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

119K characters. Original on sec.gov · Markdown

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


Second Quarter 2023 in Summary			36
Second Quarter 2023 Results of Operations			38
First Six Months 2023 in Summary			43
First Six Months 2023 Results of Operations			45
Reconciliations of Non-GAAP Financial Measures			50
Liquidity and Capital Resources			57
Pension Benefits			60
Critical Accounting Policies and Estimates			61

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 second quarter and first six months of fiscal year 2023 versus ("vs.") the second quarter and first six months of fiscal year 2022, respectively. 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 50.

For information concerning activity with our related parties, refer to Note 18, 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 and together 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.

SECOND QUARTER 2023 VS. SECOND QUARTER 2022

SECOND QUARTER 2023 IN SUMMARY

Sales of $3,200.1 increased 9%, or $255.0, as higher pricing of 8% and higher volumes of 6% were partially offset by an unfavorable impact from currency of 4% and lower energy cost pass-through to customers of 1%.
Operating income of $459.8 decreased 18%, or $102.1, as our pricing actions and higher volumes were more than offset by a charge for business and asset actions related to our withdrawal from projects in Indonesia and Ukraine of $185.6, higher other costs, and unfavorable currency. Operating margin of 14.4% decreased 470 basis points ("bp") as the unfavorable costs were only partially offset by the impact of our pricing actions.
Equity affiliates' income of $165.9 increased 37%, or $45.1, primarily due to a higher contribution from the Jazan Integrated Gasification and Power Company ("JIGPC") joint venture, which completed the second phase of the Jazan gasification and power project in January 2023.
Net income of $449.9 decreased 16%, or $86.9, primarily due to the charge for business and asset actions and higher other costs, partially offset by the impact of our pricing actions and higher volumes as well as higher equity affiliates' income from JIGPC. Net income margin of 14.1% decreased 410 bp.
Adjusted EBITDA of $1,150.9 increased 13%, or $132.3, and adjusted EBITDA margin of 36.0% increased 140 bp.
Diluted EPS of $1.97 decreased 17%, or $0.41 per share, and included a $0.69 unfavorable impact from business and asset actions as well as an unfavorable $0.08 impact from non-service related pension costs. Adjusted diluted EPS of $2.74 increased 17%, or $0.40 per share. A summary table of changes in diluted EPS is presented below.
In 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. This is the 41st consecutive year that we have increased our quarterly dividend.

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 March		Increase
	2023	2022	(Decrease)
Diluted EPS	$1.97	$2.38	($0.41)



Operating Impacts
Underlying business
Volume			$0.12
Price, net of variable costs			0.72
Other costs			(0.44)

Currency			(0.09)



Business and asset actions			(0.69)


Total operating impacts			($0.38)

Other Impacts
Equity affiliates' income			$0.16

Interest expense			(0.03)
Other non-operating income/expense, net, excluding discrete item below			0.04
Non-service pension cost/benefit, net			(0.12)
Change in effective tax rate			(0.04)







Noncontrolling interests			(0.04)

Total other impacts			($0.03)


Total change in diluted EPS			($0.41)
% Change from prior year			(17	%)

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


	Three Months Ended
	31 March		Increase
	2023	2022	(Decrease)
Diluted EPS	$1.97	$2.38	($0.41)





Business and asset actions	0.69	—	0.69




Non-service pension cost (benefit), net	0.08	(0.04)	0.12





Adjusted Diluted EPS	$2.74	$2.34	$0.40
% Change from prior year			17	%

SECOND QUARTER 2023 RESULTS OF OPERATIONS

Discussion of Second Quarter Consolidated Results


	Three Months Ended
	31 March				Changes
	2023		2022		$	%/bp
GAAP Measures
Sales	$3,200.1		$2,945.1		$255.0	9	%
Operating income	459.8		561.9		(102.1)	(18	%)
Operating margin	14.4	%	19.1	%		(470)	bp
Equity affiliates’ income	$165.9		$120.8		$45.1	37	%
Net income	449.9		536.8		(86.9)	(16	%)
Net income margin	14.1	%	18.2	%		(410)	bp
Non-GAAP Measures
Adjusted EBITDA	$1,150.9		$1,018.6		$132.3	13	%
Adjusted EBITDA margin	36.0	%	34.6	%		140	bp

Sales

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



Volume	6	%
Price	8	%

Energy cost pass-through to customers	(1	%)
Currency	(4	%)

Total consolidated sales change	9	%

Sales of $3,200.1 increased 9%, or $255.0, due to higher pricing of 8% and higher volumes of 6%, partially offset by an unfavorable impact from currency of 4% and lower energy cost pass-through to customers of 1%. Pricing improved across each of our regional segments. The volume improvement was primarily attributable to our on-site businesses. Currency was unfavorable as the U.S. Dollar strengthened against most major currencies.

Cost of Sales and Gross Margin

Cost of sales of $2,282.8 increased 6%, or $131.2, due to higher costs associated with sales volumes of $149 and unfavorable costs of $102 driven by inflation, higher planned maintenance, power for our merchant business, and project development, partially offset by a favorable impact from currency of $85 and lower energy cost pass-through to customers of $35. Gross margin of 28.7% increased 180 bp from 26.9% 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 $251.2 increased 11%, or $24.2, primarily due to higher incentive compensation, additional costs to support growth, and inflation, partially offset by a favorable currency impact. Selling and administrative expense as a percentage of sales increased to 7.8% from 7.7% in the prior year.

Research and Development Expense

Research and development expense of $27.2 increased 15%, or $3.5. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.

Business and Asset Actions

During the second quarter of fiscal year 2023, we recognized a noncash charge of $185.6 ($153.7 attributable to Air Products after tax, or $0.69 per share) to write off assets that were previously under construction in our Asia and Europe segments. The charge is reflected within “Business and asset actions” on our consolidated income statements and was not recorded in segment results. Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information.

Other Income (Expense), Net

Other income of $6.5 decreased 66%, or $12.6, primarily due to lower income from the sale of assets and an unfavorable foreign exchange impact.

