Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

First Quarter 2023 in Summary			31
First Quarter 2023 Results of Operations			33
Reconciliations of Non-GAAP Financial Measures			38
Liquidity and Capital Resources			43
Pension Benefits			47
Critical Accounting Policies and Estimates			48

As used in the discussion that follows, unless the context indicates otherwise, the terms “we,” “our,” “us,” the “Company,” "Air Products," or “registrant” include controlled subsidiaries and affiliates of Air Products. This discussion should be read in conjunction with the interim consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Unless otherwise stated, financial information is presented in millions of U.S. Dollars, except for per share data. Except for net income, which includes the results of discontinued operations, when applicable, financial information is presented on a continuing operations basis.

Comparisons of our results of operations and liquidity and capital resources are for the first quarter of fiscal year 2023 versus ("vs.") the first quarter of fiscal year 2022. The disclosures provided in this Quarterly Report on Form 10-Q are complementary to those made in our Annual Report on Form 10-K for the fiscal year ended 30 September 2022 (the "2022 Form 10-K"), which was filed with the SEC on 22 November 2022.

The financial measures discussed below are presented in accordance with U.S. generally accepted accounting principles ("GAAP"), except as noted. We present certain financial measures on an "adjusted" or "non-GAAP" basis because we believe such measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance. For each non-GAAP financial measure, including adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, adjusted effective tax rate, and capital expenditures, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These reconciliations and explanations regarding the use of non-GAAP measures are presented under the “Reconciliations of Non-GAAP Financial Measures” section beginning on page 38.

For information concerning activity with our related parties, refer to Note 16, Supplemental Information, to the consolidated financial statements.

About Air Products

Air Products and Chemicals, Inc., a Delaware corporation originally founded in 1940, has built a reputation for its innovative culture, operational excellence, and commitment to safety and the environment. Our passionate, talented, and committed employees are from diverse backgrounds, but are driven by our higher purpose to create innovative solutions that benefit the environment, enhance sustainability, and address the challenges facing customers, communities, and the world. As of 30 September 2022, we had approximately 21,900 employees, of which over 90% were working full-time and 75% were located outside the United States. For information on our product, service, and solution offerings, refer to our 2022 Form 10-K.

We manage our operations, assess performance, and report earnings under five reportable segments: Americas, Asia, Europe, Middle East and India, and Corporate and other. This Management’s Discussion and Analysis discusses our results based on these operations.

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FIRST QUARTER 2023 VS. FIRST QUARTER 2022

FIRST QUARTER 2023 IN SUMMARY

• Sales of $3,174.7 increased 6%, or $180.5, due to higher pricing of 7%, higher energy cost pass-through to customers of 3%, and higher volumes of 2%, partially offset by an unfavorable impact from currency of 6% due to the strengthening of the U.S. Dollar.

• Operating income of $652.0 increased 25%, or $129.0, as our pricing actions and higher volumes overcame the unfavorable impact from currency and higher costs. Operating margin of 20.5% increased 300 basis points ("bp"), primarily due to higher pricing, partially offset by unfavorable costs.

• Equity affiliates' income of $110.0 decreased 26%, or $37.8, primarily due to a prior year benefit associated with the sale of air separation units by the Jazan Gas Project Company joint venture.

• Net income of $583.8 increased 6%, or $34.2, primarily due to higher pricing and volumes, partially offset by unfavorable currency, lower equity affiliates' income, and higher costs. Net income margin of 18.4% was flat versus the prior year.

• Adjusted EBITDA of $1,083.5 increased 8%, or $80.4, and adjusted EBITDA margin of 34.1% increased 60 bp.

• Diluted EPS of $2.57 increased 2%, or $0.05 per share, and adjusted diluted EPS of $2.64 increased 6%, or $0.16 per share. A summary table of changes in diluted EPS is presented below.

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Changes in Diluted EPS Attributable to Air Products

The per share impacts presented in the tables below were calculated independently and may not sum to the total change in diluted EPS due to rounding.

			Three Months Ended
			31 December						Increase
			2022			2021			(Decrease)
Diluted EPS			$2.57			$2.52			$0.05
Operating Impacts
Underlying business
Volume									$0.03
Price, net of variable costs									0.71
Other costs									(0.11)
Currency									(0.15)
Total operating impacts									$0.48
Other Impacts
Equity affiliates' income									($0.14)
Interest expense									(0.04)
Other non-operating income/expense, net, excluding discrete item below									0.03
Non-service pension benefit/cost, net									(0.11)
Change in effective tax rate									(0.07)
Noncontrolling interests									(0.10)
Total other impacts									($0.43)
Total change in diluted EPS									$0.05
% Change from prior year									2		%

Upon completion of the first phase of the Jazan gasification and power project in the first quarter of fiscal year 2022, we recognized a net benefit from the recognition of previously deferred profits, net of other project finalization costs, related to the Jazan Gas Project Company joint venture within "Equity affiliates' income." Our non-controlling partner's share of the project finalization costs favorably impacted EPS within "Noncontrolling interests." Diluted earnings per share for the first quarter of fiscal year 2022 reflects a total net benefit from this event of approximately $0.20 per share.

