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 $3.1 billion increased 6%, or $171.0, due to higher energy cost pass-through to customers of 3%, a favorable impact from currency of 2%, and higher pricing of 1%. The increase in energy cost pass-through to customers primarily reflects higher natural gas prices in North America, which are contractually recoverable under our on-site agreements. Currency was favorable as the U.S. Dollar weakened, most notably against the Euro. The 1% total company price improvement, which equates to a 2% improvement for the merchant business, was driven by non-helium pricing actions in the Americas and Europe segments. Volumes were flat as higher on-sites were offset by lower helium demand and a significant, non-recurring helium sale to an existing merchant customer in the Americas segment in the prior year.

Cost of Sales and Gross Margin

Cost of sales of $2.1 billion increased 5%, or $91.0, primarily due to higher energy cost pass-through to customers of $79 and an unfavorable currency impact of $47. These increases were partially offset by $22 of lower costs related to sales volumes and $10 driven by productivity improvements and lower maintenance, which more than offset fixed-cost inflation. Gross margin of 32.1% increased 90 bp from 31.2% in the prior year as the benefits from favorable business mix and higher pricing were partially offset by higher energy cost pass-through to customers.

Selling and Administrative Expense

Selling and administrative expense of $228.7 decreased 6%, or $13.7, as productivity improvements were partially offset by labor inflation. Selling and administrative expense as a percentage of sales decreased to 7.4% from 8.3% in the prior year.

Research and Development Expense

Research and development expense of $20.4 decreased 7%, or $1.6. Research and development expense as a percentage of sales decreased to 0.7% from 0.8% in the prior year.

Business and Asset Actions

During the first quarter of fiscal year 2026, we recorded charges of $28.3 ($24.6 after tax, or $0.11 per share) related to updated estimates for prior year project exits as described in Note 4, Business and Asset Actions, to the consolidated financial statements. These charges are not reflected in the results of our reportable segments.

Of the first quarter charge, $22.0 was recorded to operating income and related to the settlement of project‑related commitments and sale of associated assets. The remaining $6.3 was recorded to "Other non‑operating income (expense), net" and reflects losses on cross‑currency interest rate swaps terminated in connection with the early repayment of related intercompany loans for one of the affected gasification projects.

Our estimates reflect our best judgment based on information available as of 31 December 2025. Final settlement of these items may differ materially from current estimates, which could impact our consolidated financial statements in future periods.

During the first quarter of fiscal year 2025, we recorded shareholder activism-related costs of $29.9 ($21.9 after tax, or $0.10 per share) in connection with a proxy contest. These costs, which were not reflected in the results of our reportable segments, included legal and other professional service fees and proxy solicitation expenses.

Other Income (Expense), Net

Other income of $10.6 decreased 54%, or $12.3, primarily due to the prior year sale of a U.S. equity method investment.

Operating Income and Operating Margin

Operating income of $734.5 increased 14%, or $90.9, due to favorable business mix of $26, lower costs of $23, higher pricing, net of power and fuel costs, of $22 driven by non-helium merchant, and favorable currency of $12. The lower costs include productivity improvements and lower maintenance, partially offset by fixed-cost inflation and the prior year sale of a U.S. equity method investment. A charge of $22 recorded in fiscal year 2026 to update cost estimates related to prior-year business and asset actions was more than offset by prior-year shareholder activism-related costs of $30. Operating margin of 23.7% increased 170 bp compared to 22.0% in the prior year, despite an approximate 50-basis-point headwind from higher energy cost pass-through to customers driven by the Americas segment.

On a non-GAAP basis, which excludes the charge for business and asset actions and prior year shareholder activism-related costs discussed above, adjusted operating income of $756.5 increased 12%, or $83.0, and adjusted operating margin of 24.4% increased 140 bp compared to 23.0% in the prior year.

Equity Affiliates' Income

Equity affiliates' income of $172.2 increased 14%, or $21.6, driven by affiliates in the Americas and Europe segments.

Interest Expense

Interest expense increased 28%, or $11.9, driven by higher interest incurred on principal borrowings from Euro- and U.S. Dollar-denominated senior fixed-rate notes issued in fiscal year 2025. Higher interest incurred was partially offset by a higher carrying value of ongoing projects under construction.

Other Non-Operating Income (Expense), Net

Other non-operating expense of $1.4 decreased $40.3 compared to income of $38.9 in the prior year, which included a $38.8 gain ($10.3 attributable to Air Products after tax, or $0.05 per share) on certain interest rate swaps held by the NEOM Green Hydrogen Company joint venture. The majority of these swaps were re‑designated as cash flow hedges by the end of fiscal year 2025, and the impact of any swaps that remained de‑designated in the first quarter of fiscal year 2026 was not material. Refer to Note 3, Variable Interest Entities, and Note 8, Financial Instruments, to the consolidated financial statements for additional information.

