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 $3.0 billion increased 1%, or $37.2, as higher energy cost pass-through to customers of 3%, higher pricing of 1%, and a favorable impact from currency of 1% were partially offset by lower volumes of 4%. The increase in energy cost pass-through to customers was primarily due to higher natural gas prices in the U.S. Gulf Coast and California. The 1% total company price improvement, which equates to a 2% improvement for the merchant business, was driven by non-helium pricing actions primarily in the Europe and Americas segments. Currency was favorable as the U.S. Dollar weakened primarily against the British Pound Sterling and the Euro. Unfavorable volumes were driven by the divestiture of the LNG business in September 2024, which resulted in a headwind of approximately 2%, lower global helium demand, and previously announced project exits, partially offset by higher on-sites.

Cost of Sales and Gross Margin

Cost of sales of $2.0 billion increased 2%, or $34.5, primarily due to higher energy cost pass-through to customers of $100, an unfavorable currency impact of $25, and higher power and fuel costs in our merchant business of $10, partially offset by lower costs of $102 attributable to lower sales volumes. Other costs were relatively flat as productivity improvements and lower planned maintenance were largely offset by higher depreciation expense and fixed-cost inflation. Gross margin of 32.5% decreased 30 bp from 32.8% in the prior year primarily due to higher energy cost pass-through to customers.

Selling and Administrative Expense

Selling and administrative expense of $222.6 decreased 5%, or $12.8, as productivity improvements were partially offset by fixed-cost inflation. Selling and administrative expense as a percentage of sales decreased to 7.4% from 7.9% in the prior year.

Research and Development Expense

Research and development expense of $24.1 decreased 11%, or $2.9. Research and development expense as a percentage of sales decreased to 0.8% from 0.9% in the prior year.

During the third quarter of fiscal year 2025, we recorded a charge of $24.1 ($15.4 after tax, or $0.07 per share) related to business and asset actions. This charge reflects updated cost estimates associated with our previously announced decision to exit certain clean energy generation and distribution projects. For additional information, refer to the discussion for the first nine months of fiscal year 2025 beginning on page 58 of this Management's Discussion and Analysis as well as Note 4, Business and Asset Actions, to the consolidated financial statements. The charge is not reflected in segment results.

Our estimates related to exiting these projects reflect our best judgment based on information available as of 30 June 2025. Final settlement of these items may differ materially from our current estimates, which could impact our consolidated financial statements in future periods. Additionally, our Board of Directors continues to review the business, which may lead to decisions that could result in additional charges in future periods.

During the third quarter of fiscal year 2025, we recorded shareholder activism-related costs of $25.0 ($18.8 after tax, or $0.08 per share). These costs primarily reflect a cash reimbursement to Mantle Ridge for expenses incurred during its proxy engagement with Air Products. Refer to Note 19, Supplemental Information, for additional information. Shareholder activism-related costs are not reflected in segment results.

Gain on Sale of Business

During the third quarter of fiscal year 2025, we recognized a gain of $67.3 ($51.9 after tax, or $0.23 per share) on the sale of our 100% ownership interest in a consolidated subsidiary in Singapore. This gain is not reflected in the results of the Asia segment. Refer to Note 5, Acquisitions and Divestitures, to the consolidated financial statements for additional information. Prior to the divestiture, the subsidiary contributed annual sales of approximately $50 to our Asia segment, primarily through the merchant gas supply mode.

Other Income (Expense), Net

Other income of $36.5 increased 82%, or $16.4. The increase was driven by a $31.3 gain ($23.8 after tax, or $0.11 per share) on the sale of a regional office in Hersham, England, which was not reflected in the results of the Europe segment. In the prior-year quarter, other income benefited from a favorable legal settlement in our Americas segment related to energy management charges in connection with an extreme weather event in 2021.