The table below summarizes the diluted per share impact of our non-GAAP adjustments for the first quarter of fiscal years 2023 and 2022:

			Three Months Ended
			31 December						Increase
			2022			2021			(Decrease)
Diluted EPS			$2.57			$2.52			$0.05
Non-service pension (benefit) cost, net			0.07			(0.04)			0.11
Adjusted Diluted EPS			$2.64			$2.48			$0.16

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FIRST QUARTER 2023 RESULTS OF OPERATIONS

Discussion of Consolidated Results

						Three Months Ended
						31 December												Changes
						2022						2021						$						%/bp
GAAP Measures
Sales						$3,174.7						$2,994.2						$180.5						6		%
Operating income						652.0						523.0						129.0						25		%
Operating margin						20.5		%				17.5		%										300		bp
Equity affiliates’ income						$110.0						$147.8						($37.8)						(26		%)
Net income						583.8						549.6						34.2						6		%
Net income margin						18.4		%				18.4		%										—		bp
Non-GAAP Measures
Adjusted EBITDA						$1,083.5						$1,003.1						$80.4						8		%
Adjusted EBITDA margin						34.1		%				33.5		%										60		bp

Sales

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

Volume			2		%
Price			7		%
Energy cost pass-through to customers			3		%
Currency			(6		%)
Total consolidated sales change			6		%

Sales of $3,174.7 increased 6%, or $180.5, due to positive pricing of 7%, higher energy cost pass-through to customers of 3%, and higher volumes of 2%, partially offset by an unfavorable currency impact of 6%. The pricing improvement was primarily attributable to our merchant businesses in the Americas and Europe segments. Higher contractual energy cost pass-through to our on-site customers was driven by our Europe segment, which continues to be impacted by historically heightened energy costs throughout the region. The volume improvement was primarily driven by higher demand for merchant products as well as our on-site business, partially offset by lower sale of equipment project activity. Currency was unfavorable as the U.S. Dollar strengthened against most major currencies.

Cost of Sales and Gross Margin

Cost of sales of $2,272.3 increased 2%, or $48.7, due to higher energy cost pass-through to customers of $75, higher costs associated with sales volumes of $55, and unfavorable other costs of $56, partially offset by favorable currency impacts of $137. The unfavorable other cost impact was driven by power for our merchant business, inflation, and higher planned maintenance. Gross margin of 28.4% increased 270 bp from 25.7% in the prior year, primarily due to the positive impact of our pricing actions, partially offset by the unfavorable costs.

Selling and Administrative Expense

Selling and administrative expense of $234.4 increased 1%, or $1.6, primarily due to inflation and increased headcount to support our growth strategy, partially offset by a favorable currency impact from the strengthening of the U.S. Dollar. Selling and administrative expense as a percentage of sales decreased to 7.4% from 7.8% in the prior year.

Research and Development Expense

Research and development expense of $24.4 increased 5%, or $1.1. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.

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Other Income (Expense), Net

Other income of $8.4 decreased 1%, or $0.1.

Operating Income and Operating Margin

Operating income of $652.0 increased 25%, or $129.0, as positive pricing, net of power and fuel costs, of $191 and higher volumes of $8 were partially offset by an unfavorable currency impact of $40 and higher costs of $30. Costs were higher primarily due to labor inflation and higher planned maintenance.

Operating margin of 20.5% increased 300 bp from 17.5% in the prior year, primarily due to higher pricing, partially offset by unfavorable costs.

Equity Affiliates' Income

Equity affiliates' income of $110.0 decreased 26%, or $37.8, primarily due to the prior year recognition of the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs, as well as a lower contribution from our Mexico affiliate. These impacts were partially offset by contributions from the Jazan Integrated Gasification and Power Company ("JIGPC") joint venture, which began contributing to our results in the Middle East and India segment in late October 2021. We expect the contribution from JIGPC to grow in future periods as a result of the second phase of the asset purchase associated with the Jazan gasification and power project, which was completed in January 2023. We expect final commissioning items to be completed later this calendar year.

Interest Expense

												Three Months Ended
												31 December
												2022			2021
Interest incurred												$56.3			$41.0
Less: Capitalized interest												15.1			10.5
Interest expense												$41.2			$30.5

Interest incurred increased 37%, or $15.3, driven by a higher average interest rate on variable-rate instruments in our debt portfolio. Capitalized interest increased 44%, or $4.6, due to a higher carrying value of projects under construction.

Other Non-Operating Income (Expense), Net

Other non-operating expense was $0.6 versus income of $22.6 in the prior year. The decrease of $23.2 was primarily attributable to higher non-service pension costs, which were driven by higher interest cost and lower expected returns on plan assets for the U.S. salaried pension plan and the U.K. pension plan. This impact was partially offset by higher interest income on cash and cash items due to higher interest rates.