Operating Income and Operating Margin

Operating income of $459.8 decreased 18%, or $102.1, as a charge of $186 to write off assets previously under construction in our Asia and Europe segments, higher other costs of $120, and an unfavorable currency impact of $26 were partially offset by positive pricing, net of power and fuel costs, of $197 and higher volumes of $33. Higher costs were driven by inflation, incentive compensation, and planned maintenance as well as project development and other costs related to the execution of our growth strategy. Operating margin of 14.4% decreased 470 bp from 19.1% in the prior year, as the unfavorable costs were only partially offset by the impact of our pricing actions.

Equity Affiliates' Income

Equity affiliates' income of $165.9 increased 37%, or $45.1, primarily due to a higher contribution from the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023, as well as higher income from affiliates in Mexico and Italy.

Interest Expense


	Three Months Ended
	31 March
	2023	2022
Interest incurred	$64.1	$40.4
Less: Capitalized interest	23.2	8.1
Interest expense	$40.9	$32.3

Interest incurred increased 59%, or $23.7, driven by a higher average interest rate on variable-rate instruments in our debt portfolio. Capitalized interest increased $15.1 due to a higher carrying value of projects under construction.

We expect interest expense to be higher in future periods due to U.S. Dollar- and Euro-denominated fixed-rate notes issued in March 2023 under our new Green Finance Framework.

Other Non-Operating Income (Expense), Net

Other non-operating expense was $13.9 versus income of $9.1 in the prior year. The decrease of $23.0 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 $449.9 decreased 16%, or $86.9, primarily due to higher costs, including a charge for business and asset actions as well as higher non-service pension costs, partially offset by higher pricing, net of power and fuel costs, and higher volumes as well as higher equity affiliates' income driven by JIGPC. Net income margin of 14.1% decreased 410 bp from 18.2% in the prior year.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,150.9 increased 13%, or $132.3, primarily due to higher pricing, net of power and fuel costs, and higher volumes as well as higher equity affiliates' income driven by JIGPC, partially offset by higher costs. Adjusted EBITDA margin of 36.0% increased 140 bp from 34.6% 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 21.2% and 18.6% for the three months ended 31 March 2023 and 2022, respectively.

During the second quarter of fiscal year 2023, 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, to the consolidated financial statements for additional information. The charge included certain losses for which we could not recognize an income tax benefit and were subject to a valuation allowance of $31.7. 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 current quarter effective tax rate was higher primarily due to the discrete tax impact of our business and asset actions. In addition, certain recurring income tax benefits had a lower impact on our effective tax rate in the current year as they did not increase in proportion to the increase to our annual forecast of income before taxes, which includes higher equity affiliates' income, the expiration of an income tax incentive, and earning a greater share of income in jurisdictions with higher tax rates in fiscal year 2023.

Our adjusted effective tax rate, which does not include the impact of our business and asset actions discussed above, was 19.7% and 18.5% for the three months ended 31 March 2023 and 2022, respectively.

Discussion of Second Quarter Results by Business Segment

Americas


	Three Months Ended
	31 March				Changes
	2023		2022		$	%/bp
Sales	$1,373.1		$1,186.6		$186.5	16	%
Operating income	324.2		275.5		48.7	18	%
Operating margin	23.6	%	23.2	%		40 bp
Equity affiliates’ income	$28.1		$20.1		$8.0	40	%
Adjusted EBITDA	514.0		449.3		64.7	14	%
Adjusted EBITDA margin	37.4	%	37.9	%		(50) bp

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



Volume	9	%
Price	8	%
Energy cost pass-through to customers	—	%
Currency	(1	%)
Total Americas sales change	16	%

Sales of $1,373.1 increased 16%, or $186.5, due to higher volumes of 9% and higher pricing of 8%, partially offset by an unfavorable currency impact of 1%. The volume improvement was primarily attributable to our on-site business due to better demand for hydrogen. Additionally, we successfully recovered higher costs in our merchant business through continued focus on pricing actions. Energy cost pass-through to customers was flat versus the prior year.

Operating income of $324.2 increased 18%, or $48.7, primarily from positive pricing, net of power and fuel costs, of $85 and favorable volumes of $15, partially offset by higher costs of $50. Higher costs were driven by higher incentive compensation, inflation, planned maintenance, and distribution and sourcing costs. Operating margin of 23.6% increased 40 bp from 23.2% in the prior year primarily due to the pricing improvement, which was partially offset by the impact of higher costs.

Equity affiliates’ income of $28.1 increased 40%, or $8.0, driven by our Mexico affiliate.

Asia


	Three Months Ended
	31 March				Changes
	2023		2022		$	%/bp
Sales	$813.9		$751.2		$62.7	8	%
Operating income	233.0		203.6		29.4	14	%
Operating margin	28.6	%	27.1	%		150 bp
Equity affiliates’ income	$7.3		$6.2		$1.1	18	%
Adjusted EBITDA	350.3		321.6		28.7	9	%
Adjusted EBITDA margin	43.0	%	42.8	%		20 bp

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



Volume	7	%
Price	5	%

Energy cost pass-through to customers	3	%
Currency	(7	%)
Total Asia sales change	8	%

Sales of $813.9 increased 8%, or $62.7, due to higher volumes of 7%, higher pricing of 5%, and higher energy cost pass-through to customers of 3%, partially offset by an unfavorable impact from currency of 7%. The volume improvement was primarily driven by our on-site business, including new plants brought onstream. Higher power costs across the region were recovered by our merchant pricing actions. In our on-site business, the higher power costs increased contractual energy cost pass-through to our customers. 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 $233.0 increased 14%, or $29.4, due to positive pricing, net of power and fuel costs, of $31 and higher volumes of $30, partially offset by higher costs of $17 driven by project development, higher planned maintenance, and inflation as well as an unfavorable currency impact of $15. Operating margin of 28.6% increased 150 bp from 27.1% in the prior year due to positive pricing and the volume improvement, partially offset by higher costs.

Equity affiliates’ income of $7.3 increased 18%, or $1.1.

