Air Products Chemicals Inc

Discussion of First Quarter Consolidated Results

Sales

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

Sales of $2,931.5 decreased 2%, or $65.9, due to lower volumes of 2% and an unfavorable impact from currency of 1%, partially offset by favorable pricing of 1%. Unfavorable volumes were driven by the divestiture of the LNG business in September 2024 and a lower contribution from on-sites and merchant in the Europe segment, which were partially offset by a significant, non-recurring sale of helium to an existing merchant customer in the Americas segment. The impact attributable to the LNG divestiture was approximately 2%. The modest 1% total company price improvement, which equates to a 2% improvement for the merchant business, was driven by pricing in the Americas and Europe segments. The unfavorable currency impact was primarily attributable to the strengthening of the U.S. Dollar against currencies in South America and Asia. Energy cost pass-through to customers was flat versus the prior year.

Cost of Sales and Gross Margin

Cost of sales of $2,016.5 decreased 2%, or $50.7, primarily due to lower costs of $61 attributable to sales volumes and a favorable currency impact of $13, partially offset by higher costs of $26 that were driven by inflation and incentive compensation. Gross margin of 31.2% increased 20 bp from 31.0% in the prior year as pricing and favorable business mix more than offset the impact of higher costs.

Selling and Administrative Expense

Selling and administrative expense of $242.4 increased 2%, or $4.0, primarily due to incentive compensation and inflation, partially offset by productivity improvements. Selling and administrative expense as a percentage of sales increased to 8.3% from 8.0% in the prior year.

Research and Development Expense

Research and development expense of $22.0 decreased 14%, or $3.7. Research and development expense as a percentage of sales decreased to 0.8% from 0.9% in the prior year.

Shareholder Activism Costs

During the first quarter of fiscal year 2025, we incurred costs of $29.9 ($21.9 after tax, or $0.10 per share) in connection with our response to a proxy contest. These costs, which are reflected on our consolidated income statements as “Shareholder activism costs”, include legal and other professional service fees as well as incremental proxy solicitation costs related to the 2025 Annual Meeting of Shareholders.

Other Income (Expense), Net

Other income of $22.9 increased $22.1 primarily due to the sale of a U.S. equity method investment and a prior year unfavorable foreign exchange impact from the devaluation of the Argentine peso.

Operating Income and Operating Margin

Operating income of $643.6 decreased 3%, or $23.3, as shareholder activism costs of $30, higher costs of $20, and lower volumes of $2 were partially offset by positive pricing, net of power and fuel costs, of $26 and favorable currency of $3. Higher costs related to incentive compensation and inflation were partially offset by productivity improvements as well as the sale of a U.S. equity method investment. The recently divested LNG business contributed operating income of approximately $25 in the prior year. Operating margin of 22.0% decreased 20 bp from 22.2% in the prior year primarily due to the impact of higher costs, which was partially offset by higher pricing and business mix.

Equity Affiliates' Income

Equity affiliates' income of $150.6 decreased 5%, or $7.8, driven by lower income from JIGPC in the Middle East & India segment.

Interest Expense

Interest incurred increased 29%, or $31.3, primarily due to a higher debt balance from senior notes issued in February 2024 as well as borrowings on financing available for the NEOM Green Hydrogen Project. Capitalized interest increased 77%, or $42.2, 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 income of $38.9 increased $53.7 from an expense of $14.8 in the prior year. The increase was driven by an unrealized gain of $38.8 ($10.3 attributable to Air Products after tax, or $0.05 per share) that was recorded for 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 7, Financial Instruments, to the consolidated financial statements for additional information. Additionally, non-service pension costs were $10.5 ($7.9 after tax, or $0.04 per share) for the first quarter of fiscal year 2025 compared to $24.9 ($18.7 after tax, or $0.08 per share) in the prior year. This decrease was driven by a higher expected return on plan assets, lower interest cost, and a decrease in actuarial loss amortization.

Net Income and Net Income Margin

Net income of $649.8 increased 5%, or $28.2. Higher pricing, net of power and fuel costs, was partially offset by higher costs related to shareholder activism, incentive compensation, and inflation. These costs were partially mitigated by productivity improvements. We also recognized lower non-service pension costs as well as a gain on de-designated cash flow hedges during the first quarter of fiscal year 2025. Net income margin of 22.2% increased 150 bp from 20.7% in the prior year due to these factors as well as favorable business mix.