Net Income and Net Income Margin

Net income of $583.8 increased 6%, or $34.2, primarily due to higher pricing, net of power and fuel costs, and higher volumes, partially offset by unfavorable currency, lower equity affiliates' income, and higher costs driven by inflation, higher planned maintenance, and higher non-service pension costs. Additionally, the effective tax rate was higher in fiscal year 2023 as further discussed below. Net income margin of 18.4% was flat.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,083.5 increased 8%, or $80.4, primarily due to higher pricing, net of power and fuel costs, and higher volumes, partially offset by unfavorable currency, lower equity affiliates' income, and higher costs driven by inflation and higher planned maintenance. Adjusted EBITDA margin of 34.1% increased 60 bp from 33.5% in the prior year.

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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 18.9% and 17.1% for the three months ended 31 December 2022 and 2021, respectively. Our effective tax rate for the first quarter of fiscal year 2023 was higher primarily due to lower excess tax benefits on share-based compensation.

Many of our share-based compensation grants vest in December. Accordingly, the tax benefits from these awards typically have a larger impact on our first quarter effective tax rate compared to other periods.

Our adjusted effective tax rate was 19.1% and 17.0% for the three months ended 31 December 2022 and 2021, respectively.

Discussion of Results by Business Segment

Americas

						Three Months Ended
						31 December												Changes
						2022						2021						$						%/bp
Sales						$1,384.2						$1,224.1						$160.1						13		%
Operating income						343.0						267.2						75.8						28		%
Operating margin						24.8		%				21.8		%										300 bp
Equity affiliates’ income						$16.4						$34.2						($17.8)						(52		%)
Adjusted EBITDA						515.4						456.7						58.7						13		%
Adjusted EBITDA margin						37.2		%				37.3		%										(10) bp

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

Volume			6		%
Price			9		%
Energy cost pass-through to customers			(1		%)
Currency			(1		%)
Total Americas sales change			13		%

Sales of $1,384.2 increased 13%, or $160.1, due to higher pricing of 9% and higher volumes of 6%, partially offset by lower energy cost pass-through to customers of 1% and an unfavorable currency impact of 1%. We successfully recovered higher energy costs in our merchant business through continued focus on pricing actions. The volume improvement was driven by better merchant demand as well as our on-site business.

Operating income of $343.0 increased 28%, or $75.8, primarily from positive pricing, net of power and fuel costs, of $92 and favorable volumes of $13, partially offset by higher costs of $26. Higher costs were driven by higher planned maintenance and inflation. Operating margin of 24.8% increased 300 bp from 21.8% in the prior year primary due to the pricing improvement, which was partially offset by the impact of higher costs.

Equity affiliates’ income of $16.4 decreased 52%, or $17.8, driven by our Mexico affiliate.

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Asia

						Three Months Ended
						31 December												Changes
						2022						2021						$						%/bp
Sales						$777.8						$780.4						($2.6)						—		%
Operating income						235.9						221.1						14.8						7		%
Operating margin						30.3		%				28.3		%										200 bp
Equity affiliates’ income						$7.4						$6.6						$0.8						12		%
Adjusted EBITDA						345.2						338.5						6.7						2		%
Adjusted EBITDA margin						44.4		%				43.4		%										100 bp

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

Volume			7		%
Price			1		%
Energy cost pass-through to customers			2		%
Currency			(10		%)
Total Asia sales change			—		%

Sales of $777.8 were flat versus the prior year as higher volumes of 7%, higher energy cost pass-through to customers of 2%, and positive pricing of 1% were offset by an unfavorable impact from currency of 10%. Volumes improved overall despite COVID-19 impacts in certain parts of China. The results of our on-site business include positive volume contributions from several traditional industrial gas plants that were brought onstream across the region. The unfavorable currency impact was primarily attributable to the strengthening of the U.S. Dollar against the Chinese Renminbi and the South Korean Won.

Operating income of $235.9 increased 7%, or $14.8, due to higher volumes of $24, positive pricing, net of power and fuel costs, of $9, and lower costs of $5, partially offset by an unfavorable currency impact of $23. Operating margin of 30.3% increased 200 bp from 28.3% in the prior year due to the volume improvement and positive pricing.

Equity affiliates’ income of $7.4 increased 12%, or $0.8.

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Europe

						Three Months Ended
						31 December												Changes
						2022						2021						$						%/bp
Sales						$791.9						$744.2						$47.7						6		%
Operating income						145.8						99.2						46.6						47		%
Operating margin						18.4		%				13.3		%										510		bp
Equity affiliates’ income						$17.7						$13.9						$3.8						27		%
Adjusted EBITDA						207.8						162.9						44.9						28		%
Adjusted EBITDA margin						26.2		%				21.9		%										430		bp

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

Volume			(6		%)
Price			14		%
Energy cost pass-through to customers			9		%
Currency			(11		%)
Total Europe sales change			6		%

Sales of $791.9 increased 6%, or $47.7, due to higher pricing of 14% and higher energy cost pass-through to customers of 9%, partially offset by an unfavorable impact from currency of 11% and lower volumes of 6%. Price improved due to continued focus on recovering higher energy costs in our merchant business. Higher energy costs driven by natural gas prices in our on-site business were contractually passed through to customers. The volume decline was primarily attributable to lower demand for hydrogen and merchant products. Additionally, sales in this region were negatively impacted by the strengthening of the U.S. Dollar against the Euro and the British Pound Sterling.