Europe


	Three Months Ended
	31 March				Changes
	2023		2022		$	%/bp
Sales	$752.9		$738.6		$14.3	2	%
Operating income	173.2		116.4		56.8	49	%
Operating margin	23.0	%	15.8	%		720 bp
Equity affiliates’ income	$29.5		$23.3		$6.2	27	%
Adjusted EBITDA	251.0		190.0		61.0	32	%
Adjusted EBITDA margin	33.3	%	25.7	%		760 bp

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



Volume	3	%
Price	11	%

Energy cost pass-through to customers	(6	%)
Currency	(6	%)

Total Europe sales change	2	%

Sales of $752.9 increased 2%, or $14.3, due to higher pricing of 11% and higher volumes of 3%, partially offset by lower energy cost pass-through to customers of 6% and an unfavorable impact from currency of 6%. We successfully recovered higher costs in our merchant business through continued focus on pricing actions. The volume improvement was primarily attributable to our on-site business due to recovery in hydrogen. Energy cost pass-through to our on-site customers was lower, reflecting lower natural gas prices across the region. Additionally, currency negatively impacted sales due to the strengthening of the U.S. Dollar against the Euro and the British Pound Sterling.

Operating income of $173.2 increased 49%, or $56.8, as higher pricing, net of power and fuel costs, of $78 and higher volumes of $5 were partially offset by higher costs of $19 driven by inflation and higher planned maintenance as well as an unfavorable currency impact of $7. Operating margin of 23.0% increased 720 bp from 15.8% in the prior year primarily due to the pricing improvement, partially offset by the impact of higher costs.

Equity affiliates’ income of $29.5 increased 27%, or $6.2, driven by an affiliate in Italy.

Middle East and India


	Three Months Ended
	31 March		Changes
	2023	2022	$	%
Sales	$44.8	$28.9	$15.9	55	%
Operating income	1.3	4.8	(3.5)	(73	%)
Equity affiliates' income	98.9	71.1	27.8	39	%
Adjusted EBITDA	106.8	82.8	24.0	29	%

Sales of $44.8 increased 55%, or $15.9, due to higher merchant volumes. Despite higher sales, operating income of $1.3 decreased 73%, or $3.5, primarily due to higher costs for planned maintenance. Equity affiliates' income of $98.9 increased 39%, or $27.8, due to a higher contribution from the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023.

Corporate and other


	Three Months Ended
	31 March		Changes
	2023	2022	$	%
Sales	$215.4	$239.8	($24.4)	(10	%)
Operating loss	(86.3)	(38.4)	(47.9)	(125	%)
Adjusted EBITDA	(71.2)	(25.1)	(46.1)	(184	%)

Sales of $215.4 decreased 10%, or $24.4, and operating loss of $86.3 increased 125%, or $47.9, 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 in support of our growth strategy.

FIRST SIX MONTHS 2023 VS. FIRST SIX MONTHS 2022

FIRST SIX MONTHS 2023 IN SUMMARY

Sales of $6,374.8 increased 7%, or $435.5, as higher pricing of 7%, higher volumes of 4%, and higher energy cost pass-through to customers of 1% were partially offset by an unfavorable impact from currency of 5%.
Operating income of $1,111.8 increased 2%, or $26.9, as our pricing actions and higher volumes were partially offset by a charge for business and asset actions related to our withdrawal from projects in Indonesia and Ukraine of $185.6, higher other costs, and unfavorable currency. Operating margin of 17.4% decreased 90 bp as the unfavorable costs were only partially offset by the impact of our pricing actions.
Equity affiliates' income of $275.9 increased 3%, or $7.3, as a higher contribution from the JIGPC joint venture, which completed the second phase of the Jazan gasification and power project in January 2023, was largely offset by a prior year benefit associated with the sale of air separation units by the Jazan Gas Project Company joint venture.
Net income of $1,033.7 decreased 5%, or $52.7, primarily due to the charge for business and asset actions and higher other costs, partially offset by the impact of our pricing actions and higher volumes. Net income margin of 16.2% decreased 210 bp.
Adjusted EBITDA of $2,234.4 increased 11%, or $212.7, and adjusted EBITDA margin of 35.1% increased 110 bp.
Diluted EPS of $4.54 decreased 7%, or $0.36 per share, and included a $0.69 unfavorable impact from business and asset actions as well as an unfavorable $0.14 impact from non-service related pension costs. Adjusted diluted EPS of $5.38 increased 12%, or $0.56 per share. A summary table of changes in diluted EPS is presented below.
In 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. This is the 41st consecutive year that we have increased our quarterly dividend.

Changes in Diluted EPS Attributable to Air Products

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


	Six Months Ended
	31 March		Increase
	2023	2022	(Decrease)

Diluted EPS	$4.54	$4.90	($0.36)


Operating Impacts
Underlying business
Volume			$0.15
Price, net of variable costs			1.44
Other costs			(0.56)
Currency			(0.24)
Business and asset actions			(0.69)





Total operating impacts			$0.10
Other Impacts
Equity affiliates' income			0.03
Interest expense			(0.07)


Other non-operating income/expense, net, excluding discrete item below			0.07
Non-service pension cost/benefit, net			(0.22)
Change in effective tax rate			(0.12)







Noncontrolling interests			(0.14)

Total other impacts			($0.45)


Total change in diluted EPS			($0.36)
% Change from prior year			(7	%)

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 noncontrolling partner's share of the project finalization costs favorably impacted EPS within "Noncontrolling interests." Diluted earnings per share for the first six months 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 six months of fiscal years 2023 and 2022:


	Six Months Ended
	31 March		Increase
	2023	2022	(Decrease)
Diluted EPS	$4.54	$4.90	($0.36)




Business and asset actions	0.69	—	0.69




Non-service pension cost (benefit), net	0.14	(0.08)	0.22






Adjusted Diluted EPS	$5.38	$4.82	$0.56
% Change from prior year			12	%

FIRST SIX MONTHS 2023 RESULTS OF OPERATIONS

Discussion of First Six Months Consolidated Results


	Six Months Ended
	31 March				Changes
	2023		2022		$	%/bp
GAAP Measures
Sales	$6,374.8		$5,939.3		$435.5	7	%
Operating income	1,111.8		1,084.9		26.9	2	%
Operating margin	17.4	%	18.3	%		(90)	bp
Equity affiliates’ income	$275.9		$268.6		$7.3	3	%
Net income	1,033.7		1,086.4		(52.7)	(5	%)
Net income margin	16.2	%	18.3	%		(210)	bp
Non-GAAP Measures
Adjusted EBITDA	$2,234.4		$2,021.7		$212.7	11	%
Adjusted EBITDA margin	35.1	%	34.0	%		110 bp

