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

Third Quarter 2023 in Summary			37
Third Quarter 2023 Results of Operations			39
First Nine Months 2023 in Summary			44
First Nine Months 2023 Results of Operations			46
Reconciliations of Non-GAAP Financial Measures			51
Liquidity and Capital Resources			58
Pension Benefits			62
Critical Accounting Policies and Estimates			63

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 third quarter and first nine months of fiscal year 2023 versus ("vs.") the third quarter and first nine 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 51.

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.

THIRD QUARTER 2023 VS. THIRD QUARTER 2022

THIRD QUARTER 2023 IN SUMMARY

• Sales of $3,033.9 decreased 5%, or $155.4, as higher pricing of 4% and higher volumes of 3% were more than offset by lower energy cost pass-through to customers of 11% and an unfavorable impact from currency of 1%.

• Operating income of $644.2 increased 3%, or $16.8, as our pricing actions and higher volumes more than offset higher costs, a charge of $59.0 for business and asset actions, and unfavorable currency. Operating margin of 21.2% increased 150 basis points ("bp") primarily due to the impact of our pricing actions.

• Equity affiliates' income of $165.0 increased 42%, or $48.9, 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 our affiliates in Mexico and Italy.

• Net income of $610.5 increased 4%, or $23.4, as the impact of our pricing actions and higher equity affiliates' income were partially offset by the charge for business and asset actions, higher non-service pension costs, and higher other costs. Net income margin of 20.1% increased 170 bp.

• Adjusted EBITDA of $1,208.1 increased 12%, or $127.4, and adjusted EBITDA margin of 39.8% increased 590 bp.

• Diluted EPS of $2.67 increased 2%, or $0.05 per share, and included unfavorable impacts from business and asset actions as well as non-service related pension costs. Adjusted diluted EPS of $2.98 increased 16%, or $0.40 per share. A summary table of changes in diluted EPS is presented below.

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.

			Three Months Ended
			30 June						Increase
			2023			2022			(Decrease)
Diluted EPS			$2.67			$2.62			$0.05
Operating Impacts
Underlying business
Volume									0.09
Price, net of variable costs									0.52
Other costs									(0.27)
Currency									(0.06)
Business and asset actions									(0.23)
Total operating impacts									$0.05
Other Impacts
Equity affiliates' income									$0.18
Interest expense									(0.05)
Other non-operating income/expense, net, excluding discrete item below									0.03
Non-service pension cost/benefit, net									(0.10)
Noncontrolling interests									(0.04)
Total other impacts									$0.02
Total change in diluted EPS									$0.05
% Change from prior year									2		%

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

			Three Months Ended
			30 June						Increase
			2023			2022			(Decrease)
Diluted EPS			$2.67			$2.62			$0.05
Business and asset actions			0.23			—			0.23
Non-service pension cost (benefit), net			0.07			(0.03)			0.10
Adjusted Diluted EPS			$2.98			$2.58			$0.40
% Change from prior year									16		%

THIRD QUARTER 2023 RESULTS OF OPERATIONS

Discussion of Third Quarter Consolidated Results

						Three Months Ended
						30 June												Changes
						2023						2022						$						%/bp
GAAP Measures
Sales						$3,033.9						$3,189.3						($155.4)						(5		%)
Operating income						644.2						627.4						16.8						3		%
Operating margin						21.2		%				19.7		%										150		bp
Equity affiliates’ income						$165.0						$116.1						$48.9						42		%
Net income						610.5						587.1						23.4						4		%
Net income margin						20.1		%				18.4		%										170		bp
Non-GAAP Measures
Adjusted EBITDA						$1,208.1						$1,080.7						$127.4						12		%
Adjusted EBITDA margin						39.8		%				33.9		%										590		bp

Sales

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

Volume			3		%
Price			4		%
Energy cost pass-through to customers			(11		%)
Currency			(1		%)
Total consolidated sales change			(5		%)

Sales of $3,033.9 decreased 5%, or $155.4, as lower energy cost pass-through to customers of 11% and an unfavorable impact from currency of 1% were partially offset by higher pricing of 4% and higher volumes of 3%. Lower energy cost pass-through to our on-site customers was driven by lower natural gas prices in the Americas and Europe segments. Pricing actions in our merchant business to recover higher costs improved sales across each of our regional segments. The volume improvement was primarily attributable to our on-site business in the Americas and Asia segments.