Operating income of $145.8 increased 47%, or $46.6, as higher pricing, net of power and fuel costs, of $89 was partially offset by lower volumes of $23, an unfavorable currency impact of $12, and higher costs of $7. Operating margin of 18.4% increased 510 bp from 13.3% in the prior year primarily due to the pricing improvement, partially offset by the impact of lower volumes and higher costs.

Equity affiliates’ income of $17.7 increased 27%, or $3.8, driven by an affiliate in Italy.

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Middle East and India

						Three Months Ended
						31 December												Changes
						2022						2021						$						%
Sales						$41.4						$23.7						$17.7						75		%
Operating income						6.7						4.8						1.9						40		%
Equity affiliates' income						64.1						92.3						(28.2)						(31		%)
Adjusted EBITDA						77.4						103.2						(25.8)						(25		%)

Sales of $41.4 increased 75%, or $17.7, and operating income of $6.7 increased 40%, or $1.9, primarily driven by a small acquisition completed in January 2022. The positive profit impact from the acquisition was partially offset by higher costs for planned maintenance activities. Despite higher equity affiliates' income attributable to the JIGPC joint venture, which contributed for the full quarter in fiscal year 2023, equity affiliates' income of $64.1 decreased 31%, or $28.2, due to a net benefit recognized in fiscal year 2022 for the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs. We expect the contribution from JIGPC to grow in future periods as a result of the second phase of the asset purchase associated with the Jazan gasification and power project, which was completed in January 2023. We expect final commissioning items to be completed later this calendar year.

Corporate and other

						Three Months Ended
						31 December												Changes
						2022						2021						$						%
Sales						$179.4						$221.8						($42.4)						(19		%)
Operating loss						(79.4)						(69.3)						(10.1)						(15		%)
Adjusted EBITDA						(62.3)						(58.2)						(4.1)						(7		%)

Sales of $179.4 decreased 19%, or $42.4, and operating loss of $79.4 increased 15%, or $10.1, primarily due to lower project activity in our sale of equipment business. Our Corporate and other segment also incurs costs to provide corporate support functions and global management activities that benefit all segments, which have increased due to efforts to support our growth strategy.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

(Millions of U.S. Dollars unless otherwise indicated, except for per share data)

We present certain financial measures, other than in accordance with U.S. generally accepted accounting principles ("GAAP"), on an "adjusted" or "non-GAAP" basis. On a consolidated basis, these measures include adjusted diluted earnings per share ("EPS"), adjusted EBITDA, adjusted EBITDA margin, the adjusted effective tax rate, and capital expenditures. On a segment basis, these measures include adjusted EBITDA and adjusted EBITDA margin. In addition to these measures, we also present certain supplemental non-GAAP financial measures to help the reader understand the impact that certain disclosed items, or "non-GAAP adjustments," have on the calculation of our adjusted diluted EPS. For each non-GAAP financial measure, we present a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP.

In many cases, non-GAAP financial measures are determined by adjusting the most directly comparable GAAP measure to exclude non-GAAP adjustments that we believe are not representative of our underlying business performance. For example, we exclude the impact of the non-service components of net periodic benefit/cost for our defined benefit pension plans as further discussed below. Additionally, we have previously excluded certain expenses associated with cost reduction actions, impairment charges, and gains on disclosed transactions. The reader should be aware that we may recognize similar losses or gains in the future.

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When applicable, the tax impact of our pre-tax non-GAAP adjustments reflects the expected current and deferred income tax impact of our non-GAAP adjustments. These tax impacts are primarily driven by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions.

We provide these non-GAAP financial measures to allow investors, potential investors, securities analysts, and others to evaluate the performance of our business in the same manner as our management. We believe these measures, when viewed together with financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. However, we caution readers not to consider these measures in isolation or as a substitute for the most directly comparable measures calculated in accordance with GAAP. Readers should also consider the limitations associated with these non-GAAP financial measures, including the potential lack of comparability of these measures from one company to another.

NON-GAAP ADJUSTMENTS

Non-Service Pension (Benefit)/Cost, Net

Effective beginning in the first quarter of fiscal year 2023, our adjusted EPS and the adjusted effective tax rate exclude the impact of non-service related components of net periodic benefit/cost for our defined benefit pension plans. The prior year non-GAAP financial measures presented below have been recast accordingly to conform to the fiscal year 2023 presentation. Non-service related components are recurring, non-operating items that include interest cost, expected returns on plan assets, prior service cost amortization, actuarial loss amortization, as well as special termination benefits, curtailments, and settlements. The net impact of non-service related components is reflected within “Other non-operating income (expense), net” on our consolidated income statements. Adjusting for the impact of non-service pension components provides management and users of our financial statements with a more accurate representation of our underlying business performance because these components are driven by factors that are unrelated to our operations, such as recent changes to the allocation of our pension plan assets associated with de-risking as well as volatility in equity and debt markets. Further, non-service related components are not indicative of our defined benefit plans’ future contribution needs due to the funded status of the plans.

