benefits payable to employees identified under a global cost reduction plan. We originated this plan during the third quarter of fiscal year 2023, which resulted in an initial charge of $27.0. Fiscal year 2023 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.

For additional information, refer to Note 5, Business and Asset Actions, to the consolidated financial statements for additional information.

Other Income (Expense), Net

Other income of $58.2 increased 67%, or $23.4, primarily due to higher income from the sale of assets as well as the favorable settlement of a legal dispute. Refer to Note 19, 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 Margin

Operating income of $4.5 billion increased 79%, or $2.0 billion, primarily due to the $1.6 billion gain recognized on the sale of the LNG business during the fourth quarter of fiscal year 2024. The improvement from the prior year also reflects positive pricing, net of power and fuel costs, of $192, lower charges for business and asset actions of $188, and favorable business mix of $63. The on-site improvements reflected within favorable business mix were partially offset by lower merchant demand and recognition of higher project cost estimates related to our sale of equipment activities in fiscal year 2024. Unfavorable items versus the prior year included an unfavorable impact from currency of $25 and higher costs of $22. The higher costs were driven by labor inflation and higher planned maintenance, partially offset by improved productivity resulting from strategic business and asset actions and lower costs for incentive compensation.

Operating margin of 36.9% increased 1,710 bp from 19.8% in the prior year primarily due to the gain recognized on the sale of the LNG business, lower charges for business and asset actions, and favorable pricing. Additionally, while energy cost pass-through has no impact on profit, it does contribute to our margins. Of the 1,710 bp operating margin improvement, lower energy cost pass-through to customers contributed approximately 100 bp.

Equity Affiliates’ Income

Equity affiliates' income of $647.7 increased 7%, or $43.4, as higher income from affiliates in the Americas segment was partially offset by a lower contribution from an affiliate in Europe.

Interest Expense

Interest incurred increased 73%, or $215.0, primarily due to a higher debt balance from senior notes issued to fund projects under our Green Finance Framework as well as borrowings on financing available for the NEOM Green Hydrogen Project. Capitalized interest increased $173.7 due to a higher carrying value of projects under construction, which is largely attributable to the NEOM Green Hydrogen Project.

Other Non-Operating Income (Expense), Net

Other non-operating expense of $73.8 increased 89%, or $34.8. We recognized non-service pension costs of $102.0 ($76.8 after tax, or $0.34 per share) in fiscal year 2024 compared to $86.8 ($65.2 after tax, or $0.29 per share) in fiscal year 2023. Additionally, in fiscal year 2024, we recorded unrealized losses of $16.3 ($4.3 attributable to Air Products after tax, or $0.02 per share) related to certain de-designated interest rate swaps associated with the financing for the NEOM Green Hydrogen Project. Refer to Note 3, Variable Interest Entities, and Note 15, Financial Instruments, to the consolidated financial statements for additional information. These unfavorable items were partially offset by higher interest income on cash and cash items and short-term investments.

During the fourth quarter of fiscal year 2024, we recorded a pre-tax loss from discontinued operations of $19.4 ($13.9 after tax, or $0.06 per share) to increase our existing liability for retained environmental remediation obligations associated with the sale of our former Amines business in September 2006. Refer to the Pace discussion within Note 19, Commitments and Contingencies, to the consolidated financial statements for additional information. In fiscal year 2023, income from discontinued operations, net of tax, of $7.4 ($0.03 per share) primarily resulted from a net tax benefit recorded in the fourth quarter upon release of tax liabilities for uncertain tax positions taken with respect to the sale of our former Performance Materials Division ("PMD"), which was completed in 2017.

Net Income and Net Income Margin

Net income of $3.9 billion increased 65%, or $1.5 billion, and net income margin of 31.9% increased 1,330 bp from 18.6% in the prior year, in each case primarily due to the $1.2 billion after-tax gain recognized upon the sale of the LNG business at the end of the fourth quarter.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $5.0 billion increased 7%, or $344.5, and adjusted EBITDA margin of 41.7% increased 440 bp from 37.3% in the prior year, primarily due to positive pricing, net of power and fuel costs, and favorable business mix, partially offset by labor inflation and higher planned maintenance costs. The on-site improvements reflected within favorable business mix were partially offset by lower merchant demand and recognition of higher project cost estimates related to our sale of equipment activities in fiscal year 2024. The higher costs for labor inflation and planned maintenance activities were offset by improved productivity resulting from strategic business and asset actions and lower costs for incentive compensation. While lower energy cost pass-through does not impact profit, it improved adjusted EBITDA margin by approximately 200 basis points.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Refer to Note 24, Income Taxes, to the consolidated financial statements for details regarding factors affecting the effective tax rate.