Cost of Sales and Gross Margin

Cost of sales of $2,070.7 decreased 12%, or $271.4, due to lower energy cost pass-through to customers of $356 and a favorable impact from currency of $25, partially offset by higher costs associated with sales volumes of $88 and unfavorable other costs of $22, which were driven by inflation and project development activities. Gross margin of 31.7% increased 510 bp from 26.6% in the prior year, primarily due to positive impacts from lower energy cost pass-through to customers as well as our pricing actions.

Selling and Administrative Expense

Selling and administrative expense of $238.7 increased 10%, or $21.8, primarily due to additional costs to support growth, higher incentive compensation, and inflation. Selling and administrative expense as a percentage of sales increased to 7.9% from 6.8% in the prior year.

Research and Development Expense

Research and development expense of $29.3 increased 18%, or $4.5. Research and development expense as a percentage of sales increased to 1.0% from 0.8% in the prior year.

Business and Asset Actions

Our consolidated income statement for the three months ended 30 June 2023 reflects a charge of $59.0 ($51.2 attributable to Air Products after tax, or $0.23 per share) for strategic business and asset actions intended to optimize costs and focus resources on our growth projects. The charge, which was not recorded in segment results, included a noncash charge of $32.0 to write off assets related to our exit from certain projects previously under construction as well as an expense of $27.0 for severance and other benefits payable to approximately 450 employees as a result of position eliminations and the restructuring of certain organizations. Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information.

Other Income (Expense), Net

Other income of $8.0 decreased 63%, or $13.9, primarily due to lower income from the sale of assets and an unfavorable foreign exchange impact.

Operating Income and Operating Margin

Operating income of $644.2 increased 3%, or $16.8, as positive pricing, net of power and fuel costs, of $142 and higher volumes of $24 were partially offset by higher costs of $74, a charge of $59 for business and asset actions, and an unfavorable currency impact of $16. The higher costs were driven by inflation as well as project development and other costs related to the execution of our growth strategy. Operating margin of 21.2% increased 150 bp from 19.7% in the prior year primarily due to our pricing actions and lower energy cost-pass through, partially offset by higher costs.

Equity Affiliates' Income

Equity affiliates' income of $165.0 increased 42%, or $48.9, 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 our affiliates in Mexico and Italy.

Interest Expense

												Three Months Ended
												30 June
												2023			2022
Interest incurred												$77.8			$42.0
Less: Capitalized interest												30.4			9.3
Interest expense												$47.4			$32.7

Interest incurred increased 85%, or $35.8, driven by a higher average interest rate on variable-rate instruments in our debt portfolio as well as a higher debt balance from the U.S. Dollar- and Euro-denominated fixed-rate notes issued in March 2023 under our new Green Finance Framework. Capitalized interest increased $21.1 due to a higher carrying value of projects under construction.

Other Non-Operating Income (Expense), Net

Other non-operating expense was $11.7 versus income of $10.5 in the prior year primarily due to higher non-service pension costs in 2023, 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 $610.5 increased 4%, or $23.4, as higher pricing, net of power and fuel costs, and higher equity affiliates' income were partially offset by the charge for business and asset actions, higher non-service pension costs, and higher other costs. Net income margin of 20.1% increased 170 bp, which also included a positive impact from lower energy cost pass-through.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $1,208.1 increased 12%, or $127.4, as higher pricing, net of power and fuel costs, and higher equity affiliates' income were partially offset by higher costs. Adjusted EBITDA margin of 39.8% increased 590 bp, which also included a positive impact from lower energy cost pass-through.

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 18.6% for both the three months ended 30 June 2023 and 2022. Our adjusted effective tax rate, which does not include the impact of our business and asset actions or non-service pension costs, was 18.4% and 18.5% for the three months ended 30 June 2023 and 2022, respectively.

