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 $3.2 billion increased 5%, or $138.3, due to higher volumes of 3%, higher pricing of 1%, and favorable currency of 1%. Volume growth was driven by new on-site assets and HyCO facilities. Favorable currency reflected a weaker U.S. Dollar across multiple currencies.

Cost of Sales and Gross Margin

Cost of sales of $2.1 billion increased 4%, or $84.9. Unfavorable costs of $36 were driven by fixed-cost inflation and higher incentive compensation, partially offset by lower depreciation expense. Unfavorable currency increased costs by $28, while higher sales volumes and energy cost pass-through to customers increased costs by an additional $12 and $6, respectively. Gross margin of 32.8% increased 30 bp from 32.5%.

Selling and Administrative Expense

Selling and administrative expense of $219.1 decreased 2%, or $3.5, driven by productivity improvements related to our global cost reduction plan, partially offset by higher incentive compensation, fixed-cost inflation, and unfavorable currency. Selling and administrative expense as a percentage of sales improved to 6.9% from 7.4%, down 50 bp from the prior year.

Research and Development Expense

Research and development expense of $21.5 decreased 11%, or $2.6. Research and development expense as a percentage of sales improved to 0.7% from 0.8% in the prior year.

Business and Asset Actions (Project Exit Costs)

During the third quarter of fiscal year 2026, we recognized project exit charges of $2.9 billion ($2.2 billion after-tax, or $9.92 per share) as a result of our decision to cancel a clean energy complex under construction in Louisiana, a green hydrogen production facility under construction in Casa Grande, Arizona, and certain other smaller-scale projects supporting clean energy distribution. In the prior-year quarter, we recognized project exit charges of $24.1 pre-tax ($15.4 after-tax, or $0.07 per share), primarily reflecting revisions to cost estimates associated with project exit actions approved in the second quarter of fiscal year 2025. 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.

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 recorded during the third quarter of fiscal year 2025 were $25.0 pre-tax ($18.8 after-tax, or $0.08 per share), primarily related to the reimbursement of proxy-related expenses incurred by Mantle Ridge LP and its affiliated entities. 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.

During the third quarter of fiscal year 2025, we recognized a gain of $67.3 pre-tax ($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 was not reflected in the results of the Asia segment. Refer to Note 17, Supplemental Information, to the consolidated financial statements for additional information.

Other Income (Expense), Net

Other income of $14.9 decreased 59%, or $21.6. The decrease was primarily driven by a prior-year gain of $31.3 pre-tax ($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, as well as favorable foreign exchange impacts.

Operating Income (Loss) and Operating Margin

Operating loss was $2.1 billion during the third quarter of fiscal year 2026 compared to operating income of $790.6 in the prior-year quarter. The current-year loss was driven by pre-tax charges of $2.9 billion associated with project exit decisions announced on 30 June 2026, compared to pre-tax project exit-related charges of $24.1 in the prior-year quarter. Additionally, the prior year included pre-tax gains totaling approximately $99 million in connection with the sale of a consolidated subsidiary and a regional office as discussed above, partially offset by shareholder activism-related costs of $25.

Volume improved $60, driven primarily by on-site, including new assets and HyCO facilities. Favorable currency impacts contributed $21. Higher pricing, net of power costs, added $16. These factors were partially offset by higher costs of $28, primarily reflecting fixed-cost inflation and higher incentive compensation.

Operating margin was negative 66.3% compared to 26.2% in the prior-year quarter, which was primarily attributable to the charges for business and asset actions in fiscal year 2026.

On a non-GAAP basis, which excludes the charges for business and asset actions, sales of businesses and other assets, and prior year-shareholder activism-related costs discussed above, adjusted operating income of $810.3 increased 9%, or $69.2, primarily driven by higher on-site volumes, favorable currency, and higher pricing, partially offset by higher costs. Adjusted operating margin improved 110 bp to 25.6% from 24.5% in the prior year.

Equity Affiliates' Income

Equity affiliates' income of $205.2 increased 22%, or $37.6, primarily driven by affiliates in the Americas and Middle East and India segments.

Interest Expense

Interest expense decreased 20%, or $12.0, primarily driven by an increase in capitalized interest due to a higher carrying value of projects under construction.

Other Non-Operating Income (Expense), Net

Other non-operating income of $3.6 increased $9.6 compared to an expense of $6.0 in the prior year. The increase was primarily attributable to lower non-service pension costs as well as income from excluded components from the assessment of effectiveness of our derivatives, partially offset by lower interest income on cash equivalents and short-term investments.