In December 2024, the Internal Revenue Service and U.S. Department of the Treasury published final regulations that clarified certain investment tax credit eligibility requirements for Section 48 energy investment tax credits that were enacted as part of the U.S. Inflation Reduction Act of 2022. We are in the process of evaluating the impact of these regulations and expect to realize significant benefits from the tax incentives once qualifying projects come onstream in the U.S. We have not included any forecasted benefits in the calculation of our annual effective tax rate for the period ending 31 December 2024 due to uncertainty in the timing and amount of such benefits.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,190.9 increased 1%, or $16.4, as higher pricing, net of power and fuel costs, was partially offset by higher costs and lower equity affiliates' income. Adjusted EBITDA margin of 40.6% increased 140 bp from 39.2% in the prior year primarily due to favorable business mix and higher pricing.

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 17.8% and 17.9% for the three months ended 31 December 2024 and 2023, respectively. The current quarter effective tax rate was lower due to earning a greater share of income in jurisdictions with lower tax rates and a benefit from a U.S. state tax law change in the current period, which were mostly offset by higher net costs on foreign-related income taxed in the U.S., lower U.S. tax benefits for foreign-derived income, and the release of certain previously unrecognized tax benefits in the prior year.

Our adjusted effective tax rate, which excludes the impact of adjustments presented in the "Reconciliations of Non-GAAP Financial Measures" section beginning on page 41, was 18.7% and 18.1% for the three months ended 31 December 2024 and 2023, respectively.

Discussion of First Quarter Results by Business Segment

Americas

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

Sales of $1,287.6 increased 3%, or $35.5, as higher volumes of 3% and higher pricing of 2% were partially offset by lower energy cost pass-through to customers of 1% and an unfavorable currency impact of 1%. The volume improvement was primarily due to a significant, non-recurring sale of helium to an existing merchant customer. The total segment pricing increase of 2% equates to a 4% improvement in our merchant business, where pricing was favorable across most product lines.

Operating income of $388.2 increased 10%, or $33.8, as higher volumes of $35 and positive pricing, net of power and fuel costs, of $18 were partially offset by higher costs of $15 and unfavorable currency of $4. Higher costs for inflation, planned maintenance expense, depreciation expense, and incentive compensation were partially offset by income recognized on the sale of an equity method investment. Operating margin of 30.1% increased 180 bp from 28.3% in the prior year.

Equity affiliates’ income of $35.1 decreased 5%, or $2.0.

Asia

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

Sales of $817.1 increased 3%, or $23.3, as higher volumes of 2% driven by new on-site assets and higher energy cost pass-through to customers of 2% were partially offset by an unfavorable currency impact of 1%. Pricing was flat versus the prior year.

Operating income of $216.4 increased 2%, or $5.2, due to lower costs of $6 and favorable volumes of $3, partially offset by lower pricing, net of power and fuel costs, of $2 and unfavorable currency of $2. The cost improvement was primarily attributable to productivity improvements, which were partially offset by higher costs related to incentive compensation and inflation. Operating margin of 26.5% decreased 10 bp from 26.6% in the prior year.

Equity affiliates’ income of $10.3 increased 145%, or $6.1, driven by prior year maintenance expense at an affiliate in China.

Europe

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

Sales of $697.2 decreased 5%, or $34.0, due to lower volumes of 5% and lower energy cost pass-through to customers of 1%, partially offset by higher pricing of 1%. The unfavorable volumes were driven by a lower contribution from our on-site business and lower helium in our merchant business. Currency remained flat versus the prior year.

Operating income of $186.5 decreased 6%, or $11.1, due to lower volumes of $23, partially offset by higher pricing, net of power and fuel costs, of $10 and favorable costs of $2. The lower costs were driven by productivity improvements and lower costs for planned maintenance outages, which were partially offset by inflation and higher depreciation expense. Operating margin of 26.7% decreased 30 bp from 27.0% in the prior year.

Equity affiliates’ income of $18.2 decreased 12%, or $2.5.

Middle East and India

Sales of $32.8 decreased 7%, or $2.6, primarily due to lower demand for merchant products. Operating loss was $0.6 compared to income of $3.9 in the prior year, which also reflects the impact of higher costs.

Equity affiliates' income of $85.0 decreased 9%, or $7.9, as a higher portion of income from the JIGPC joint venture was allocated to shareholders entitled to preferred distributions. Refer to Note 3, Variable Interest Entities, to the consolidated financial statements for additional information.

Corporate and other

Sales of $96.8 decreased 48%, or $88.1, primarily due to the divestiture of the LNG business in September 2024.

Operating loss of $117.0 increased 17%, or $16.8. The increase was driven by the divestiture of the LNG business, which generated operating income of approximately $25 for the first quarter of fiscal year 2024, as well as higher costs for incentive compensation.

Equity affiliates' income of $2.0 decreased 43%, or $1.5.