Sales

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


Sales % Change from Prior Year
Volume	4	%
Price	7	%
Energy cost pass-through to customers	1	%
Currency	(5	%)

Total Consolidated Sales Change	7	%

Sales of $6,374.8 increased 7%, or $435.5, due to higher pricing of 7%, higher volumes of 4%, and higher energy cost pass-through to customers of 1%, partially offset by an unfavorable impact from currency of 5%. The pricing improvement was primarily attributable to our merchant businesses in the Americas and Europe segments. Higher volumes were driven by our on-site business and better demand for merchant products, 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 $4,555.1 increased 4%, or $179.9, due to higher costs associated with sales volumes of $203, unfavorable costs of $159 driven by inflation, higher planned maintenance, and power for our merchant business, as well as higher energy cost pass-through to customers of $40, partially offset by a favorable impact from currency of $222. Gross margin of 28.5% increased 220 bp from 26.3% 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 $485.6 increased 6%, or $25.8, primarily due to higher incentive compensation, additional costs to support growth, and inflation, partially offset by a favorable currency impact. Selling and administrative expense as a percentage of sales decreased to 7.6% from 7.7% in the prior year.

Research and Development Expense

Research and development expense of $51.6 increased 10%, or $4.6. Research and development expense as a percentage of sales of 0.8% was flat versus the prior year.

Business and Asset Actions

Other Income (Expense), Net

Other income of $14.9 decreased 46%, or $12.7, primarily due to lower income from the sale of assets and an unfavorable foreign exchange impact.

Operating Income and Operating Margin

Operating income of $1,111.8 increased 2%, or $26.9, as positive pricing, net of power and fuel costs, of $388 and higher volumes of $41 were partially offset by a charge of $186 to write off assets previously under construction in our Asia and Europe segments, higher other costs of $150, and an unfavorable currency impact of $66. Higher other costs were driven by inflation, planned maintenance, and incentive compensation, as well as project development and other costs related to the execution of our growth strategy. Despite higher operating income, operating margin of 17.4% decreased 90 bp from 18.3% in the prior year, as the unfavorable costs were only partially offset by the impact of our pricing actions.

Equity Affiliates' Income

Equity affiliates' income of $275.9 increased 3%, or $7.3. A higher contribution from the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project in January 2023, was mostly offset by 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. Additionally, higher income from our affiliate in Italy was mostly offset by lower income from our affiliate in Mexico.

Interest Expense


	Six Months Ended
	31 March
	2023	2022
Interest incurred	$120.4	$81.4
Less: Capitalized interest	38.3	18.6
Interest expense	$82.1	$62.8

Interest incurred increased 48%, or $39.0, driven by a higher average interest rate on variable-rate instruments in our debt portfolio. Capitalized interest increased $19.7 due to a higher carrying value of projects under construction.

We expect interest expense to be higher in future periods due to U.S. Dollar- and Euro-denominated fixed-rate notes issued in March 2023 under our new Green Finance Framework.

Other Non-Operating Income (Expense), net

Other non-operating expense was $14.5 versus income of $31.7 in the prior year. The decrease of $46.2 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 $1,033.7 decreased 5%, or $52.7, primarily due to higher costs, including a charge for business and asset actions as well as higher non-service pension costs, partially offset by higher pricing, net of power and fuel costs, and higher volumes. Net income margin of 16.2% decreased 210 bp from 18.3% in the prior year.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $2,234.4 increased 11%, or $212.7, primarily due to higher pricing, net of power and fuel costs, and higher volumes, partially offset by higher costs. Adjusted EBITDA margin of 35.1% increased 110 bp from 34.0% in the prior year.

Effective Tax Rate

Our effective tax rate was 19.9% and 17.8% for the six months ended 31 March 2023 and 2022, respectively.

Our effective tax rate for the current year was higher primarily due to lower excess tax benefits on share-based compensation and the discrete tax impact of our business and asset actions. In addition, certain recurring income tax benefits had a lower impact on our effective tax rate in the current year as they did not increase in proportion to the increase to our annual forecast of income before taxes, which includes higher equity affiliates' income, the expiration of an income tax incentive, and earning a greater share of income in jurisdictions with higher tax rates in fiscal year 2023.

Our adjusted effective tax rate, which does not include the impact of our business and asset actions discussed above, was 19.4% and 17.7% for the six months ended 31 March 2023 and 2022, respectively.

Discussion of First Six Months Results by Business Segment

Americas


	Six Months Ended
	31 March				Changes
	2023		2022		$	%/bp
Sales	$2,757.3		$2,410.7		$346.6	14	%
Operating income	667.2		542.7		124.5	23	%
Operating margin	24.2	%	22.5	%		170 bp
Equity affiliates’ income	$44.5		$54.3		($9.8)	(18	%)
Adjusted EBITDA	1,029.4		906.0		123.4	14	%
Adjusted EBITDA margin	37.3	%	37.6	%		(30) bp

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



Volume	7	%
Price	9	%
Energy cost pass-through to customers	(1	%)
Currency	(1	%)
Total Americas sales change	14	%

Sales of $2,757.3 increased 14%, or $346.6, due to higher pricing of 9% and higher volumes of 7%, partially offset by lower energy cost pass-through to customers of 1% and an unfavorable currency impact of 1%. We successfully recovered higher costs in our merchant business through continued focus on pricing actions. Additionally, volumes improved primarily due to our on-site business.

Operating income of $667.2 increased 23%, or $124.5, due to positive pricing, net of power and fuel costs, of $177 and favorable volumes of $29, partially offset by higher costs of $75 and an unfavorable currency impact of $6. Higher costs were driven by higher incentive compensation, inflation, planned maintenance, and distribution and sourcing costs. Operating margin of 24.2% increased 170 bp from 22.5% in the prior year, primarily due to the pricing improvement, which was partially offset by the impact of higher costs.