ADJUSTED DILUTED EPS

The table below provides a reconciliation to the most directly comparable GAAP measure for each of the major components used to calculate adjusted diluted EPS from continuing operations, which we view as a key performance metric. In periods that we have non-GAAP adjustments, we believe it is important for the reader to understand the per share impact of each such adjustment because management does not consider these impacts when evaluating underlying business performance. Per share impacts are calculated independently and may not sum to total diluted EPS and total adjusted diluted EPS due to rounding.

			Three Months Ended 31 December
Q1 2023 vs. Q1 2022			Operating Income						Equity Affiliates' Income			Other Non-Operating Income/Expense, net			Income Tax Provision			Net Income Attributable to Air Products			Diluted EPS
2023 GAAP			$652.0						$110.0			($0.6)			$136.4			$572.2			$2.57
2022 GAAP			523.0						147.8			22.6			113.3			560.4			2.52
$ Change GAAP																					$0.05
% Change GAAP																					2		%
2023 GAAP			$652.0						$110.0			($0.6)			$136.4			$572.2			$2.57
Non-service pension (benefit) cost, net			—						—			19.5			4.9			14.6			0.07
2023 Non-GAAP ("Adjusted")			$652.0						$110.0			$18.9			$141.3			$586.8			$2.64
2022 GAAP			$523.0						$147.8			$22.6			$113.3			$560.4			$2.52
Non-service pension (benefit) cost, net			—						—			(12.0)			(2.9)			(9.1)			(0.04)
2022 Non-GAAP ("Adjusted")			$523.0						$147.8			$10.6			$110.4			$551.3			$2.48
$ Change Non-GAAP																					$0.16
% Change Non-GAAP																					6		%

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ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN

We define adjusted EBITDA as net income less income from discontinued operations, net of tax, and excluding non-GAAP adjustments, which we do not believe to be indicative of underlying business trends, before interest expense, other non-operating income (expense), net, income tax provision, and depreciation and amortization expense. Adjusted EBITDA and adjusted EBITDA margin provide useful metrics for management to assess operating performance. Margins are calculated independently for each period by dividing each line item by consolidated sales for the respective period and may not sum to total margin due to rounding.

The table below presents consolidated sales and a reconciliation of net income on a GAAP basis to adjusted EBITDA and net income margin on a GAAP basis to adjusted EBITDA margin:

			Three Months Ended
			31 December
			2022									2021
			$			Margin						$			Margin
Sales			$3,174.7									$2,994.2
Net income and net income margin			$583.8			18.4		%				$549.6			18.4		%
Add: Interest expense			41.2			1.3		%				30.5			1.0		%
Less: Other non-operating income (expense), net			(0.6)			—		%				22.6			0.8		%
Add: Income tax provision			136.4			4.3		%				113.3			3.8		%
Add: Depreciation and amortization			321.5			10.1		%				332.3			11.1		%
Adjusted EBITDA and adjusted EBITDA margin			$1,083.5			34.1		%				$1,003.1			33.5		%
Change GAAP
Net income $ change			$34.2
Net income % change			6%
Net income margin change			— bp
Change Non-GAAP
Adjusted EBITDA $ change			$80.4
Adjusted EBITDA % change			8%
Adjusted EBITDA margin change			60 bp

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The tables below present sales and a reconciliation of operating income and operating margin by segment to adjusted EBITDA and adjusted EBITDA margin for the three months ended 31 December 2022 and 2021:

Americas

			Three Months Ended 31 December									Changes vs. Prior Year
			2022			2021						$			%/bp
Sales			$1,384.2			$1,224.1						$160.1			13		%
Operating income			$343.0			$267.2						$75.8			28		%
Operating margin			24.8		%	21.8		%							300 bp
Reconciliation of GAAP to Non-GAAP:
Operating income			$343.0			$267.2
Add: Depreciation and amortization			156.0			155.3
Add: Equity affiliates' income			16.4			34.2
Adjusted EBITDA			$515.4			$456.7						$58.7			13		%
Adjusted EBITDA margin			37.2		%	37.3		%							(10) bp

Asia

			Three Months Ended 31 December									Changes vs. Prior Year
			2022			2021						$			%/bp
Sales			$777.8			$780.4						($2.6)			—		%
Operating income			$235.9			$221.1						$14.8			7		%
Operating margin			30.3		%	28.3		%							200 bp
Reconciliation of GAAP to Non-GAAP:
Operating income			$235.9			$221.1
Add: Depreciation and amortization			101.9			110.8
Add: Equity affiliates' income			7.4			6.6
Adjusted EBITDA			$345.2			$338.5						$6.7			2		%
Adjusted EBITDA margin			44.4		%	43.4		%							100 bp