Lower interest income on short-term investments and a loss on cross‑currency interest rate swaps terminated in connection with business and asset actions were partially offset by lower non-service pension costs, which decreased to $3.4 ($2.5 after tax, or $0.01 per share) for the first quarter of fiscal year 2026 compared to $10.5 ($7.9 after tax, or $0.04 per share) in the prior year.

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 18.7% and 17.8% for the three months ended 31 December 2025 and 2024, respectively. Our effective rate was higher in fiscal year 2026 primarily due to higher net costs on foreign-related income taxed in the U.S. and lower U.S. tax benefits for foreign-derived income, which were impacted by tax deductions for prior year business and asset actions. Also contributing to the higher current year rate were prior-year non-recurring gains on the de-designation of cash flow hedges in jurisdictions with lower tax rates. These increases were partially offset by the release of certain unrecognized tax benefits resulting from tax settlements in the current 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 48, was 18.5% and 18.7% for the three months ended 31 December 2025 and 2024, 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 $1.3 billion increased 4%, or $54.1, as higher energy cost pass-through to customers of 6% and favorable pricing of 2% were partially offset by lower volumes of 4%. The higher energy cost pass-through reflects increased natural gas rates in the U.S. Gulf Coast and California. Pricing improved for non-helium products. The 2% total segment price increase equates to a 4% improvement in our merchant business. Volumes were unfavorable primarily due to a significant, non-recurring helium sale to an existing merchant customer in the prior year. Currency was flat compared to the prior year.

Operating income of $403.8 increased 4%, or $15.6, as higher pricing of $16 and favorable business mix of $3 were partially offset by higher costs of $4. Costs were modestly unfavorable as prior‑year income from the sale of an equity method investment and fixed-cost inflation more than offset lower maintenance. Operating margin of 30.1% was flat compared to prior year, as the benefits from favorable business mix and pricing were offset by a headwind of approximately 150 basis points from higher energy cost pass‑through to customers.

Equity affiliates’ income of $51.7 increased 47%, or $16.6, driven by 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 $831.5 increased 2%, or $14.4, as higher energy cost pass-through to customers of 2% and a favorable currency impact of 1% were partially offset by lower pricing of 1% primarily driven by helium. The 1% total segment price decrease equates to a 4% decline in our merchant business. Volumes were flat as new on-site assets were offset by lower demand for helium.

Operating income of $232.3 increased 7%, or $15.9, due to lower costs of $15 driven by productivity, favorable business mix of $7, and favorable currency of $4, partially offset by lower pricing of $10. Depreciation was reduced in fiscal year 2026 due to certain coal gasification assets being classified as held for sale. Operating margin of 27.9% increased 140 bp from 26.5% in the prior year.

Equity affiliates’ income of $13.8 increased 34%, or $3.5, driven by affiliates in China.

Europe

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

Sales of $782.0 increased 12%, or $84.8, due to favorable currency of 8%, higher volumes of 5%, and higher pricing of 1%, partially offset by lower energy cost pass-through to customers of 2%, primarily due to lower natural gas rates. Favorable currency primarily reflected the weakening of the U.S. Dollar against the Euro. The higher volumes were driven by on-sites, including the impact of a prior-year turnaround, and non-helium merchant. Pricing improved for non-helium products. The 1% total segment price increase equates to a 2% improvement in our merchant business.

Operating income of $223.5 increased 20%, or $37.0, due to higher volumes of $21, higher pricing of $16, and favorable currency of $11, partially offset by higher costs of $11. The increase in costs was primarily due to higher depreciation and fixed-cost inflation, partially offset by productivity-driven improvements. Operating margin of 28.6% increased 190 bp from 26.7% in the prior year, as the benefits from higher volumes and pricing were partially offset by higher costs.

Equity affiliates’ income of $23.4 increased 29%, or $5.2, driven by an affiliate in Italy.

Middle East and India

** Percentage change versus prior period is not meaningful.

Sales of $30.3 decreased 8%, or $2.5, due to lower volumes. Operating income was $5.8 compared to a loss of $0.6 in the prior year, primarily due to lower costs following the deconsolidation of Blue Hydrogen Industrial Gases Company ("BHIG") in the second quarter of fiscal year 2025 as well as productivity improvements.

Equity affiliates' income of $84.5 decreased 1%, or $0.5.

Corporate and other

** Percentage change versus prior period is not meaningful.

Sales of $117.0 increased 21%, or $20.2. Operating loss of $108.9 decreased 7%, or $8.1, primarily due to productivity-driven cost improvements.

Equity affiliates' loss was $1.2 compared to income of $2.0 in the prior year, driven by an affiliate in Algeria.