Equity affiliates’ income of $44.5 decreased 18%, or $9.8, driven by our Mexico affiliate.

Asia


	Six Months Ended
	31 March				Changes
	2023		2022		$	%/bp
Sales	$1,591.7		$1,531.6		$60.1	4	%
Operating income	468.9		424.7		44.2	10	%
Operating margin	29.5	%	27.7	%		180 bp
Equity affiliates’ income	$14.7		$12.8		$1.9	15	%
Adjusted EBITDA	695.5		660.1		35.4	5	%
Adjusted EBITDA margin	43.7	%	43.1	%		60 bp

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



Volume	7	%
Price	3	%
Energy cost pass-through to customers	3	%
Currency	(9	%)
Total Asia sales change	4	%

Sales of $1,591.7 increased 4%, or $60.1, due to higher volumes of 7%, higher pricing of 3%, and higher energy cost pass-through to customers of 3%, partially offset by an unfavorable currency impact of 9%. Higher volumes driven by our on-site business, including several traditional industrial gas plants that were brought onstream across the region, were partially offset by COVID-19 impacts in certain parts of China. Higher power costs across the region were recovered by our merchant pricing actions. In our on-site business, the higher power costs increased contractual energy cost pass-through to our customers. 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 $468.9 increased 10%, or $44.2, due to higher volumes of $54 and positive pricing, net of power and fuel costs, of $40, partially offset by an unfavorable currency impact of $38 and higher costs of $12 driven by project development, higher planned maintenance, and inflation. Operating margin of 29.5% increased 180 bp from 27.7% in the prior year due to positive pricing and the volume improvement, partially offset by higher costs.

Equity affiliates’ income of $14.7 increased 15%, or $1.9.

Europe


	Six Months Ended
	31 March				Changes
	2023		2022		$	%/bp
Sales	$1,544.8		$1,482.8		$62.0	4	%
Operating income	319.0		215.6		103.4	48	%
Operating margin	20.6	%	14.5	%		610 bp
Equity affiliates’ income	$47.2		$37.2		$10.0	27	%
Adjusted EBITDA	458.8		352.9		105.9	30	%
Adjusted EBITDA margin	29.7	%	23.8	%		590 bp

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



Volume	(1	%)
Price	12	%
Energy cost pass-through to customers	2	%
Currency	(9	%)

Total Europe sales change	4	%

Sales of $1,544.8 increased 4%, or $62.0, due to higher pricing of 12% and higher energy cost pass-through to customers of 2%, partially offset by an unfavorable impact from currency of 9% and lower volumes of 1%. We successfully recovered higher costs in our merchant business through continued focus on pricing actions. Despite a decline in natural gas prices during the second quarter, energy costs remained elevated versus the prior year, which increased energy cost pass-through to our on-site customers. Currency negatively impacted sales due to the strengthening of the U.S. Dollar against the Euro and the British Pound Sterling. Additionally, volumes declined slightly due to lower demand for hydrogen and merchant products in the first quarter.

Operating income of $319.0 increased 48%, or $103.4, as higher pricing, net of power and fuel costs, of $167 was partially offset by higher costs of $26 driven by inflation and planned maintenance, an unfavorable currency impact of $19, and lower volumes of $19. Operating margin of 20.6% increased 610 bp from 14.5% in the prior year primarily due to the pricing improvement, partially offset by the impact of higher costs and lower volumes.

Equity affiliates’ income of $47.2 increased 27%, or $10.0, driven by an affiliate in Italy.

Middle East and India


	Six Months Ended
	31 March		Changes
	2023	2022	$	%
Sales	$86.2	$52.6	$33.6	64	%
Operating income	8.0	9.6	(1.6)	(17	%)
Equity affiliates' income	163.0	163.4	(0.4)	—	%
Adjusted EBITDA	184.2	186.0	(1.8)	(1	%)

Sales of $86.2 increased 64%, or $33.6, driven by higher merchant volumes, including contributions from a small acquisition completed in January 2022. Despite higher sales, operating income of $8.0 decreased 17%, or $1.6, primarily due to higher costs for planned maintenance.

In January 2023, we made an additional investment in the JIGPC joint venture, which completed the second phase of the asset purchase associated with the Jazan gasification and power project. Despite a higher contribution from JIGPC, equity affiliates' income of $163.0 decreased $0.4 primarily due to a prior year net benefit recognized for the remaining deferred profit associated with air separation units previously sold to Jazan Gas Project Company, net of other project finalization costs.

Corporate and other


	Six Months Ended
	31 March		Changes
	2023	2022	$	%
Sales	$394.8	$461.6	($66.8)	(14	%)
Operating loss	(165.7)	(107.7)	(58.0)	(54	%)
Adjusted EBITDA	(133.5)	(83.3)	(50.2)	(60	%)

Sales of $394.8 decreased 14%, or $66.8, and operating loss of $165.7 increased 54%, or $58.0, 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 in support of 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 may exclude 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.

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 ADJUSTMENT FOR NON-SERVICE PENSION COST (BENEFIT), 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 March
Q2 2023 vs. Q2 2022	Operating Income	Equity Affiliates' Income	Other Non-Operating Income/Expense, Net	Income Tax Provision	Net Income Attributable to Air Products	Diluted EPS
Q2 2023 GAAP	$459.8	$165.9	($13.9)	$121.0	$439.8	$1.97
Q2 2022 GAAP	561.9	120.8	9.1	122.7	530.5	2.38
$ Change GAAP						($0.41)
% Change GAAP						(17	%)

Q2 2023 GAAP	$459.8	$165.9	($13.9)	$121.0	$439.8	$1.97

Business and asset actions(A)	185.6	—	—	26.9	153.7	0.69












Non-service pension cost, net	—	—	22.9	5.7	17.2	0.08







Q2 2023 Non-GAAP ("Adjusted")	$645.4	$165.9	$9.0	$153.6	$610.7	$2.74

Q2 2022 GAAP	$561.9	$120.8	$9.1	$122.7	$530.5	$2.38













Non-service pension benefit, net	—	—	(11.9)	(2.9)	(9.0)	(0.04)







Q2 2022 Non-GAAP ("Adjusted")	$561.9	$120.8	($2.8)	$119.8	$521.5	$2.34
$ Change Non-GAAP ("Adjusted")						$0.40
% Change Non-GAAP ("Adjusted")						17	%

(A ) Charge includes $5.0 attributable to noncontrolling interests.