Operating Income and Operating Margin

Operating income of $790.6 increased 7%, or $53.0. In fiscal year 2025, we recognized pre-tax gains totaling approximately $99 in connection with the sale of a consolidated subsidiary and a regional office, as described above. Compared to the prior year, higher pricing, net of power and fuel costs, favorably impacted operating results by $15, driven by non-helium merchant products. Costs were $9 favorable as productivity improvements and lower planned maintenance were partially offset by higher depreciation expense, fixed-cost inflation, and a favorable legal settlement recorded in the prior year. These items were partially offset by shareholder activism-related costs of $25 and charges for business and asset actions of $24. Additionally, volumes were unfavorable by $23, reflecting the September 2024 divestiture of the LNG business, lower global helium demand, and previously announced project exits. In the prior year, the LNG business contributed approximately $35 in operating income. These headwinds were partially offset by higher on-site volumes.

Operating margin of 26.2% increased 150 bp compared to 24.7% in the prior year, primarily reflecting the margin impact of gains from the sale of a subsidiary and a regional office, partially offset by charges for business and asset actions and shareholder activism-related costs.

Equity Affiliates' Income

Equity affiliates' income of $167.6 decreased 1%, or $1.3.

Interest Expense

Interest expense of $61.4 increased 10%, or $5.7, driven by the impact of project exits and a higher debt balance, partially offset by a higher carrying value of ongoing projects under construction.

Other Non-Operating Income (Expense), Net

Other non-operating expense of $6.0 increased $4.7 from the prior year. De-designated interest rate swaps related to financing for the NEOM Green Hydrogen Project resulted in an immaterial unrealized loss in the third quarter of fiscal year 2025, compared to a gain of $11.2 ($3.0 after tax, or $0.01 per share) in the prior year. Refer to Note 3, Variable Interest Entities, and Note 10, Financial Instruments, to the consolidated financial statements for additional information. Additionally, we recognized lower interest income on short-term investments in fiscal year 2025. These items were partially offset by a decrease in non-service pension costs, which were $10.9 ($8.1 after tax, or $0.04 per share) for the third quarter of fiscal year 2025 versus $25.3 ($19.1 after tax, or $0.09 per share) in the prior year.

Discontinued Operations

During the third quarter of fiscal year 2025, we recorded a pre-tax loss from discontinued operations of $10.6 ($8.0 after tax) primarily to increase our existing liability for retained environmental remediation obligations associated with production facilities in the atmospheric emulsions and global pressure sensitive adhesives businesses sold in 2008. Refer to the "Piedmont" discussion under Note 14, Commitments and Contingencies, for additional information. The loss did not have an impact on our statement of cash flows for the first nine months of fiscal year 2025.

Net Income

Net income of $723.2 increased 2%, or $14.3. Fiscal year 2025 benefited from gains recognized in connection with the sale of a consolidated subsidiary and a regional office, higher non-helium merchant pricing, and lower non-service pension costs. Costs were also favorable, as productivity improvements and lower planned maintenance were partially offset by higher depreciation expense, fixed-cost inflation, and a prior year legal settlement. These items were partially offset by lower volumes, shareholder activism-related costs, and charges for business and asset actions. The lower volumes were primarily associated with the divestiture of the LNG business in September 2024. Additionally, fiscal year 2025 includes an after-tax loss from discontinued operations, primarily reflecting an increase to an existing liability for retained environmental remediation obligations associated with a previously divested business.

Adjusted EBITDA

Adjusted EBITDA of $1.3 billion increased 3%, or $42.9, driven by favorable costs and higher pricing, partially offset by lower volumes.

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 17.9% and 16.6% for the three months ended 30 June 2025 and 2024, respectively. Our effective rate was higher in fiscal year 2025 due to lower tax benefits on both U.S. export income and excess tax benefits on share-based compensation, and higher net costs on foreign-related income taxed in the U.S. These increases were partially offset by larger benefits in fiscal year 2025 for the release of certain unrecognized tax benefits upon expiration of the statute of limitations.

Our adjusted effective tax rate, which excludes the impact of adjustments presented in the "Reconciliations of Non-GAAP Financial Measures" section beginning on page 66, was 18.1% and 16.9% for the three months ended 30 June 2025 and 2024, respectively.