Discussion of Third Quarter Results by Business Segment

Americas

						Three Months Ended
						30 June												Changes
						2023						2022						$						%/bp
Sales						$1,260.7						$1,416.3						($155.6)						(11		%)
Operating income						374.8						298.9						75.9						25		%
Operating margin						29.7		%				21.1		%										860		bp
Equity affiliates’ income						$29.9						$21.4						$8.5						40		%
Adjusted EBITDA						567.8						480.8						87.0						18		%
Adjusted EBITDA margin						45.0		%				33.9		%										1,110		bp

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

Volume			6		%
Price			4		%
Energy cost pass-through to customers			(21		%)
Currency			—		%
Total Americas sales change			(11		%)

Sales of $1,260.7 decreased 11%, or $155.6, due to lower energy cost pass-through to customers of 21%, partially offset by higher volumes of 6% and higher pricing of 4%. Lower energy cost pass-through to our on-site customers was driven by lower natural gas prices. The volume improvement was primarily attributable to our on-site business, which benefited from higher demand for hydrogen. Additionally, we recovered higher costs in our merchant business through continued focus on pricing actions. Currency was flat versus the prior year.

Operating income of $374.8 increased 25%, or $75.9, primarily due to positive pricing, net of power and fuel costs, of $68 and favorable volumes of $29, partially offset by higher costs of $20 driven by inflation and planned maintenance. Operating margin of 29.7% increased 860 bp from 21.1% in the prior year, primarily due to lower energy cost pass-through to customers and the pricing improvement, partially offset by the impact of higher costs.

Equity affiliates’ income of $29.9 increased 40%, or $8.5, driven by our Mexico affiliate.

Asia

						Three Months Ended
						30 June												Changes
						2023						2022						$						%/bp
Sales						$822.9						$751.4						$71.5						10		%
Operating income						240.8						210.6						30.2						14		%
Operating margin						29.3		%				28.0		%										130		bp
Equity affiliates’ income						$7.5						$5.7						$1.8						32		%
Adjusted EBITDA						356.6						323.9						32.7						10		%
Adjusted EBITDA margin						43.3		%				43.1		%										20 bp

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

Volume			8		%
Price			4		%
Energy cost pass-through to customers			3		%
Currency			(5		%)
Total Asia sales change			10		%

Sales of $822.9 increased 10%, or $71.5, due to higher volumes of 8%, higher pricing of 4%, and higher energy cost pass-through to customers of 3%, partially offset by an unfavorable impact from currency of 5%. The volume improvement was primarily driven by our on-site business, including new plants brought on-stream. Higher power costs across the region were recovered by our merchant pricing actions. In our on-site business, the higher power costs increased 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, New Taiwan Dollar, and South Korean Won.

Operating income of $240.8 increased 14%, or $30.2, due to higher volumes of $29 and positive pricing, net of power and fuel costs, of $16, partially offset by unfavorable currency impacts of $10 and higher costs of $5. Operating margin of 29.3% increased 130 bp from 28.0% in the prior year due to the volume improvement and positive pricing, partially offset by higher costs.

Equity affiliates’ income of $7.5 increased 32%, or $1.8.

Europe

						Three Months Ended
						30 June												Changes
						2023						2022						$						%/bp
Sales						$706.6						$739.6						($33.0)						(4		%)
Operating income						176.1						137.4						38.7						28		%
Operating margin						24.9		%				18.6		%										630		bp
Equity affiliates’ income						$28.8						$20.6						$8.2						40		%
Adjusted EBITDA						253.5						206.9						46.6						23		%
Adjusted EBITDA margin						35.9		%				28.0		%										790		bp

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

Volume			1		%
Price			6		%
Energy cost pass-through to customers			(13		%)
Currency			2		%
Total Europe sales change			(4		%)

Sales of $706.6 decreased 4%, or $33.0, due to lower energy cost pass-through to customers of 13%, partially offset by higher pricing of 6%, a favorable impact from currency of 2%, and higher volumes of 1%. We recovered higher costs in our merchant business through continued focus on pricing actions. Currency positively impacted sales due to the weakening of the U.S. Dollar against the Euro. Higher volumes in our on-site business driven by improvement in hydrogen were mostly offset by weaker demand for merchant products. Energy cost pass-through to our on-site customers was lower, reflecting lower natural gas prices across the region.