	Six Months Ended 31 March
2023 vs. 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	$1,111.8	$275.9	($14.5)	$257.4	$1,012.0	$4.54
2022 GAAP	1,084.9	268.6	31.7	236.0	1,090.9	4.90
$ Change GAAP						($0.36)
% Change GAAP						(7	%)

2023 GAAP	$1,111.8	$275.9	($14.5)	$257.4	$1,012.0	$4.54
Business and asset actions(A)	185.6	—	—	26.9	153.7	0.69
Non-service pension cost, net	—	—	42.4	10.6	31.8	0.14


















2023 Non-GAAP ("Adjusted")	$1,297.4	$275.9	$27.9	$294.9	$1,197.5	$5.38

2022 GAAP	$1,084.9	$268.6	$31.7	$236.0	$1,090.9	$4.90


















Non-service pension benefit, net	—	—	(23.9)	(5.8)	(18.1)	(0.08)
2022 Non-GAAP ("Adjusted")	$1,084.9	$268.6	$7.8	$230.2	$1,072.8	$4.82
$ Change Non-GAAP ("Adjusted")						$0.56
% Change Non-GAAP ("Adjusted")						12	%

(A ) Charge includes $5.0 attributable to noncontrolling interests.

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 tables below present 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 March						Six Months Ended 31 March
	2023			2022			2023			2022
	$	Margin		$	Margin		$	Margin		$	Margin
Sales	$3,200.1			$2,945.1			$6,374.8			$5,939.3

Net income and net income margin	$449.9	14.1	%	$536.8	18.2	%	$1,033.7	16.2	%	$1,086.4	18.3	%

Add: Interest expense	40.9	1.3	%	32.3	1.1	%	82.1	1.3	%	62.8	1.1	%
Less: Other non-operating income (expense), net	(13.9)	(0.4	%)	9.1	0.3	%	(14.5)	(0.2	%)	31.7	0.5	%
Add: Income tax provision	121.0	3.8	%	122.7	4.2	%	257.4	4.0	%	236.0	4.0	%
Add: Depreciation and amortization	339.6	10.6	%	335.9	11.4	%	661.1	10.4	%	668.2	11.3	%
Add: Business and asset actions	185.6	5.8	%	—	—	%	185.6	2.9	%	—	—	%









Adjusted EBITDA and adjusted EBITDA margin	$1,150.9	36.0	%	$1,018.6	34.6	%	$2,234.4	35.1	%	$2,021.7	34.0	%


Change GAAP
Net income $ change	($86.9)						($52.7)
Net income % change	(16%)						(5%)
Net income margin change	(410) bp						(210) bp
Change Non-GAAP
Adjusted EBITDA $ change	$132.3						$212.7
Adjusted EBITDA % change	13%						11%
Adjusted EBITDA margin change	140 bp						110 bp

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 and six months ended 31 March 2023 and 2022:

Americas


	Three Months Ended							Six Months Ended
	31 March				Changes vs. Prior Year			31 March				Changes vs. Prior Year
	2023		2022		$	%/bp		2023		2022		$	%/bp
Sales	$1,373.1		$1,186.6		$186.5	16	%	$2,757.3		$2,410.7		$346.6	14	%

Operating income	$324.2		$275.5		$48.7	18	%	$667.2		$542.7		$124.5	23	%
Operating margin	23.6	%	23.2	%		40 bp		24.2	%	22.5	%		170 bp

Reconciliation of GAAP to Non-GAAP:
Operating income	$324.2		$275.5					$667.2		$542.7
Add: Depreciation and amortization	161.7		153.7					317.7		309.0
Add: Equity affiliates' income	28.1		20.1					44.5		54.3
Adjusted EBITDA	$514.0		$449.3		$64.7	14	%	$1,029.4		$906.0		$123.4	14	%
Adjusted EBITDA margin	37.4	%	37.9	%		(50) bp		37.3	%	37.6	%		(30) bp

Asia


	Three Months Ended							Six Months Ended
	31 March				Changes vs. Prior Year			31 March				Changes vs. Prior Year
	2023		2022		$	%/bp		2023		2022		$	%/bp
Sales	$813.9		$751.2		$62.7	8	%	$1,591.7		$1,531.6		$60.1	4	%

Operating income	$233.0		$203.6		$29.4	14	%	$468.9		$424.7		$44.2	10	%
Operating margin	28.6	%	27.1	%		150 bp		29.5	%	27.7	%		180 bp

Reconciliation of GAAP to Non-GAAP:
Operating income	$233.0		$203.6					$468.9		$424.7
Add: Depreciation and amortization	110.0		111.8					211.9		222.6
Add: Equity affiliates' income	7.3		6.2					14.7		12.8
Adjusted EBITDA	$350.3		$321.6		$28.7	9	%	$695.5		$660.1		$35.4	5	%
Adjusted EBITDA margin	43.0	%	42.8	%		20 bp		43.7	%	43.1	%		60 bp

Europe


	Three Months Ended							Six Months Ended
	31 March				Changes vs. Prior Year			31 March				Changes vs. Prior Year
	2023		2022		$	%/bp		2023		2022		$	%/bp
Sales	$752.9		$738.6		$14.3	2	%	$1,544.8		$1,482.8		$62.0	4	%

Operating income	$173.2		$116.4		$56.8	49	%	$319.0		$215.6		$103.4	48	%
Operating margin	23.0	%	15.8	%		720	bp	20.6	%	14.5	%		610 bp

Reconciliation of GAAP to Non-GAAP:
Operating income	$173.2		$116.4					$319.0		$215.6
Add: Depreciation and amortization	48.3		50.3					92.6		100.1
Add: Equity affiliates' income	29.5		23.3					47.2		37.2
Adjusted EBITDA	$251.0		$190.0		$61.0	32	%	$458.8		$352.9		$105.9	30	%
Adjusted EBITDA margin	33.3	%	25.7	%		760	bp	29.7	%	23.8	%		590 bp

