Air Products and Chemicals (APD) Reports 13% Decrease in Operating Income

enminbi, lower volumes of 1%, and lower energy cost pass-through to customers of 1%, partially offset by higher pricing. Operating income of $203.6 decreased 13%, or $29.4, primarily due to lower volumes and an unfavorable impact from currency of $9, partially offset by higher pricing, net of power and fuel costs, of $3. Operating margin of 26.1% decreased 250 bp from 28.6% in the prior year due to these factors as well as higher costs for labor inflation.Middle East and IndiaThree Months Ended31 MarchChange vs. Prior Year20242023$%/bpSales$332.3 $363.2 ($30.9)(9 %)Operating income93.9 104.5 (10.6)(10 %)Operating margin28.3 %28.8 %(50  bp)Equity affiliates’ income$90.8 $130.5 ($39.7)(30 %)Adjusted EBITDA131.9 165.1 (33.2)(20 %)Adjusted EBITDA margin39.7 %45.5 %(580  bp)The table below summarizes the major factors that impacted sales in the Middle East and India segment for the periods presented:Volume(2 %)Price— %Energy cost pass-through to customers(9 %)Currency— %Total Middle East and India Sales Change(9 %)Sales of $332.3 decreased 9%, or $30.9, due to lower energy cost pass-through to customers of 9% driven by lower natural gas prices in the Middle East and India, and lower volumes of 2%. Operating income of $93.9 decreased 10%, or $10.6, primarily due to lower volumes and an unfavorable impact from currency of $5, partially offset by higher pricing, net of power and fuel costs, of $3. Operating margin of 28.3% decreased 50 bp from 28.8% in the prior year due to these factors as well as higher costs for labor inflation.Corporate and OtherThree Months Ended31 MarchChange vs. Prior Year20242023$%/bpSales$572.4 $649.9 ($77.5)(12 %)Operating loss(32.2)(201.9)169.7 (84 %)Adjusted EBITDA(19.8)(194.5)174.7 (90 %)The table below summarizes the major factors that impacted sales in the Corporate and Other segment for the periods presented:Volume(1 %)Price— %Energy cost pass-through to customers(5 %)Currency(6 %)Total Corporate and Other Sales Change(12 %)Sales of $572.4 decreased 12%, or $77.5, due to lower energy cost pass-through to customers of 5% driven by lower natural gas prices in North America, lower volumes of 1%, and an unfavorable impact from currency of 6%. Operating loss of $32.2 improved 84%, or $169.7, primarily due to lower charges for business and asset actions of $86, lower other costs of $36, and lower costs associated with sales volumes of $34. The lower costs included favorable non-recurring items such as sales of assets as well as lower incentive compensation and distribution costs, partially offset by the impact of labor inflation. Adjusted EBITDA loss of $19.8 improved 90%, or $174.7, due to the factors noted above as well as lower energy cost pass-through to customers, which favorably impacted margin by approximately 300 basis points.42Table of ContentsFIRST SIX MONTHS 2024 VS. FIRST SIX MONTHS 2023 FIRST SIX MONTHS 2024 IN SUMMARY•Sales of $5,822.2 decreased 7%, or $439.4, as lower energy cost pass-through to customers of 6%, lower volumes of 2%, and an unfavorable impact from currency of 1% were partially offset by higher pricing of 2%. •Operating income of $1,256.4 increased 31%, or $297.9, as lower costs and positive pricing were partially offset by lower volumes and unfavorable currency impacts. Operating margin of 21.6% increased 530 basis points ("bp") due to these factors as well as a positive impact from lower energy cost pass-through to customers.•Equity affiliates' income of $278.9 decreased 6%, or $18.2, as lower contributions from affiliates in our Europe and Middle East and India segments were partially offset by higher income from affiliates in the Americas segment.•Net income of $1,149.9 increased 27%, or $245.3, primarily due to lower costs and positive pricing, partially offset by lower equity affiliates' income, lower volumes, and higher interest expense. Net income margin of 19.7% increased 470 bp due to these factors as well as a positive impact from lower energy cost pass-through to customers.