Our effective tax rate was 19.6% and 19.1% for the fiscal years ended 30 September 2024 and 2023, respectively. Our current year effective tax rate was higher primarily due to the recognition of the $1,575.6 gain on the sale of our LNG business during the fourth quarter of fiscal year 2024. This gain increased our income from continuing operations before taxes, which diluted the impact of recurring effective tax rate reconciling items for fiscal year 2024. The gain was also recognized in jurisdictions with higher tax rates. Partially offsetting this increase were tax benefits unrelated to the sale of our LNG business, which included the release of certain unrecognized tax benefits upon expiration of the statute of limitations for uncertain tax positions taken in prior years, a tax benefit on the sale of a non-U.S. subsidiary, and a tax election for a non-U.S. subsidiary during fiscal year 2024.

Our adjusted effective tax rate, which excludes the impact of the gain on the sale of the LNG business as well as other adjustments described in the "Reconciliations of Non-GAAP Financial Measures" section, was 17.8% and 18.9% for the fiscal years ended 30 September 2024 and 2023, respectively. Our current year adjusted effective tax rate is lower primarily due to earning a greater share of income in jurisdictions with lower tax rates in addition to the tax benefits discussed above.

DISCUSSION OF RESULTS BY BUSINESS SEGMENT

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

Sales of $5.0 billion decreased 6%, or $329.2, due to lower energy cost pass-through to customers of 9% and an unfavorable currency impact of 1%, partially offset by higher pricing of 3% and higher volumes of 1%. The total segment pricing increase of 3% equates to a 6% improvement in our merchant business, where pricing was favorable across most product lines. Volumes improved modestly as higher hydrogen demand and a one-time asset sale associated with an early contract termination at the request of a customer were mostly offset by lower demand for merchant products.

Operating income of $1.6 billion increased 9%, or $125.4, due to positive pricing, net of lower power and fuel costs, of $145 and favorable business mix of $49, partially offset by higher costs of $61 and unfavorable currency of $8. Favorable business mix was attributable to the one-time asset sale as well as higher hydrogen demand. 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 31.1% increased 430 bp from 26.8% in the prior year primarily due to lower energy cost pass-through to customers and favorable pricing. Of the 430 bp operating margin improvement, lower energy cost pass-through to customers contributed approximately 250 bp.

Equity affiliates’ income of $158.8 increased 45%, or $49.6, due to higher income from an affiliate in Mexico as well as recognition of our share of income from a one-time asset sale.

Asia

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

Sales of $3.2 billion were flat as higher volumes of 1% and higher energy cost pass-through to customers of 1% were offset by unfavorable currency impacts of 2%. Higher volumes in our on-site business, including several new assets across the region, were offset by lower demand for merchant products. The unfavorable currency impact was primarily attributable to the strengthening of the U.S. Dollar against the Chinese Renminbi. Pricing was flat versus the prior year.

Operating income of $859.2 decreased 5%, or $47.3, primarily due to unfavorable mix of $22, an unfavorable currency impact of $21, and higher variable costs in our merchant business of $13, partially offset by favorable other costs of $12. Favorable other costs reflect lower distribution costs and strategic productivity actions that more than offset the impact of inflation. Operating margin of 26.6% decreased 160 bp from 28.2% in the prior year primarily due to unfavorable mix.

Equity affiliates’ income of $32.9 increased 11%, or $3.2, as higher income from affiliates in Thailand was partially offset 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 $2.8 billion decreased 5%, or $139.7, due to lower energy cost pass-through to customers of 8%, partially offset by a favorable currency impact of 2% and higher volumes of 1%. The positive currency impact was primarily attributable 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. Pricing was flat versus the prior year.

Operating income of $810.0 increased 22%, or $146.6, due to favorable mix of $80, pricing, net of lower power and fuel costs, of $69, and a favorable impact from currency of $14, partially offset by higher costs of $16. Higher costs resulting from labor inflation were partially offset by strategic productivity actions. Operating margin of 28.7% increased 630 bp from 22.4% in the prior year due to favorable volumes and pricing as well as lower energy cost pass-through to customers. Of the 630 bp operating margin improvement, lower energy cost pass-through to customers contributed approximately 200 bp.

Equity affiliates’ income of $88.1 decreased 14%, or $14.4, driven by prior year non-recurring items for our affiliate in Italy.

Sales of $134.4 decreased 17%, or $28.1, and operating income of $5.9 decreased 65%, or $11.0, in each case primarily due to lower merchant volumes and pricing.

Equity affiliates' income of $347.5 decreased 1%, or $2.3, driven by higher costs for an affiliate in Saudi Arabia.

Sales of $878.4 decreased 1%, or $10.6, and operating loss of $292.7 increased 2%, or $5.4, primarily due to lower equipment sales and higher project cost estimates. The lower profit contribution was partially offset by lower incentive compensation and strategic productivity actions.

As discussed above, we completed the sale of the LNG business on 30 September 2024. The LNG business generated operating income for this segment of approximately $135 and $120 in fiscal years 2024 and 2023, respectively.

Equity affiliates' income of $20.4 increased 56%, or $7.3, driven by higher contributions from an affiliate in Algeria.