Air Products Chemicals Inc

Discussion of Second Quarter 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 $2.9 billion decreased $14.0. On a percentage basis, sales were flat due to lower volumes of 3% and an unfavorable impact from currency of 2%, partially offset by higher energy cost pass-through to customers of 4% 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 favorability in our on-site business in the Americas and Europe segments. Currency was unfavorable as the U.S. Dollar strengthened against most major currencies. Volumes and currency were mostly offset by higher energy cost pass-through to customers driven by higher natural gas prices in the U.S. Gulf Coast and Europe. The 1% total company price improvement, which equates to a 3% improvement for the merchant business, was primarily attributable to non-helium pricing actions in the Americas and Europe segments.

Cost of Sales and Gross Margin

Cost of sales of $2.1 billion increased 3%, or $62.4, primarily due to higher energy cost pass-through to customers of $95, higher other costs of $35, and higher power and fuel costs in our merchant business of $28. The other costs of $35 were driven by higher expense for maintenance, primarily in the Americas segment, depreciation, and fixed-cost inflation. These impacts were partially offset by lower costs of $62 attributable to sales volumes and a favorable currency impact of $33. Gross margin of 29.6% decreased 240 bp from 32.0% in the prior year due to the impact of higher costs and energy cost pass-through to customers.

Selling and Administrative Expense

Selling and administrative expense of $222.0 decreased 8%, or $18.6, as productivity improvements were partially offset by inflation. Selling and administrative expense as a percentage of sales decreased to 7.6% from 8.2% in the prior year.

Research and Development Expense

Research and development expense of $22.9 decreased 10%, or $2.5. 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 three 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 second quarter 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 second quarter of fiscal year 2025, we recorded costs of $31.4 ($31.0 after tax, or $0.14 per share) 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. Following the election, the Board of Directors appointed a new Chief Executive Officer ("CEO"). The costs incurred during the second quarter primarily reflect 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.

Other Income (Expense), Net

Other income of $13.9 decreased 35%, or $7.6, primarily due to higher income from non-recurring asset sales in the prior year.

Operating Income (Loss) and Operating Margin

Operating loss was $2.3 billion during the second quarter of fiscal year 2025 compared to income of $637.2 in the prior year. The loss in fiscal year 2025 was driven by materially higher charges for business and asset actions of $2,927.9 compared to $57.0 in the prior year. Volumes were unfavorable by $34 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 $35. Fiscal year 2025 also reflects shareholder activism-related costs of $31, higher other costs of $29, and unfavorable currency of $10. The higher other costs of $29 were driven by inflation and higher expense for maintenance and depreciation. Additionally, the prior year included higher income from non-recurring asset sales. These impacts were partially mitigated by productivity improvements. Compared to the prior year, higher pricing driven by non-helium merchant products favorably impacted operating results by $10, which is net of higher power and fuel costs in our merchant business.

Operating margin was negative 79.8% compared to 21.7% in the prior year, which was primarily attributable to the charge for business and asset actions, shareholder activism-related costs, higher other costs, and higher energy cost pass-through to customers.

Equity Affiliates' Income

Equity affiliates' income of $145.5 increased 2%, or $2.2. Higher income from affiliates in Italy and Saudi Arabia was primarily offset by a prior year asset sale in an Americas affiliate. Additionally, as discussed under Project Exit Costs beginning on page 46, fiscal year 2025 includes an impairment charge of $6.8 related to a joint venture in China.

Interest Expense

Interest incurred increased 16%, or $20.3, primarily due to a higher debt balance. Capitalized interest increased 58%, or $38.0, 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 $18.6 increased $9.4 from the prior year. The increase was driven by lower interest income on short-term investments, which was primarily due to interest rate fluctuations and a lower investment balance. Additionally, during the second quarter of fiscal year 2025, we recorded an unrealized loss of $11.5 ($3.0 attributable to Air Products after tax, or $0.01 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 non-service pension costs, which were $10.7 ($8.0 after tax, or $0.04 per share) for the second quarter of fiscal year 2025 compared to $25.1 ($18.9 after tax, or $0.08 per share) in the prior year.

Net Income (Loss)

Net loss was $1.7 billion during the second quarter of fiscal year 2025 compared to income of $580.9 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, unfavorable volumes, and higher costs. The higher costs were driven by inflation and higher expense for maintenance and depreciation. Additionally, the prior year included higher income from non-recurring asset sales. These impacts were partially mitigated by productivity improvements and higher pricing as well as lower non-service pension costs in fiscal year 2025.

Adjusted EBITDA

Adjusted EBITDA of $1.2 billion decreased 3%, or $31.1. The decrease was driven by lower volumes, higher costs, and unfavorable currency, partially offset by productivity improvements, higher pricing, and higher equity affiliates' income.