•Adjusted EBITDA of $2,431.0 increased 7%, or $157.7, and adjusted EBITDA margin of 41.8% increased 370 bp.•Diluted EPS of $5.10 increased 28%, or $1.12 per share. Diluted EPS for the first six months of fiscal years 2024 and 2023 included unfavorable impacts from business and asset actions as well as non-service related pension costs. On a non-GAAP basis, adjusted diluted EPS of $5.51 increased 9%, or $0.47 per share. A summary table of changes in diluted EPS is presented below.•In January 2024, the Board of Directors increased the quarterly dividend to $1.77 per share, representing our 42nd consecutive year of dividend increases.FIRST SIX MONTHS 2024 RESULTS OF OPERATIONSDiscussion of First Six Months Consolidated ResultsSix Months Ended31 MarchChange vs. Prior Year20242023$%/bpGAAP MeasuresSales$5,822.2 $6,261.6 ($439.4)(7 %)Operating income1,256.4 958.5 297.9 31 %Operating margin21.6 %16.1 %530  bpEquity affiliates’ income$278.9 $297.1 ($18.2)(6 %)Net income1,149.9 904.6 245.3 27 %Net income margin19.7 %14.4 %470  bpNon-GAAP MeasuresAdjusted EBITDA$2,431.0 $2,273.3 $157.7 7 %Adjusted EBITDA margin41.8 %36.3 %370  bpSalesThe table below summarizes the major factors that impacted consolidated sales for the periods presented:Volume(2 %)Price2 %Energy cost pass-through to customers(6 %)Currency(1 %)Total Consolidated Sales Change(7 %)Sales of $5,822.2 decreased 7%, or $439.4, as lower energy cost pass-through to customers of 6% driven by lower natural gas prices in the Americas and Europe segments, lower volumes of 2%, and an unfavorable impact from currency of 1% were partially offset by higher pricing of 2%. Cost of Sales and Gross MarginCost of sales of $3,975.3 decreased 11%, or $488.8, due to lower energy cost pass-through to customers of $393, lower costs associated with sales volumes of $80, and lower other costs of $59 driven by lower power costs in our merchant business, and a favorable impact from currency of $25. Gross margin of 31.7% increased 370 bp from 28.0% in the prior year primarily due to lower energy cost pass-through to customers, which favorably impacted margin by approximately 250 bp.43Table of ContentsSelling and Administrative ExpenseSelling and administrative expense of $496.3 decreased 4%, or $20.1, primarily due to lower incentive compensation. Selling and administrative expense as a percentage of sales increased to 8.5% from 8.0% in the prior year.Research and Development ExpenseResearch and development expense of $50.8 decreased 6%, or $3.2. Research and development expense as a percentage of sales increased to 0.9% from 0.8% in the prior year.Business and Asset ActionsOur consolidated income statements for the six months ended 31 March 2024 and 2023 include charges of $114.2 ($88.0 after tax, or $0.40 per share) and $185.6 ($153.7 attributable to Air Products after tax, or $0.69 per share), respectively, for strategic business and asset actions intended to optimize costs and focus resources on our growth projects. Charges for business and asset actions are not recorded in segment results.The current year charge of $114.2 was for severance and other postemployment benefits payable to employees identified under a global cost reduction plan that was initiated in June 2023. The prior year charge of $185.6 resulted from the noncash write-off of assets related to our withdrawal from projects in Indonesia and Ukraine.Other Income (Expense), NetOther income of $39.7 increased $25.3 primarily due to higher income from the sale of assets.Operating Income and Operating MarginOperating income of $1,256.4 increased 31%, or $297.9, as lower charges for business and asset actions of $72, positive pricing, net of power and fuel costs, of $83, and lower other costs of $56 were partially offset by lower volumes of $28 and an unfavorable impact from currency of $14. The lower