Air Products Chemicals Inc

Discussion of First Six Months Consolidated Results

**Change versus prior period is not meaningful due to the $2.9 billion pre-tax charge for business and asset actions in fiscal year 2025.

Sales

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

Sales of $5.8 billion decreased 1%, or $79.9, due to lower volumes of 3% and unfavorable currency of 1%, partially offset by higher energy cost pass-through to customers of 2% and higher pricing of 1%. Unfavorable volumes were attributable to the divestiture of the LNG business in September 2024, which resulted in a headwind of approximately 2%, as well as lower global demand for helium. These items were largely offset by a significant, non-recurring sale of helium to an existing merchant customer in the Americas segment in the first quarter as well as higher volumes in our on-site business, primarily in the Americas segment. The 1% total company price improvement, which equates to a 3% improvement for the merchant business, was attributable to non-helium pricing actions in the Americas and Europe segments.

Cost of Sales and Gross Margin

Cost of sales of $4.1 billion increased $11.7 due to higher energy cost pass-through to customers of $90, higher other costs of $62, and higher power and fuel costs in our merchant business of $30. The other costs of $62 were driven by fixed-cost inflation, depreciation, and incentive compensation. These impacts were partially offset by lower costs of $124 attributable to sales volumes and a favorable currency impact of $46. Gross margin of 30.4% decreased 110 bp from 31.5% in the prior year primarily due to the impact of higher costs.

Selling and Administrative Expense

Selling and administrative expense of $464.4 decreased 3%, or $14.6, as productivity improvements were partially offset by inflation and incentive compensation. Selling and administrative expense as a percentage of sales decreased to 7.9% from 8.1% in the prior year.

Research and Development Expense

Research and development expense of $44.9 decreased 12%, or $6.2. Research and development expense as a percentage of sales decreased to 0.8% from 0.9% in the prior year.

Our consolidated income statements for the six months ended 31 March 2025 and 2024 include charges for strategic business and asset actions of $2,934.7 ($2,290.6 attributable to Air Products after tax, or $10.28 per share) and $57.0 ($43.8 after tax, or $0.20 per share), respectively, as further described below and in Note 4, Business and Asset Actions, to the consolidated financial statements. These charges were not allocated to our reportable segments.

During the second quarter of fiscal year 2025, our Board of Directors and Chief Executive Officer initiated a project review in an effort to streamline our backlog and allow us to focus resources on projects that we believe will enhance value for our shareholders. In connection with this review, we decided to exit various projects related to clean energy generation and distribution.

As a result of these decisions, we recorded charges for project exit costs of $2,861.8 and $6.8 through operating loss and equity affiliates' income, respectively. The charge reflected in operating loss primarily includes the write down of project assets to their estimated net realizable value as well as estimated costs required to terminate various contractual commitments. The $6.8 recorded to equity affiliates' income reflects an other-than-temporary impairment of a joint venture in China that had been formed to develop clean hydrogen infrastructure in the region. The amount of these charges attributable to our noncontrolling partners was $3.5.

Our estimates related to exiting these projects, including the net realizable value of assets to be disposed, reflect our best judgment based on information available at the time the project exit costs were recorded. Final settlement of these items may differ materially from our current estimates, which could impact our consolidated financial statements in future periods.

We initiated a global cost reduction plan in June 2023 that provides employees identified for involuntarily separation with severance and other postemployment benefits. Costs incurred in connection with the plan totaled $66.1 and $57.0 for the first six months of fiscal years 2025 and 2024, respectively. Once all actions under the plan are fully executed, we expect to realize annual pre-tax savings of approximately $185 to $195, primarily through selling and administrative expense.

During the first half of fiscal year 2025, we recorded costs in connection with a proxy contest led by an activist shareholder that concluded in January upon certification of the election of directors following our 2025 Annual Meeting of Shareholders. These costs totaled $61.3 ($52.9 after tax, or $0.24 per share) for the six months ended 31 March 2025.

The costs incurred during the second quarter were primarily related to executive separation costs for our former CEO, which included a noncash expense of $22.4 to accelerate vesting of share-based awards and $7.3 for severance and other cash benefits that were paid during the quarter. On a year-to-date basis, shareholder activism-related costs also include those incurred for legal and other professional service fees as well as incremental proxy solicitation costs related to the 2025 Annual Meeting of Shareholders, most of which were incurred during the first quarter.

Other Income (Expense), Net

Other income of $36.8 increased 65%, or $14.5, primarily due to the sale of an equity method investment during the first quarter of fiscal year 2025 and a prior year unfavorable foreign exchange impact related to the devaluation of the Argentine peso. These items were partially offset by higher income from non-recurring asset sales in the prior year.