Middle East and India


	Three Months Ended					Six Months Ended
	31 March		Changes vs. Prior Year			31 March		Changes vs. Prior Year
	2023	2022	$	%/bp		2023	2022	$	%/bp
Sales	$44.8	$28.9	$15.9	55	%	$86.2	$52.6	$33.6	64	%

Operating income	$1.3	$4.8	($3.5)	(73	%)	$8.0	$9.6	($1.6)	(17	%)

Reconciliation of GAAP to Non-GAAP:
Operating income	$1.3	$4.8				$8.0	$9.6
Add: Depreciation and amortization	6.6	6.9				13.2	13.0
Add: Equity affiliates' income	98.9	71.1				163.0	163.4
Adjusted EBITDA	$106.8	$82.8	$24.0	29	%	$184.2	$186.0	($1.8)	(1	%)

Corporate and other


	Three Months Ended					Six Months Ended
	31 March		Changes vs. Prior Year			31 March		Changes vs. Prior Year
	2023	2022	$	%/bp		2023	2022	$	%/bp
Sales	$215.4	$239.8	($24.4)	(10	%)	$394.8	$461.6	($66.8)	(14	%)

Operating loss	($86.3)	($38.4)	($47.9)	(125	%)	($165.7)	($107.7)	($58.0)	(54	%)

Reconciliation of GAAP to Non-GAAP:
Operating loss	($86.3)	($38.4)				($165.7)	($107.7)
Add: Depreciation and amortization	13.0	13.2				25.7	23.5
Add: Equity affiliates' income	2.1	0.1				6.5	0.9
Adjusted EBITDA	($71.2)	($25.1)	($46.1)	(184	%)	($133.5)	($83.3)	($50.2)	(60	%)

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 March				Six Months Ended 31 March
	2023		2022		2023		2022
Income tax provision	$121.0		$122.7		$257.4		$236.0
Income before taxes	570.9		659.5		1,291.1		1,322.4
Effective tax rate	21.2	%	18.6	%	19.9	%	17.8	%


Income tax provision	$121.0		$122.7		$257.4		$236.0


Business and asset actions	26.9		—		26.9		—
Non-service pension tax impact	5.7		(2.9)		10.6		(5.8)
















Adjusted income tax provision	$153.6		$119.8		$294.9		$230.2

Income before taxes	$570.9		$659.5		$1,291.1		$1,322.4

Business and asset actions	185.6		—		185.6		—
Non-service pension (benefit) cost, net	22.9		(11.9)		42.4		(23.9)











Adjusted income before taxes	$779.4		$647.6		$1,519.1		$1,298.5
Adjusted effective tax rate	19.7	%	18.5	%	19.4	%	17.7	%

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 on our consolidated statement of cash flows. Beginning in the second quarter of fiscal year 2023, we also adjust capital expenditures to exclude NEOM Green Hydrogen Company (“NGHC”) spending reflected in “Additions to plant and equipment, including long-term deposits” that is ultimately funded through our partners' equity contributions to NGHC as well as non-recourse project financing incurred by NGHC. We believe adjusting for NGHC expenditures not funded by Air Products' equity to arrive at capital expenditures provides users of our financial statements with a better understanding of the investment on which we expect to make a return.

A reconciliation of cash used for investing activities to our reported capital expenditures is provided below:



	Six Months Ended
	31 March
	2023	2022
Cash used for investing activities	$2,476.0	$2,635.8
Proceeds from sale of assets and investments	7.2	25.3
Purchases of investments	(290.5)	(909.4)
Proceeds from investments	611.6	1,391.4
Other investing activities	(51.2)	6.5
NGHC expenditures not funded by Air Products' equity	(335.3)	—
Capital expenditures	$2,417.8	$3,149.6

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. During the second quarter of fiscal year 2023, we issued U.S. Dollar- and Euro-denominated fixed-rate notes with aggregate principal amounts of $600 and €700 million, respectively, under our new Green Finance Framework. We intend to use the net proceeds to finance or refinance, in whole or in part, existing or future projects that are expected to have environmental benefits, including those related to pollution prevention and control, renewable energy generation and procurement, and sustainable aviation fuel. At this time, we have not utilized, nor do we expect to access, our credit facility for additional liquidity.

As of 31 March 2023, we had $1,122.5 of foreign cash and cash items compared to total cash and cash items of $2,242.4. 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


Six Months Ended 31 March	2023	2022



Net income attributable to Air Products	$1,012.0	$1,090.9


Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization	661.1	668.2
Deferred income taxes	29.0	51.3


Business and asset actions	185.6	—
Undistributed earnings of equity method investments	(78.1)	(200.8)
Gain on sale of assets and investments	(3.9)	(11.8)
Share-based compensation	31.2	26.5
Noncurrent lease receivables	39.5	43.9



Other adjustments	70.9	(101.0)

Changes in working capital accounts	(589.3)	(262.2)






Cash Provided by Operating Activities	$1,358.0	$1,305.0

For the first six months of fiscal year 2023, cash provided by operating activities was $1,358.0. Business and asset actions of $185.6 included noncash charges to write-down the full carrying value of assets previously under construction in our Asia and Europe segments. Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information. Other adjustments of $70.9 primarily included adjustments for noncash currency impacts of intercompany balances. The working capital accounts were a use of cash of $589.3, primarily driven by $451.3 from payables and accrued liabilities, $124.7 from other working capital, and $112.3 from inventory, partially offset by a source of cash of $162.0 from trade receivables, less allowances. The use of cash within payables and accrued liabilities primarily resulted from the impact of lower prices for the purchase of natural gas, a decrease in value of derivatives that hedge intercompany loans, and payments for incentive compensation under the fiscal year 2022 plan. The use of cash within other working capital primarily relates to the timing of income tax payments. The source of cash within trade receivables includes lower natural gas costs contractually passed through to customers.