costs included favorable non-recurring items such as sales of assets as well as lower incentive compensation and distribution costs, partially offset by the impact of labor inflation. Operating margin of 21.6% increased 530 bp from 16.1% in the prior year due to the factors above as well as lower energy cost pass-through to customers, which positively impacted margin by approximately 250 basis points.Equity Affiliates' IncomeEquity affiliates' income of $278.9 decreased 6%, or $18.2, as lower contributions from affiliates in our Europe and Middle East and India segments were partially offset by higher income from affiliates in the Americas segment.Interest ExpenseSix Months Ended31 March20242023Interest incurred$249.5 $125.1 Less: Capitalized interest123.5 49.2 Interest expense$126.0 $75.9 Interest incurred increased 100%, or $124.4, primarily due to a higher debt balance from senior notes that were issued in March 2023 and February 2024 to fund projects under our Green Finance Framework as well as borrowings on financing available for the NEOM Green Hydrogen Project. Capitalized interest increased $74.3 due to a higher carrying value of projects under construction, including the NEOM Green Hydrogen Project.Other Non-Operating Income (Expense), NetOther non-operating expense of $17.6 decreased 36%, or $9.8, as higher interest income on cash and cash items and short-term investments was partially offset by higher non-service pension costs.Net Income and Net Income MarginNet income of $1,149.9 increased 27%, or $245.3, primarily due to lower charges for business and asset actions, favorable pricing, and lower other costs, partially offset by lower equity affiliates' income, lower volumes, and higher interest expense. Net income margin of 19.7% increased 470 bp from 14.4% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by approximately 250 bp.44Table of ContentsAdjusted EBITDA and Adjusted EBITDA MarginAdjusted EBITDA of $2,431.0 increased 7%, or $157.7, as higher pricing and lower costs were partially offset by lower equity affiliates' income. Adjusted EBITDA margin of 41.8% increased 370 bp from 36.3% in the prior year due to the factors noted above as well as lower energy cost pass-through to customers, which positively impacted margin by about 250 bp.Effective Tax RateThe 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 19.4% and 22.0% for the six months ended 31 March 2024 and 2023, respectively. Our current year rate was lower primarily due to a discrete tax impact recorded in the prior year from business and asset actions further discussed below as well as earning a greater share of income in jurisdictions with lower tax rates and the impact from equity affiliates' income.In the prior year, we recognized a charge of $185.6 ($153.7 attributable to Air Products after tax) related to various business and asset actions. Refer to Note 4, Business and Asset Actions, for additional information. This charge included certain losses for which we could not recognize an income tax benefit. Therefore, we recorded a valuation allowance of $31.7 against deferred tax assets resulting from the charge. Partially offsetting the valuation allowance cost was a $15.9 income tax benefit from a tax election related to a non-U.S. subsidiary. Our adjusted effective tax rate, which excludes the impact of the business and asset actions discussed above as well as the non-service components of net periodic cost for our defined benefit pension plans, was 19.6% and 20.0% for the six months ended 31 March 2024 and 2023, respectively. The current year rate was lower due to the higher income in jurisdictions with lower tax rates as well as the impact from equity affiliates' income.Discussion of First Six Months Results by Business SegmentAmericasSix Months Ended31 MarchChange vs. Prior Year20242023$%/bpSales$2,515.3 $2,729.0 ($213.7)(8 %)Operating income740.4 676.0 64.4 10 %Operating margin29.4 %24.7 %470  bpEquity affiliates’ income$56.7 $51.0 $5.7 11 %Adjusted EBITDA1,181.6 1,111.6 70.0 6 %Adjusted EBITDA margin47.0 %40.7 %630  bpThe table below summarizes the major factors that impacted sales in the Americas segment for the periods presented:Volume(2 %)Price3 %Energy cost pass-through to customers(8 %)Currency(1 %)Total Americas Sales Change(8 %)Sales of $2,515.3 decreased 8%, or $213.7, due to lower energy cost pass-through to customers of 8% driven by lower natural gas prices in North America and an unfavorable impact from currency of 1%, partially offset higher pricing of 3% and higher volumes of 2%. Volumes were down overall primarily due to weaker merchant demand and lower hydrogen demand in our on-site business. Operating income of $740.4 increased 10%, or $64.4, primarily due to positive pricing, net of power and fuel costs, of $72 and favorable volumes of $37, partially offset by higher costs of $27. Higher costs for labor inflation were partially offset by lower incentive compensation. Operating margin of 29.4% increased 470 bp from 24.7% in the prior year due to these factors as well as lower energy cost pass-through to customers, which positively impacted margin by approximately 250 basis points. Equity affiliates’ income of $56.7 increased 11%, or $5.7, driven by higher income from an affiliate in Mexico as well as recognition of our share of income from an asset sale.45Table of ContentsAsiaSix Months Ended31 MarchChange vs. Prior Year20242023$%/bpSales$1,534.9 $1,634.6 ($99.7)(6 %)Operating income410.8 474.0 (63.2)(13 %)Operating margin26.8 %29.0 %(220  bp)Equity affiliates’ income$17.1 $15.3 $1.8 12 %Adjusted EBITDA703.6 749.3 (45.7)(6 %)Adjusted EBITDA margin45.9 %45.8 %10  bpThe table below summarizes the major factors that impacted sales in the Asia segment for the periods presented:Volume(1 %)Price2 %Energy cost pass-through to customers(7 %)Currency— %Total Asia Sales Change(6 %)Sales of $1,534.9 decreased 6%, or $99.7, due to lower energy cost pass-through to customers of 7% driven by lower natural gas prices in North Asia, lower volumes of 1%, and an unfavorable impact from currency of 1%, partially offset by higher pricing of 2%. Operating income of $410.8 decreased 13%, or $63.2, primarily due to lower volumes and an unfavorable impact from currency of $19, partially offset by higher pricing, net of power and fuel costs, of $7. Operating margin of 26.8% decreased 220 bp from 29.0% in the prior year due to these factors as well as higher costs for labor inflation.Middle East and IndiaSix Months Ended31 MarchChange vs. Prior Year20242023$%/bpSales$678.1 $726.0 ($47.9)(7 %)Operating income189.7 214.8 (25.1)(12 %)Operating margin28.0 %29.6 %(160  bp)Equity affiliates’ income$165.5 $214.7 ($49.2)(23 %)Adjusted EBITDA224.8 266.9 (42.1)(16 %)Adjusted EBITDA margin33.2 %36.8 %(360  bp)The table below summarizes the major factors that impacted sales in the Middle East and India segment for the periods presented:Volume(2 %)Price— %Energy cost pass-through to customers(7 %)Currency— %Total Middle East and India Sales Change(7 %)Sales of $678.1 decreased 7%, or $47.9, due to lower energy cost pass-through to customers of 7% driven by lower natural gas prices in the Middle East and India, and lower volumes of 2%. Operating income of $189.7 decreased 12%, or $25.1, primarily due to lower volumes and an unfavorable impact from currency of $9, partially offset by higher pricing, net of power and fuel costs, of $4. Operating margin of 28.0% decreased 160 bp from 29.6% in the prior year due to these factors as well as higher costs for labor inflation.Corporate and OtherSix Months Ended31 MarchChange vs. Prior Year20242023$%/bpSales$1,093.9 $1,171.9 ($78.0)(7 %)Operating loss(84.5)(405.3)320.8 (79 %)Adjusted EBITDA(39.0)(380.5)341.5 (90 The market has reacted to these announcements by moving the company's shares -1.1% to a price of $235.47. If you want to know more, read the company's complete 10-Q report here.