Operating Income (Loss) and Operating Margin

Operating loss was $1.7 billion during the first six months of fiscal year 2025 compared to income of $1.3 billion in the prior year. The loss in fiscal year 2025 was driven by materially higher pre-tax charges for business and asset actions of $2,927.9 compared to $57.0 in the prior year. Volumes were unfavorable by $37 driven by the divestment of the LNG business in September 2024 as well as weaker global helium demand, partially offset by higher volumes in our on-site business. Operating income contributed by the LNG business in the prior year was approximately $60. Fiscal year 2025 also reflects shareholder activism-related costs of $61, higher other costs of $49, and unfavorable currency of $7. The higher other costs were driven by inflation, depreciation, and incentive compensation. Additionally, the prior year included higher income from non-recurring asset sales. These impacts were partially mitigated by productivity improvements and the sale of a U.S. equity method investment during the first quarter of fiscal year 2025. Compared to the prior year, higher pricing favorably impacted operating results by $37, which is net of higher power and fuel costs in our merchant business. The higher pricing was primarily attributable to non-helium merchant products.

Operating margin was negative 28.8% compared to 22.0% in the prior year, which was primarily attributable to the charge for business and asset actions, shareholder activism-related costs, and higher operating costs.

Equity Affiliates' Income

Equity affiliates' income of $296.1 decreased 2%, or $5.6, primarily due to a prior year asset sale in an Americas affiliate and an impairment charge of $6.8 related to a joint venture in China that was recorded during the second quarter of fiscal year 2025. The impairment charge was related to the business and asset actions discussed under Project Exit Costs beginning on page 57. These impacts were partially offset by higher income from an affiliate in Italy.

Interest Expense

Interest incurred increased 22%, or $51.6, primarily due to a higher debt balance. Capitalized interest increased 66%, or $80.2, 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 $20.3 increased $44.3 from an expense of $24.0 in the prior year. The increase was driven by lower non-service pension costs, which were $21.2 ($15.9 after tax, or $0.07 per share) for the first six months of fiscal year 2025 compared to $50.0 ($37.6 after tax, or $0.17 per share) for the first six months of fiscal year 2024. Additionally, during the first six months of fiscal year 2025, we recorded an unrealized gain of $27.3 ($7.3 attributable to Air Products after tax, or $0.03 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 8, Financial Instruments, to the consolidated financial statements for additional information. These items were partially offset by lower interest income on short-term investments, which was primarily due to interest rate fluctuations and a lower investment balance.

Net Income (Loss)

Net loss was $1.1 billion during the first half of fiscal year 2025 compared to net income of $1.2 billion in the prior year. The loss in fiscal year 2025 was driven by materially higher charges for business and asset actions, which had an after-tax impact attributable to Air Products of $2.3 billion in fiscal year 2025 compared to $43.8 in the prior year. Fiscal year 2025 also reflects the impact of shareholder activism-related costs, higher costs, and unfavorable volumes. The higher costs reflect inflation, depreciation, and incentive compensation, which were partially mitigated by productivity improvements. Additionally, the prior year included higher income from non-recurring asset sales; however, this impact was partially offset by the sale of an equity method investment during the first quarter of fiscal year 2025. These unfavorable impacts were partially offset by higher pricing, net of power and fuel costs, which was primarily attributable to non-helium merchant products. We also recognized lower non-service pension costs as well as a gain on de-designated cash flow hedges during the first half of fiscal year 2025.

Adjusted EBITDA

Adjusted EBITDA of $2.4 billion decreased 1%, or $14.7, primarily due to higher costs, lower volumes, and unfavorable currency, partially offset by productivity improvements and higher pricing.

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.

For the six months ended 31 March 2025, our consolidated income statements include an income tax benefit of $365.1 compared to an income tax expense of $265.9 in the prior year period. The tax benefit in fiscal year 2025 represents an effective tax rate of 25.1% on the pre-tax loss of $1.5 billion reported for the six months ended 31 March 2025. The tax expense in fiscal year 2024 represented an effective rate of 18.1% on the pre-tax income of $1.5 billion reported for the six months ended 31 March 2024.

The current year rate was primarily impacted by the $2.9 billion pre-tax charge for business and asset actions and other items as further discussed below. Our estimates related to many of these items reflect our best judgment based on information available at the time the items were recorded. The amount and timing of final settlement of these items may differ from our current estimates, which could impact our tax provision in future periods.

For additional information, refer to Note 16, Income Taxes, to the consolidated financial statements.

Tax Impact of Business and Asset Actions

During the second quarter of fiscal year 2025, we recorded a pre-tax charge of $2.9 billion for the business and asset actions discussed in Note 4, Business and Asset Actions, to the consolidated financial statements. This charge had a related net income tax benefit of $640.6.

During the second quarter of fiscal year 2025, we recorded a net income tax benefit of $34.9 related to our intent to file a refund claim after a review of several U.S. Tax Court cases regarding the U.S. taxation of deemed foreign dividends in the transition year of the U.S. Tax Cuts and Jobs Act (our fiscal year 2018).

During the second quarter of fiscal year 2025, we recorded an income tax expense of $31.4 related to estimated withholding taxes on foreign earnings that we no longer intend to indefinitely reinvest. There were no other changes to our assumptions regarding the reinvestment of foreign earnings during the first six months of fiscal year 2025.