During the third quarter of fiscal year 2025, we recorded a pre-tax loss from discontinued operations of $10.6 ($8.0 after tax, or $0.04 per share) primarily to increase existing liabilities for retained environmental remediation obligations associated with businesses sold in 2008. Refer to the "Piedmont" discussion under Note 12, Commitments and Contingencies, for additional information. The loss did not result in cash flows from discontinued operations.

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. The table below outlines the calculation of the effective tax rate for the third quarter of fiscal years 2026 and 2025:

The current-year rate was significantly impacted by net tax benefits of $695.4 associated with project exit decisions, as discussed in Note 4, Business and Asset Actions, to the consolidated financial statements. These benefits primarily reflect tax benefits recognized at local statutory income tax rates in the U.S. based on information available when the project exit charges were recorded. Changes in the amount or timing of the final settlement of these matters could affect our income tax provision in future periods.

Also impacting the effective tax rate were higher net costs on foreign-related income taxed in the U.S. in the current fiscal year and higher releases of certain unrecognized tax benefits upon expiration of the statute of limitations in the prior year. These costs were partially offset by higher foreign and domestic tax credit and incentives and higher equity affiliates' income.

Our adjusted effective tax rate, which excludes the impact of project exit costs and other adjustments described in the "Reconciliations of Non-GAAP Financial Measures" section, was 18.6% and 18.1% for the three months ended 30 June 2026 and 2025, respectively. A reconciliation of the adjusted measures to the effective tax rate calculated in accordance with GAAP is provided on page 71.

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 5%, or $60.4, due to higher volumes of 7%, partially offset by lower energy cost pass-through to customers of 2%. Volume growth was driven by on-site, including HyCO facilities and a new asset contribution. Lower energy cost pass-through to customers primarily reflected decreased natural gas rates.

Operating income of $395.4 increased 6%, or $21.3, primarily driven by higher volumes of $30 and higher pricing, net of lower power costs, of $6. These benefits were partially offset by higher costs of $16, which included fixed-cost inflation, increased product distribution and dislocation costs, and project development costs, partially offset by lower depreciation expense. Operating margin of 29.9% increased 20 bp from 29.7% in the prior year, including an approximate 50 bp favorable impact from lower energy cost pass-through to customers.

Equity affiliates’ income of $56.2 increased 49%, or $18.4, 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 $886.0 increased 9%, or $76.0, due to higher volumes of 6%, favorable currency of 2%, and higher energy cost pass-through to customers of 1%. Volume growth was driven by higher on-site, including new assets, as well as improved helium volumes. Favorable currency was primarily attributable to the weakening of the U.S. Dollar against the Chinese Renminbi.

Operating income of $256.4 increased 18%, or $39.6, driven by higher volumes of $45 and favorable currency impacts of $4. These benefits were partially offset by higher costs of $9, including increased incentive compensation. Depreciation expense was lower in fiscal year 2026, primarily due to the classification of certain gasification assets as held for sale. Operating margin of 28.9% increased 210 bp from 26.8% in the prior year, as the benefits of higher volumes more than offset higher costs.

Equity affiliates’ income of $12.9 increased 36%, or $3.4, 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 $815.7 increased 6%, or $45.2, as higher energy cost pass-through to customers of 3%, favorable currency of 3%, and higher pricing of 2% were partially offset by lower volumes of 2%. The increase in energy cost pass-through reflected higher natural gas rates across the region, while favorable currency impacts were primarily attributable to the weakening of the U.S. Dollar against the Euro. Volumes declined primarily due to lower on-site volumes.

Operating income of $230.7 increased 2%, or $5.5, driven by higher pricing, net of higher power costs, of $8 and favorable currency of $5. Favorable business mix contributed an additional $2, driven by higher-margin on-site volumes. These benefits were partially offset by higher costs of $10, including fixed-cost inflation. Operating margin of 28.3% decreased 90 bp from 29.2% in the prior year, including an approximate 50 bp headwind from higher energy cost pass-through to customers.

Equity affiliates’ income of $32.6 increased 10%, or $2.9, driven primarily by an affiliate in Italy.

Middle East and India

Sales of $34.8 decreased 9%, or $3.5, as lower volumes were partially offset by higher pricing. Operating income of $8.0 was flat.

Equity affiliates' income of $101.1 increased 18%, or $15.1, driven primarily by affiliates in Saudi Arabia.

Corporate and other

Sales of $103.1 decreased 28%, or $39.8, primarily driven by lower equipment sales volumes. Operating loss of $80.2 improved 3%, or $2.9, primarily reflecting productivity and favorable foreign exchange impacts.

Equity affiliates' income of $2.4 decreased 48%, or $2.2, driven primarily by an affiliate in Algeria.