Europe

			Three Months Ended 31 December									Changes vs. Prior Year
			2022			2021						$			%/bp
Sales			$791.9			$744.2						$47.7			6		%
Operating income			$145.8			$99.2						$46.6			47		%
Operating margin			18.4		%	13.3		%							510		bp
Reconciliation of GAAP to Non-GAAP:
Operating income			$145.8			$99.2
Add: Depreciation and amortization			44.3			49.8
Add: Equity affiliates' income			17.7			13.9
Adjusted EBITDA			$207.8			$162.9						$44.9			28		%
Adjusted EBITDA margin			26.2		%	21.9		%							430		bp

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Middle East and India

			Three Months Ended 31 December									Changes vs. Prior Year
			2022			2021						$			%/bp
Sales			$41.4			$23.7						$17.7			75		%
Operating income			$6.7			$4.8						$1.9			40		%
Reconciliation of GAAP to Non-GAAP:
Operating income			$6.7			$4.8
Add: Depreciation and amortization			6.6			6.1
Add: Equity affiliates' income			64.1			92.3
Adjusted EBITDA			$77.4			$103.2						($25.8)			(25		%)

Corporate and other

			Three Months Ended 31 December									Changes vs. Prior Year
			2022			2021						$			%/bp
Sales			$179.4			$221.8						($42.4)			(19		%)
Operating loss			($79.4)			($69.3)						($10.1)			(15		%)
Reconciliation of GAAP to Non-GAAP:
Operating loss			($79.4)			($69.3)
Add: Depreciation and amortization			12.7			10.3
Add: Equity affiliates' income			4.4			0.8
Adjusted EBITDA			($62.3)			($58.2)						($4.1)			(7		%)

ADJUSTED EFFECTIVE TAX RATE

The effective tax rate equals the income tax provision divided by income before taxes. We calculate our adjusted effective tax rate by adjusting the numerator and denominator to exclude the tax and before tax impacts of our non-GAAP adjustments, respectively. The table below presents a reconciliation of the GAAP effective tax rate to our adjusted effective tax rate:

			Three Months Ended 31 December
			2022			2021
Income tax provision			$136.4			$113.3
Income before taxes			720.2			662.9
Effective tax rate			18.9		%	17.1		%
Income tax provision			$136.4			$113.3
Non-service pension tax impact			4.9			(2.9)
Adjusted income tax provision			$141.3			$110.4
Income before taxes			$720.2			$662.9
Non-service pension (benefit) cost, net			19.5			(12.0)
Adjusted income before taxes			$739.7			$650.9
Adjusted effective tax rate			19.1		%	17.0		%

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CAPITAL EXPENDITURES

We define capital expenditures as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:

						Three Months Ended
						31 December
						2022			2021
Cash used for investing activities						$256.2			$1,719.1
Proceeds from sale of assets and investments						4.0			1.1
Purchases of investments						(19.2)			(727.4)
Proceeds from investments						591.5			1,331.9
Other investing activities						1.7			6.4
Capital expenditures						$834.2			$2,331.1

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance and cash flows from operations are our primary sources of liquidity and are generally sufficient to meet our liquidity needs. In addition, we have the flexibility to access capital through a variety of financing activities, including accessing the capital markets, drawing upon our credit facility, or alternatively, accessing the commercial paper markets. At this time, we have not utilized, nor do we expect to access, our credit facility for additional liquidity.

As of 31 December 2022, we had $1,516.3 of foreign cash and cash items compared to total cash and cash items of $3,131.0. We do not expect that a significant portion of the earnings of our foreign subsidiaries and affiliates will be subject to U.S. income tax upon repatriation to the U.S. Depending on the country in which the subsidiaries and affiliates reside, the repatriation of these earnings may be subject to foreign withholding and other taxes. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items that would be subject to additional taxes outside the U.S.

Cash Flows From Operations

Three Months Ended 31 December			2022			2021
Net income attributable to Air Products			$572.2			$560.4
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization			321.5			332.3
Deferred income taxes			13.8			15.7
Distributed (Undistributed) earnings of equity method investments			17.2			(117.3)
Gain on sale of assets and investments			(2.3)			(0.8)
Share-based compensation			16.1			15.8
Noncurrent lease receivables			19.4			21.8
Other adjustments			99.0			(49.4)
Changes in working capital accounts			(337.6)			6.7
Cash Provided by Operating Activities			$719.3			$785.2

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For the first three months of fiscal year 2023, cash provided by operating activities was $719.3. Distributed earnings of equity method investments reflect distributions in excess of earnings for the period of $17.2. Other adjustments of $99.0 primarily included adjustments for noncash currency impacts of intercompany balances. The working capital accounts were a use of cash of $337.6, primarily driven by $257.6 from payables and accrued liabilities and $102.8 from inventory. The use of cash within payables and accrued liabilities primarily resulted from the decrease in value of derivatives that hedge intercompany loans, payments for incentive compensation under the fiscal year 2022 plan and a reduction of liabilities associated with the purchase of natural gas.