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 three months ended 31 March 2025, our consolidated income statement includes an income tax benefit of $505.8 compared to an income tax expense of $130.5 in the prior year period. The tax benefit in fiscal year 2025 represents an effective tax rate of 22.5% on the pre-tax loss of $2.2 billion reported for the three months ended 31 March 2025. The tax expense in fiscal year 2024 represented an effective rate of 18.3% on the pre-tax income of $711.4 reported for the three 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 second quarter of fiscal year 2025.

During the second quarter of fiscal year 2025, we incurred costs of $31.4 related to a proxy contest as further discussed in Note 17, Supplemental Information. We recognized a $0.4 income tax benefit related to these costs in the second quarter.

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., which was partially offset 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 19.1% and 18.9% for the three months ended 31 March 2025 and 2024, respectively.

Discussion of Second 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 $1.3 billion increased 3%, or $41.4, as higher energy cost pass-through to customers of 4% and favorable pricing of 2% were partially offset by lower volumes of 2% and an unfavorable currency impact of 1%. The increase attributable to energy cost pass-through reflects higher natural gas rates in the U.S. Gulf Coast. The total segment price increase of 2% equates to a 4% improvement in our merchant business, which reflects favorable pricing across most non-helium product lines. Volumes declined due to lower demand for helium, which was partially offset by growth in our on-site hydrogen business and a favorable one-time customer contract amendment.

Operating income of $365.7 decreased 2%, or $6.2, as higher costs of $31 and unfavorable currency of $4 were partially offset by favorable business mix of $18 and higher pricing, net of higher power and fuel costs in our merchant business, of $11. Higher costs of $31 reflect higher maintenance and depreciation, project development, and inflation, which were partially offset by productivity improvements. Operating margin of 28.4% decreased 150 bp from 29.9% in the prior year, of which approximately 100 bp was attributable to energy cost pass-through to customers.

Equity affiliates’ income of $31.2 decreased 29%, or $13.0, 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 $774.1 decreased 1%, or $5.6, as an unfavorable currency impact of 3% and lower pricing of 1% were partially offset by higher energy cost pass-through to customers of 2% and higher volumes of 1%. 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. New assets contributed to the volume improvement across the region and were partially offset by weaker demand for helium.

Operating income of $191.4 decreased 6%, or $12.2, due to lower pricing, net of power and fuel costs, of $9 and unfavorable currency of $6, partially offset by lower costs of $3. Operating margin of 24.7% decreased 140 bp from 26.1% in the prior year primarily due to the impact of lower pricing.

Equity affiliates’ income of $10.5 increased 27%, or $2.2, driven by affiliates in Thailand.

Europe

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

Sales of $727.4 increased 9%, or $59.5, due to higher energy cost pass-through to customers of 5%, higher pricing of 4%, and higher volumes of 2%, partially offset by unfavorable currency of 2%. The 5% increase attributable to energy cost pass-through reflects higher natural gas rates across the region. The total segment price increase of 4% equates to a 5% improvement in our merchant business, which reflects favorable pricing across most non-helium product lines. Higher volumes were driven by our on-site business and were partially offset by lower demand for most merchant products, including helium. Unfavorable currency was primarily attributable to strengthening of the U.S. Dollar against the Euro.

Operating income of $195.5 decreased 3%, or $5.5, due to higher costs of $9, unfavorable business mix of $4, and unfavorable currency of $3, partially offset by higher pricing, net of higher power and fuel costs in our merchant business, of $11. The prior year included higher income from non-recurring asset sales, which contributed to the higher costs in fiscal year 2025. Additionally, higher costs reflect higher depreciation and inflation, which were partially offset by productivity improvements. Operating margin of 26.9% decreased 320 bp from 30.1% in the prior year, of which approximately 150 bp was attributable to energy cost pass-through to customers.

Equity affiliates’ income of $27.7 increased $16.0 primarily due to prior year non-recurring items at an affiliate in Italy.

Middle East and India

Sales of $32.8 decreased 8%, or $2.9, primarily due to lower pricing. Operating loss was $2.9 compared to income of $5.6 in the prior year, which reflects the impact of lower pricing as well higher costs.

Equity affiliates' income of $78.2 increased 6%, or $4.3, driven by JIGPC.

Corporate and other

Sales of $94.7 decreased 53%, or $106.4, primarily due to the divestiture of the LNG business in September 2024.

Operating loss of $118.4 increased 35%, or $30.5, primarily due to the divestiture of the LNG business, which generated operating income of approximately $35 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. These impacts were partially mitigated by productivity improvements and lower incentive compensation.

Equity affiliates' income of $4.7 decreased 10%, or $0.5.