On 4 July 2025, H.R.1, commonly referred to as the One Big Beautiful Bill Act (OBBBA), was enacted in the United States. OBBBA includes a broad range of tax reform provisions, including extending and modifying certain key Tax Cuts and Jobs Act provisions (both domestic and international), expanding certain Inflation Reduction Act incentives, and accelerating the phase-out of other provisions. We are evaluating the impacts of this legislation on our consolidated financial statements.

Despite the OBBBA’s revisions to the Inflation Reduction Act incentives, we still anticipate future benefits from tax incentives for certain carbon sequestration and clean hydrogen production projects.

Discussion of Third 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 2%, or $26.3, as higher energy cost pass-through to customers of 7% and favorable pricing of 1% were partially offset by lower volumes of 6%. Higher energy cost pass-through to customers was primarily attributable to higher natural gas prices in the U.S. Gulf Coast and California. The total segment price increase of 1% equates to a 3% improvement in our merchant business, primarily in non-helium product lines. Volumes were unfavorable primarily due to lower on-sites, including previously announced project exits, and lower helium demand.

Operating income of $374.1 decreased 4%, or $17.0, primarily due to unfavorable costs of $21 and lower volumes of $4, partially offset by higher pricing, net of power and fuel costs in our merchant business, of $9. The unfavorable costs were driven by maintenance-related depreciation and a favorable prior year legal settlement. Operating margin of 29.7% decreased 200 bp from 31.7% in the prior year, primarily due to higher energy cost pass-through to customers.

Equity affiliates’ income of $37.8 increased 1%, or $0.3.

Asia

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

Sales of $810.0 increased 3%, or $20.4, as higher volumes of 2%, higher energy cost pass-through to customers of 1%, and a favorable currency impact of 1%, were partially offset by lower pricing of 1%. The higher volumes were driven by on-sites, partially offset by lower helium demand. The total segment pricing decline of 1% equates to a 4% decline in our merchant business, which was primarily attributable to helium.

Operating income of $216.8 increased 8%, or $16.7. Favorable costs of $25, primarily due to productivity improvements and lower maintenance, were partially offset by $10 of lower pricing, net of power and fuel costs, which was primarily attributable to helium. Operating margin of 26.8% increased 150 bp from 25.3% in the prior year, as the cost improvement was partially offset by lower helium pricing.

Equity affiliates’ income of $9.5 increased 9%, or $0.8.

Europe

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

Sales of $770.5 increased 11%, or $77.1, due to favorable currency of 5%, higher volumes of 3%, higher pricing of 2%, and higher energy cost pass-through to customers of 1%. Favorable currency was primarily attributable to weakening of the U.S. Dollar against the British Pound Sterling and the Euro. The higher volumes were driven by on-sites, partially offset by lower helium demand. The total segment price increase of 2% equates to a 4% improvement in our merchant business, driven by non-helium product lines.

Operating income of $225.2 increased 10%, or $20.5, due to higher pricing of $14, net of power and fuel costs, favorable currency of $8, and higher volumes of $4, partially offset by higher costs of $5. The higher costs were driven by depreciation and fixed-cost inflation, partially offset by productivity improvements. Operating margin of 29.2% decreased 30 bp from 29.5% in the prior year as the higher costs and unfavorable business mix were partially offset by pricing.

Equity affiliates’ income of $29.7 increased 13%, or $3.4, driven by an affiliate in Italy.

Middle East and India

** Change versus prior period is not meaningful.

Sales of $38.3 increased 17%, or $5.5, primarily due to higher volumes. Operating income was $8.1 compared to a loss of $1.4 in the prior year, which reflects the impact of lower costs and favorable volumes.

Equity affiliates' income of $86.0 decreased 4%, or $3.2, driven by JIGPC.

Corporate and other

Sales of $142.9 decreased 39%, or $92.1, and operating loss of $83.1 increased 46%, or $26.2, primarily due to the divestiture of the LNG business in September 2024. Operating income generated by LNG in the prior year was approximately $35. The headwind from the LNG divestiture was partially offset by lower costs related to sale of equipment and productivity improvements.

Equity affiliates' income of $4.6 decreased 36%, or $2.6, driven by an affiliate in Algeria.