For the first three months of fiscal year 2022, cash provided by operating activities was $785.2. The working capital accounts were a source of cash of $6.7, primarily driven by a source of cash of $167.6 from payables and accrued liabilities, partially offset by a use of cash of $132.7 from trade receivables, less allowances. The source of cash within payables and accrued liabilities primarily resulted from customer advances for sale of equipment projects and higher natural gas costs, which also drove the use of cash within trade receivables as we contractually passed through these higher costs to customers.

Cash Flows From Investing Activities

Three Months Ended 31 December			2022			2021
Additions to plant and equipment, including long-term deposits			($834.2)			($663.8)
Acquisitions, less cash acquired			—			(34.6)
Investment in and advances to unconsolidated affiliates			—			(1,632.7)
Proceeds from sale of assets and investments			4.0			1.1
Purchases of investments			(19.2)			(727.4)
Proceeds from investments			591.5			1,331.9
Other investing activities			1.7			6.4
Cash Used for Investing Activities			($256.2)			($1,719.1)

For the first three months of fiscal year 2023, cash used for investing activities was $256.2. Capital expenditures for additions to plant and equipment, including long-term deposits, were $834.2. Proceeds from investments of $591.5 resulted from maturities of time deposits and treasury securities with terms greater than three months but less than one year and exceeded purchases of investments of $19.2.

For the first three months of fiscal year 2022, cash used for investing activities was $1,719.1. Capital expenditures primarily included $1,632.7 for investment in and advances to unconsolidated affiliates, as further discussed below. Proceeds from investments of $1,331.9 resulted from maturities of time deposits and treasury securities with terms greater than three months but less than one year and exceeded purchases of investments of $727.4.

Capital Expenditures

Capital expenditures is a non-GAAP financial measure that we define as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), and investment in and advances to unconsolidated affiliates. The components of our capital expenditures are detailed in the table below. We also present a reconciliation of our capital expenditures to cash used for investing activities on page 43.

						Three Months Ended
						31 December
						2022			2021
Additions to plant and equipment, including long-term deposits						$834.2			$663.8
Acquisitions, less cash acquired						—			34.6
Investment in and advances to unconsolidated affiliates						—			1,632.7
Capital Expenditures(A)						$834.2			$2,331.1

(A)Includes contributions from noncontrolling partners in consolidated subsidiaries, including investments associated with the Jazan gasification and power project as discussed below.

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Capital expenditures for the first three months of fiscal year 2023 totaled $834.2 compared to $2,331.1 for the first three months of fiscal year 2022. The prior year included our initial investment of $1.6 billion in the JIGPC joint venture in the first quarter of fiscal year 2022. This investment included approximately $130 from the noncontrolling partner of Air Products Qudra. Refer to Note 5, Equity Affiliates, to the consolidated financial statements for additional information.

Subsequent Event

On 19 January 2023, we made an additional investment of $908 toward the second phase of the Jazan gasification and power project. This investment included $73 received from the noncontrolling partner of Air Products Qudra. We expect to complete a remaining investment of approximately $115, including approximately $9 from the non-controlling partner of Air Products Qudra, later this calendar year.

Outlook for Investing Activities

It is not possible, without unreasonable efforts, to reconcile our forecasted capital expenditures to future cash used for investing activities because we are unable to identify the timing or occurrence of our future investment activity, which is driven by our assessment of competing opportunities at the time we enter into transactions. These decisions, either individually or in the aggregate, could have a significant effect on our cash used for investing activities.

We expect capital expenditures for fiscal year 2023 to be approximately $5 to $5.5 billion.

Cash Flows From Financing Activities

Three Months Ended 31 December			2022			2021
Long-term debt proceeds			$476.3			$51.6
Payments on long-term debt			(195.9)			(400.0)
Net (decrease) increase in commercial paper and short-term borrowings			(4.1)			113.1
Dividends paid to shareholders			(359.4)			(332.1)
Proceeds from stock option exercises			14.0			13.3
Other financing activities			(16.5)			(31.0)
Cash Used for Financing Activities			($85.6)			($585.1)

For the first three months of fiscal year 2023, cash used for financing activities was $85.6. The use of cash was primarily driven by dividend payments to shareholders of $359.4 and payments on long-term debt of $195.9 partially offset by long-term debt proceeds of $476.3. Refer to the Credit Facilities section below and Note 9, Debt, to the consolidated financial statements for additional information.

For the first three months of fiscal year 2022, cash used for financing activities was $585.1. The use of cash was primarily driven by payments on long-term debt of $400.0 for the repayment of a 3.0% Senior Note and dividend payments to shareholders of $332.1. These uses of cash were partially offset by short-term borrowings and long-term debt proceeds of $113.1 and $51.6, respectively.

Financing and Capital Structure

Debt

Capital needs in the first three months of fiscal year 2023 were satisfied with our cash balance, cash from operations and long-term borrowings. Total debt increased from $7,644.8 as of 30 September 2022 to $8,057.8 as of 31 December 2022. Total debt includes related party debt of $791.5 and $781.0 as of 31 December 2022 and 30 September 2022, respectively.