For the first six months of fiscal year 2022, cash provided by operating activities was $1,305.0. The working capital accounts were a use of cash of $262.2, primarily driven by a use of cash of $203.1 from trade receivables, less allowances, $138.7 from other working capital, and $57.3 from inventory partially offset by a source of cash of $123.1 from payables and accrued liabilities. 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 impacted the use of cash within trade receivables as we contractually passed through these higher costs to customers. The use of cash within other working capital primarily relates to contract fulfillment costs and the timing of income tax payments.

Cash Flows From Investing Activities


Six Months Ended 31 March	2023	2022
Additions to plant and equipment, including long-term deposits	($1,841.1)	($1,433.6)
Acquisitions, less cash acquired	—	(65.1)
Investment in and advances to unconsolidated affiliates	(912.0)	(1,650.9)
Proceeds from sale of assets and investments	7.2	25.3
Purchases of investments	(290.5)	(909.4)
Proceeds from investments	611.6	1,391.4
Other investing activities	(51.2)	6.5
Cash Used for Investing Activities	($2,476.0)	($2,635.8)

For the first six months of fiscal year 2023, cash used for investing activities was $2,476.0. The use of cash primarily resulted from additions to plant and equipment, including long-term deposits, of $1,841.1 and investment in and advances to unconsolidated affiliates of $912.0. Refer to the Capital Expenditures section below for further detail. Proceeds from investments of $611.6 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 $290.5.

For the first six months of fiscal year 2022, cash used for investing activities was $2,635.8. Capital expenditures primarily included $1,650.9 for investment in and advances to unconsolidated affiliates and $1,433.6 for additions to plant and equipment. Proceeds from investments of $1,391.4 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 $909.4.

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 on our consolidated statement of cash flows. Beginning in the second quarter of fiscal year 2023, we also adjust capital expenditures to exclude NEOM Green Hydrogen Company (“NGHC”) spending reflected in “Additions to plant and equipment, including long-term deposits” that is ultimately funded through our partners' equity contributions to NGHC as well as non-recourse project financing incurred by NGHC. 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 56.


	Six Months Ended
	31 March
	2023	2022
Additions to plant and equipment	$1,841.1	$1,433.6
Acquisitions, less cash acquired	—	65.1
Investment in and advances to unconsolidated affiliates	912.0	1,650.9
NGHC expenditures not funded by Air Products' equity	(335.3)	—
Capital Expenditures	$2,417.8	$3,149.6

Capital expenditures for the first six months of fiscal year 2023 totaled $2,417.8 compared to $3,149.6 for the first six months of fiscal year 2022. The prior year included our initial investment of $1.6 billion in JIGPC, which included approximately $130 from a noncontrolling partner in one of our subsidiaries, in the first quarter of fiscal year 2022. In the second quarter of fiscal year 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 our noncontrolling partner. We expect to complete a remaining investment of approximately $115 later this calendar year. Refer to Note 7, Equity Affiliates, to the consolidated financial statements for additional information.

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


Six Months Ended 31 March	2023	2022
Long-term debt proceeds	$1,891.6	$87.5
Payments on long-term debt	(596.0)	(400.0)
Net (decrease) increase in commercial paper and short-term borrowings	(16.3)	210.9
Dividends paid to shareholders	(719.2)	(664.7)
Proceeds from stock option exercises	17.1	14.4
Investments by noncontrolling interests	72.8	3.6
Other financing activities	(46.6)	(37.3)
Cash Provided by (Used for) Financing Activities	$603.4	($785.6)

For the first six months of fiscal year 2023, cash provided by financing activities was $603.4. The source of cash was primarily driven by long-term debt proceeds of $1,891.6, partially offset by dividend payments to shareholders of $719.2 and payments on long-term debt of $596.0. Refer to the Credit Facilities section below and Note 11, Debt, to the consolidated financial statements for additional information.

For the first six months of fiscal year 2022, cash used for financing activities was $785.6. The use of cash was primarily driven by dividend payments to shareholders of $664.7 and payments on long-term debt of $400.0 for the repayment of a 3.0% Senior Note. These uses of cash were partially offset by short-term borrowings and long-term debt proceeds of $210.9 and $87.5, respectively.

Financing and Capital Structure

Debt

Capital needs in the first six 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 $9,140.9 as of 31 March 2023, primarily due to U.S. Dollar- and Euro-denominated fixed-rate notes that were issued in the second quarter of fiscal year 2023. Total debt includes related party debt of $822.1 and $781.0 as of 31 March 2023 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 March 2023, we are in compliance with all of the financial and other covenants under our debt agreements.

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 March 2023 and 30 September 2022, expressed as a percentage of total capitalization, was 38.4% and 35.8%, respectively. No borrowings were outstanding under the 2021 Credit Agreement as of 31 March 2023.

We also have credit facilities available to certain of our foreign subsidiaries totaling $1,324.4, of which $823.5 was borrowed and outstanding as of 31 March 2023. 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 six months of fiscal years 2023 or 2022. As of 31 March 2023, $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 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.

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 12, 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		Six Months Ended
	31 March		31 March
	2023	2022	2023	2022
Service cost	$5.8	$10.2	$11.8	$20.4







Non-service related cost (benefit)	22.9	(11.9)	42.4	(23.9)
Other	0.2	0.2	0.5	1.0
Net Periodic Cost (Benefit)	$28.9	($1.5)	$54.7	($2.5)

Net periodic cost was $28.9 and $54.7 for the three and six months ended 31 March 2023, respectively, versus a benefit of $1.5 and $2.5 for the three and six months ended 31 March 2022, respectively. 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 recorded in the first quarter 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 six months 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 six months ended 31 March 2023 and 2022, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were $15.4 and $16.1, respectively.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 were no changes to our accounting policies during the first six months of fiscal year 2023.

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. As discussed in Note 4, Business and Asset Actions, to the consolidated financial statements, we concluded that we will not proceed with certain projects in Indonesia and Ukraine and wrote down the full carrying value of related assets. Additionally, we recorded changes to project cost estimates on certain projects accounted for under the cost incurred input method. Accordingly, we recorded a cumulative effect adjustment that unfavorably impacted operating income by approximately $35 and $60 for the three and six months ended 31 March 2023. There were no other changes to our estimates during the first six months of fiscal year 2023 that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk