Air Products & Chemicals, Inc.

Discussion of Second Quarter Consolidated Results

Sales

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

Sales of $3.2 billion increased 9%, or $255.6, due to higher volumes of 4%, a favorable currency impact of 4%, and higher energy cost pass-through to customers of 2%, partially offset by lower pricing of 1%. Volume growth was driven by on-sites, primarily HyCO in the Americas segment. The favorable currency impact reflected a weaker U.S. Dollar, most notably against the Euro, Chinese Renminbi, and British Pound Sterling. Lower pricing was primarily attributable to helium, partially offset by pricing improvements across non-helium product lines.

Cost of Sales and Gross Margin

Cost of sales of $2.2 billion increased 6%, or $130.5, due to an unfavorable currency impact of $81, higher energy cost pass-through to customers of $45, and higher costs of $19 related to sales volumes. These increases were partially offset by $8 of lower costs driven by productivity improvements and lower depreciation, which more than offset fixed-cost inflation and higher Americas maintenance costs, as well as $6 of lower product sourcing costs in our merchant business. Gross margin of 31.1% increased 150 bp from 29.6% in the prior year, driven by higher volumes.

Selling and Administrative Expense

Selling and administrative expense of $227.2 increased 2%, or $5.2, as unfavorable currency and labor inflation were partially offset by productivity improvements. Selling and administrative expense as a percentage of sales improved to 7.2% from 7.6% in the prior year.

Research and Development Expense

Research and development expense of $21.6 decreased 6%, or $1.3. Research and development expense as a percentage of sales decreased to 0.7% from 0.8% in the prior year.

We did not record any charges related to business and asset actions in the second quarter of fiscal year 2026.

Our consolidated prior year income statement for the three months ended 31 March 2025 included charges of $2.9 billion ($2.3 billion attributable to Air Products after tax, or $10.28 per share), consisting of initial charges related to project exit decisions as well as costs incurred in connection with our global cost reduction plan. These charges were not reflected in the results of our reportable segments. For additional information, refer to Note 4, Business and Asset Actions, to the consolidated financial statements.

Prior Year Shareholder Activism-Related Costs

We recorded shareholder activism-related costs in fiscal year 2025 in connection with a proxy contest that concluded in January 2025 following certification of the election of directors at the 2025 Annual Meeting of Shareholders. Costs of $31.4 ($31.0 after tax, or $0.14 per share) incurred during the second quarter were primarily for executive separation costs for our former chief executive officer. These costs were not reflected in the results of our reportable segments. For additional information, refer to Note 17, Supplemental Information, to the consolidated financial statements.

Other Income (Expense), Net

Other income of $14.1 increased 1%, or $0.2.

Operating Income (Loss) and Operating Margin

Operating income of $752.7 increased 132%, or $3.1 billion, from an operating loss of $2.3 billion in the prior year. The fiscal year 2025 loss was driven by $2.9 billion of charges for business and asset actions, largely related to project exit decisions reached in the second quarter of fiscal year 2025, and also included $31 of shareholder activism‑related costs. Volume impacts were favorable by $94, driven by on-sites. Currency was favorable by $25, and costs were lower by $13, as productivity improvements and lower depreciation more than offset fixed-cost inflation and higher Americas maintenance costs. These factors were partially offset by lower pricing, net of power costs, of $11, driven by lower helium pricing. Lower helium pricing was partially mitigated by pricing improvements across non-helium product lines. Operating margin was 23.7% compared to negative 79.8% in the prior year, which was primarily attributable to the charges for business and asset actions in fiscal year 2025.

On a non-GAAP basis, which excludes the charges for business and asset actions and prior-year shareholder activism-related costs discussed above, adjusted operating income of $752.7 increased 19%, or $121.4, due to higher volumes, favorable currency, and lower costs, partially offset by lower pricing. Adjusted operating margin improved to 23.7% from 21.6% in the prior year, primarily due to higher volumes and productivity, partially offset by energy cost pass-through to customers and pricing.

Equity Affiliates' Income

Equity affiliates' income of $179.4 increased 23%, or $33.9, primarily driven by an affiliate in Mexico within the Americas segment. Additionally, the prior year included a project exit-related impairment charge of $6.8 related to a joint venture in China.

Interest Expense

Interest expense increased 17%, or $7.3, driven by higher interest on principal borrowings from Euro- and U.S. Dollar-denominated senior fixed-rate notes issued in fiscal year 2025.

Other Non-Operating Income (Expense), Net

Other non-operating income of $0.9 increased $19.5 compared to an expense of $18.6 in the prior year. The prior year included an expense of $11.5 ($3.0 attributable to Air Products after tax, or $0.01 per share) on certain interest rate swaps held by the NEOM Green Hydrogen Company joint venture. As of 1 January 2026, all swaps were re‑designated as cash flow hedges. Refer to Note 3, Variable Interest Entities, and Note 8, Financial Instruments, to the consolidated financial statements for additional information.

The increase also reflects income from excluded components from the assessment of effectiveness of our derivatives and lower non-service pension costs, partially offset by lower interest income on short-term investments.

The effective tax rate equals the income tax expense (benefit) divided by income or loss before taxes. Equity affiliates' income is primarily included net of income taxes within income or loss before taxes on our consolidated income statements.

For the three months ended 31 March 2026, our consolidated income statement includes an income tax expense of $158.7 compared to an income tax benefit of $505.8 in the prior year period. The tax expense in fiscal year 2026 represents an effective tax rate of 18.0% on the pre-tax income of $883.5 reported for the three months ended 31 March 2026. The tax benefit in fiscal year 2025 represented an effective rate of 22.5% on the pre-tax loss of $2.2 billion reported for the three months ended 31 March 2025.

The prior-year rate was primarily impacted by $2.9 billion of pre-tax charges for business and asset actions and other items as further discussed in Note 16, Income Taxes. Also contributing to a lower rate for the current fiscal year were higher foreign and domestic tax credits and incentives and higher equity affiliates' income. These items were partially offset by a higher cost of U.S. tax on foreign earnings and withholding taxes on foreign earnings we no longer intend to indefinitely reinvest.

Our adjusted effective tax rate, which excludes the impact of adjustments presented in the "Reconciliations of Non-GAAP Financial Measures" section beginning on page 62, was 18.0% and 19.1% for the three months ended 31 March 2026 and 2025, 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 $1.4 billion increased 8%, or $96.7, due to higher energy cost pass-through to customers of 4%, higher volumes of 3%, and favorable currency of 1%. The higher energy cost pass-through reflects increased natural gas rates in the U.S. Gulf Coast. Volumes were favorable in both on-sites and merchant, including helium, partially offset by income from a favorable one-time customer contract amendment in the prior year.

Operating income of $373.9 increased 2%, or $8.2, as higher volumes of $15 and favorable currency of $3 were partially offset by higher costs of $6 and lower pricing, net of power costs, of $4. The lower pricing reflected lower helium pricing and higher power costs in our merchant business, which were partially mitigated by favorable pricing actions across non-helium product lines. The increase in costs was primarily due to maintenance turnarounds and fixed-cost inflation, partially offset by lower depreciation. Operating margin of 27.0% decreased 140 bp from 28.4% in the prior year driven by a headwind of approximately 100 bp from higher energy cost pass-through to our on-site customers.

Equity affiliates’ income of $55.8 increased 79%, or $24.6, driven primarily 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 $832.6 increased 8%, or $58.5, due to higher volumes of 4% primarily related to on-site activity, including new assets, and improved helium, as well as favorable currency of 4% driven by the weakening of the U.S. Dollar against the Chinese Renminbi. Higher energy cost pass-through to customers contributed 1%, offset by lower pricing of 1%. The 1% total segment price decrease equates to a 5% decline in our merchant business, driven by lower helium pricing.

Operating income of $240.0 increased 25%, or $48.6, due to higher volumes of $34, lower costs of $16 driven by productivity, and favorable currency of $8, partially offset by lower pricing, net of power costs, of $10. Depreciation was lower in fiscal year 2026 primarily due to certain gasification assets being classified as held for sale. Operating margin of 28.8% increased 410 bp from 24.7% in the prior year, primarily due to the impact of higher volumes and favorable costs, partially offset by lower pricing.

Equity affiliates’ income of $11.7 increased 11%, or $1.2, driven primarily by an affiliate in Thailand.

Europe

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

Sales of $789.0 increased 8%, or $61.6, as favorable currency of 9% and higher volumes of 2% were partially offset by lower energy cost pass-through to customers of 2% and lower pricing of 1%. Favorable currency primarily reflected the weakening of the U.S. Dollar against the Euro and British Pound Sterling. Higher volumes were driven by on-sites, including the impact of a prior-year turnaround, partially offset by lower helium. Energy cost pass-through declined due to lower natural gas rates. Lower helium pricing was partially mitigated by favorable pricing actions across non-helium product lines.

Operating income of $211.6 increased 8%, or $16.1, due to higher volumes of $16, favorable currency of $16, and higher pricing, net of lower power costs, of $4, partially offset by higher costs of $20. The increase in costs was primarily due to higher depreciation and fixed-cost inflation. Operating margin of 26.8% decreased 10 bp from 26.9% in the prior year.

Equity affiliates’ income of $31.9 increased 15%, or $4.2, driven primarily by an affiliate in Italy.

Middle East and India

Sales of $29.2 decreased 11%, or $3.6, primarily due to lower volumes. Operating income was $4.6 compared to a loss of $2.9 in the prior year, reflecting lower costs, including productivity improvements and the impact of the deconsolidation of Blue Hydrogen Industrial Gases Company ("BHIG") in the second quarter of fiscal year 2025.

Equity affiliates' income of $79.2 increased 1%, or $1.0.

Corporate and other

Sales of $137.1 increased 45%, or $42.4. Operating loss of $77.4 improved 35%, or $41.0, primarily due to lower changes to sale of equipment project estimates and productivity improvements.

Equity affiliates' income of $0.8 decreased 83%, or $3.9, driven by an affiliate in Algeria.