Various debt agreements to which we are a party include financial covenants and other restrictions, including restrictions pertaining to the ability to create property liens and enter into certain sale and leaseback transactions. As of 31 December 2022, we are in compliance with all of the financial and other covenants under our debt agreements.

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Credit Facilities

We have a five-year $2,750 revolving credit agreement maturing 31 March 2026 with a syndicate of banks (the “2021 Credit Agreement”), under which senior unsecured debt is available to us and certain of our subsidiaries. The 2021 Credit Agreement provides a source of liquidity and supports our commercial paper program. The only financial covenant in the 2021 Credit Agreement is a maximum ratio of total debt to total capitalization (equal to total debt plus total equity) not to exceed 70%. Total debt as of 31 December 2022 and 30 September 2022, expressed as a percentage of total capitalization, was 35.7% and 35.8%, respectively. No borrowings were outstanding under the 2021 Credit Agreement as of 31 December 2022.

We also have credit facilities available to certain of our foreign subsidiaries totaling $1,319.5, of which $751.9 was borrowed and outstanding as of 31 December 2022. The amount borrowed and outstanding as of 30 September 2022 was $457.5. The increase from 30 September 2022 was driven by borrowings on a new variable-rate Saudi Riyal loan facility that matures in October 2026. The interest rate on the facility is based on the Saudi Arabian Interbank Offered Rate ("SAIBOR") plus an annual margin of 1.35%. We entered into this facility in October 2022 and utilized a portion of the proceeds to repay a variable-rate 4.10% Saudi Riyal Loan Facility of $195.6, which was presented within long-term debt on our consolidated balance sheet as of 30 September 2022.

Equity Securities

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. We did not purchase any of our outstanding shares in the first three months of fiscal years 2023 or 2022. As of 31 December 2022, $485.3 in share repurchase authorization remained.

Dividends

The Board of Directors determines whether to declare cash dividends on our common stock and the timing and amount based on financial condition and other factors it deems relevant. Dividends are paid quarterly, usually during the sixth week after the close of the fiscal quarter. We expect to continue to pay cash dividends in the future at comparable or increased levels.

On 22 November 2022, the Board of Directors declared a quarterly dividend of $1.62 per share that is payable on 13 February 2023 to shareholders of record at the close of business on 3 January 2023.

On 26 January 2023, the Board of Directors declared a quarterly dividend of $1.75 per share, representing an 8% increase, or $0.13 per share, from the prior quarterly dividend of $1.62 per share. The dividend is payable on 8 May 2023 to shareholders of record at the close of business on 3 April 2023. This is the 41st consecutive year that we have increased our quarterly dividend.

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PENSION BENEFITS

We and certain of our subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of our worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005, after which defined contribution plans were offered to new employees. The shift to defined contribution plans is expected to continue to reduce volatility of both plan expense and contributions. For additional information, refer to Note 10, Retirement Benefits, to the consolidated financial statements.

Net Periodic Cost/Benefit

The table below summarizes the components of net periodic cost/benefit for our U.S. and international defined benefit pension plans:

			Three Months Ended
			31 December
			2022			2021
Service cost			$6.0			$10.2
Non-service related cost (benefit)			19.5			(12.0)
Other			0.3			0.8
Net periodic cost (benefit)			$25.8			($1.0)

Net periodic cost was $25.8 for the first quarter of fiscal year 2023 versus a benefit of $1.0 in the prior year. The increased costs from the prior year were primarily attributable to higher non-service costs, which were driven by higher interest cost and lower expected returns on plan assets due to a smaller beginning balance of plan assets. Fiscal year 2023 non-service items also include a $1.9 curtailment gain for the write-off of prior service credits in an amended international defined benefit pension plan. Non-service related components of net periodic cost/benefit are reflected within "Other non-operating income (expense), net" on our consolidated income statements.

Service costs result from benefits earned by active employees and are reflected as operating expenses primarily within "Cost of sales" and "Selling and administrative expense" on our consolidated income statements. The amount of service costs capitalized in the first quarter of fiscal years 2023 and 2022 was not material.

Company Contributions

Management considers various factors when making pension funding decisions, including tax, cash flow, and regulatory implications. For the three months ended 31 December 2022 and 2021, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were $8.0 and $9.1, respectively.

Funding Outlook

Total contributions for fiscal year 2023 are expected to be approximately $25 to $35. During fiscal year 2022, total contributions were $44.7.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of our financial condition and results of operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates reflect our best judgment about current and/or future economic and market conditions and their effect based on information available as of the date of our consolidated financial statements. If conditions change, actual results may differ materially from these estimates.

Judgments and estimates of uncertainties are required to apply our accounting policies in many areas. However, application of policies that management has identified as critical places significant importance on management’s judgment, often as the result of the need to make estimates about the effects of matters that are inherently uncertain. A description of our major accounting policies, including those that we consider to be the most critical to understanding our financial statements, is included in our 2022 Form 10-K. There have been no changes to our accounting policies or estimates during the first three months of fiscal year 2023 that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.