During the first half of fiscal year 2025, we incurred costs of $61.3 related to a proxy contest as further discussed in Note 17, Supplemental Information, to the consolidated financial statements. We recognized an income tax benefit of $8.4 primarily related to costs incurred during the first quarter for legal and other professional service fees as well as incremental proxy solicitation costs related to the 2025 Annual Meeting of Shareholders.

Other

In addition to the items discussed above, our effective tax rate was higher in fiscal year 2025 due to higher net costs on foreign-related income taxed in the U.S. and larger benefits in the prior year for the release of certain unrecognized tax benefits upon expiration of the statute of limitations for uncertain tax positions taken in prior years. These increases were partially offset by larger excess tax benefits on share-based compensation in the current year and by greater tax benefits for foreign investments.

Adjusted Effective Tax Rate

Our adjusted effective tax rate, which excludes the impact of adjustments presented in the "Reconciliations of Non-GAAP Financial Measures" section beginning on page 65, was 18.9% and 18.5% for the six months ended 31 March 2025 and 2024, respectively.

Discussion of First Six Months 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 $2.6 billion increased 3%, or $76.9, as higher pricing of 2%, higher volumes of 1%, and higher energy cost pass-through to customers of 1% were partially offset by an unfavorable currency impact of 1%. The total segment pricing increase of 2% equates to a 4% improvement in our merchant business, which reflects favorable pricing across most non-helium product lines. The volume improvement reflects a significant, non-recurring sale of helium to an existing merchant customer during the first quarter of fiscal year 2025, growth in our on-site hydrogen business, and a favorable one-time customer contract amendment in the second quarter of fiscal year 2025, which were mostly offset by lower demand for helium.

Operating income of $753.9 increased 4%, or $27.6, due to favorable volumes of $53 and positive pricing, net of power and fuel costs, of $30, partially offset by higher costs of $47 and unfavorable currency of $8. The higher costs primarily reflect higher maintenance and depreciation, inflation, and project development, which were partially offset by productivity improvements and income recognized on the sale of an equity method investment in the first quarter. Operating margin of 29.3% increased 20 bp from 29.1% in the prior year as the volume improvement was mostly offset by higher costs.

Equity affiliates’ income of $66.3 decreased 18%, or $15.0, driven by our share of income from an asset sale in the prior year as well as lower 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 $1.6 billion increased 1%, or $17.7, as higher volumes of 2% and higher energy cost pass-through to customers of 2% were partially offset by an unfavorable currency impact of 2% and lower pricing of 1%. New assets contributed to the volume improvement across the region and were partially offset by weaker helium demand. Currency was unfavorable due to strengthening of the U.S. Dollar against most major currencies in the region. The total segment pricing decline of 1% equates to a 2% decline in our merchant business, which was primarily attributable to helium.

Operating income of $407.8 decreased 2%, or $7.0, primarily due to lower pricing, net of power and fuel costs, of $11 and unfavorable currency of $8, partially offset by lower costs of $10. The cost improvement was primarily attributable to productivity, which was partially offset by higher costs related to incentive compensation and inflation. Operating margin of 25.6% decreased 80 bp from 26.4% in the prior year.

Equity affiliates’ income of $20.8 increased 66%, or $8.3, driven by prior year maintenance expense at an affiliate in China as well as higher income from affiliates in Thailand.

Europe

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

Sales of $1.4 billion increased 2%, or $25.5, due to higher pricing of 3% and higher energy cost pass-through to customers of 2%, partially offset by lower volumes of 2% and an unfavorable impact from currency of 1%. The total segment price increase of 3% equates to a 4% improvement in our merchant business, which reflects favorable pricing across most non-helium product lines. Unfavorable volumes were driven by lower demand for helium in our merchant business and a lower year-to-date contribution from our on-site business.

Operating income of $382.0 decreased 4%, or $16.6, primarily due to unfavorable volumes of $27 and higher costs of $7, partially offset by favorable pricing, net of power and fuel costs, of $21. The higher costs reflect inflation, depreciation, and higher income from non-recurring asset sales in the prior year, which were partially offset by productivity improvements and lower maintenance. Operating margin of 26.8% decreased 170 bp from 28.5% in the prior year primarily due to lower volumes.

Equity affiliates’ income of $45.9 increased 42%, or $13.5, driven by prior year non-recurring items at an affiliate in Italy.

Middle East and India

Sales of $65.6 decreased 8%, or $5.5, primarily due to lower merchant volumes and pricing. Operating loss was $3.5 compared to income of $9.5 in the prior year, which was primarily driven by higher costs.

Equity affiliates' income of $163.2 decreased 2%, or $3.6, driven by JIGPC.

Corporate and other

Sales of $191.5 decreased 50%, or $194.5, primarily due to the divestiture of the LNG business in September 2024.

Operating loss of $235.4 increased 25%, or $47.3, primarily due to the divestiture of the LNG business, which generated operating income of approximately $60 in the prior year. Additionally, operating results in fiscal year 2025 were negatively impacted by changes to project cost estimates on certain sale of equipment projects as well as higher costs for incentive compensation and inflation. These impacts were partially offset by lower project development costs and productivity improvements.

Equity affiliates' income of $6.7 decreased 23%, or $2.0.