Operating income of $176.1 increased 28%, or $38.7, primarily due to higher pricing, net of power and fuel costs, of $57 and higher volumes of $13, partially offset by higher costs of $33 driven by inflation and higher incentive compensation. Operating margin of 24.9% increased 630 bp from 18.6% in the prior year primarily due to the pricing improvement and lower energy cost pass-through to customers.

Equity affiliates’ income of $28.8 increased 40%, or $8.2, driven by an affiliate in Italy.

Middle East and India

						Three Months Ended
						30 June												Changes
						2023						2022						$						%
Sales						$39.7						$35.4						$4.3						12		%
Operating income						5.8						6.9						(1.1)						(16		%)
Equity affiliates' income						95.5						67.2						28.3						42		%
Adjusted EBITDA						108.3						80.9						27.4						34		%

Sales of $39.7 increased 12%, or $4.3, primarily due to higher merchant volumes. Despite higher sales, operating income of $5.8 decreased 16%, or $1.1, primarily due to higher business development costs. Equity affiliates' income of $95.5 increased 42%, or $28.3, 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
						30 June												Changes
						2023						2022						$						%
Sales						$204.0						$246.6						($42.6)						(17		%)
Operating loss						(94.3)						(26.4)						(67.9)						(257		%)
Adjusted EBITDA						(78.1)						(11.8)						(66.3)						(562		%)

Sales of $204.0 decreased 17%, or $42.6, and operating loss of $94.3 increased $67.9, 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 to support our growth strategy.

FIRST NINE MONTHS 2023 VS. FIRST NINE MONTHS 2022

FIRST NINE MONTHS 2023 IN SUMMARY

• Sales of $9,408.7 increased 3%, or $280.1, as higher pricing of 6% and higher volumes of 4% were partially offset by an unfavorable impact from currency of 4% and lower energy cost pass-through to customers of 3%.

• Operating income of $1,756.0 increased 3%, or $43.7, as our pricing actions and higher volumes were partially offset by a charge of $244.6 for business and asset actions, higher other costs, and unfavorable currency. Despite higher operating income, operating margin of 18.7% decreased 10 bp as the impact of our pricing actions was offset by the charge for business and asset actions and higher other costs.

• Equity affiliates' income of $440.9 increased 15%, or $56.2, 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 our affiliate in Italy. These impacts were partially 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.

• Net income of $1,644.2 decreased 2%, or $29.3, primarily due to the charge for business and asset actions, higher non-service pension costs, and higher other costs, partially offset by higher pricing, net of power and fuel costs. Net income margin of 17.5% decreased 80 bp.

• Adjusted EBITDA of $3,442.5 increased 11%, or $340.1, and adjusted EBITDA margin of 36.6% increased 260 bp.

• Diluted EPS of $7.22 decreased 4%, or $0.30 per share, and included unfavorable impacts from business and asset actions as well as non-service related pension costs. Adjusted diluted EPS of $8.36 increased 13%, or $0.95 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.

			Nine Months Ended
			30 June						Increase
			2023			2022			(Decrease)
Diluted EPS			$7.22			$7.52			($0.30)
Operating Impacts
Underlying business
Volume									$0.24
Price, net of variable costs									1.95
Other costs									(0.83)
Currency									(0.30)
Business and asset actions									(0.92)
Total operating impacts									$0.14
Other Impacts
Equity affiliates' income									$0.21
Interest expense									(0.13)
Other non-operating income/expense, net, excluding discrete item below									0.11
Non-service pension cost/benefit, net									(0.33)
Change in effective tax rate									(0.11)
Noncontrolling interests									(0.18)
Weighted average diluted shares									(0.01)
Total other impacts									($0.44)
Total change in diluted EPS									($0.30)
% Change from prior year									(4		%)

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 nine 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 nine months of fiscal years 2023 and 2022:

			Nine Months Ended
			30 June						Increase
			2023			2022			(Decrease)
Diluted EPS			$7.22			$7.52			($0.30)
Business and asset actions			0.92			—			0.92
Non-service pension cost (benefit), net			0.22			(0.11)			0.33
Adjusted Diluted EPS			$8.36			$7.41			$0.95
% Change from prior year									13		%

FIRST NINE MONTHS 2023 RESULTS OF OPERATIONS

Discussion of First Nine Months Consolidated Results

						Nine Months Ended
						30 June												Changes
						2023						2022						$						%/bp
GAAP Measures
Sales						$9,408.7						$9,128.6						$280.1						3		%
Operating income						1,756.0						1,712.3						43.7						3		%
Operating margin						18.7		%				18.8		%										(10)		bp
Equity affiliates’ income						$440.9						$384.7						$56.2						15		%
Net income						1,644.2						1,673.5						(29.3)						(2		%)
Net income margin						17.5		%				18.3		%										(80)		bp
Non-GAAP Measures
Adjusted EBITDA						$3,442.5						$3,102.4						$340.1						11		%
Adjusted EBITDA margin						36.6		%				34.0		%										260		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			6		%
Energy cost pass-through to customers			(3		%)
Currency			(4		%)
Total Consolidated Sales Change			3		%

Sales of $9,408.7 increased 3%, or $280.1, as higher pricing of 6% and higher volumes of 4% were partially offset by an unfavorable impact from currency of 4% and lower energy cost pass-through to customers of 3%. Pricing actions to recover higher costs in our merchant business improved sales across each of our regional segments, primarily in the Americas and Europe. Higher volumes were driven by 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 $6,625.8 decreased 1%, or $91.5, due to lower energy cost pass-through to customers of $316 and a favorable impact from currency of $246, partially offset by higher costs associated with sales volumes of $291 and unfavorable other costs of $180, which were driven by inflation, power for our merchant business, project development activities, and planned maintenance. Gross margin of 29.6% increased 320 bp from 26.4% in the prior year, primarily due to the positive impact of our pricing actions and lower energy cost pass-through to customers, partially offset by the unfavorable costs.

Selling and Administrative Expense

Selling and administrative expense of $724.3 increased 7%, or $47.6, primarily due to higher incentive compensation, inflation, and additional costs to support growth, partially offset by a favorable impact from currency. Selling and administrative expense as a percentage of sales increased to 7.7% from 7.4% in the prior year.

Research and Development Expense

Research and development expense of $80.9 increased 13%, or $9.1. Research and development expense as a percentage of sales increased to 0.9% from 0.8% in the prior year.

Business and Asset Actions

Our consolidated income statement for the nine months ended 30 June 2023 reflects a charge of $244.6 ($204.9 attributable to Air Products after tax, or $0.92 per share) for strategic business and asset actions intended to optimize costs and focus resources on our growth projects. The charge, which was not recorded in segment results, included a noncash charge of $217.6 to write off assets related to our exit from certain projects previously under construction as well as an expense of $27.0 for severance and other benefits payable to approximately 450 employees as a result of position eliminations and the restructuring of certain organizations. Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information.

Other Income (Expense), Net

Other income of $22.9 decreased 54%, or $26.6, primarily due to lower income from the sale of assets and an unfavorable foreign exchange impact.

Operating Income and Operating Margin

Operating income of $1,756.0 increased 3%, or $43.7, as positive pricing, net of power and fuel costs, of $531 and higher volumes of $65 were partially offset by a charge of $245 for business and asset actions, higher other costs of $225, and an unfavorable currency impact of $82. 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 18.7% decreased 10 bp as the impact of our pricing actions was offset by the charge for business and asset actions and higher other costs.

Equity Affiliates' Income

Equity affiliates' income of $440.9 increased 15%, or $56.2, 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 our affiliate in Italy. These impacts were partially 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.

Interest Expense

												Nine Months Ended
												30 June
												2023			2022
Interest incurred												$198.2			$123.4
Less: Capitalized interest												68.7			27.9
Interest expense												$129.5			$95.5

Interest incurred increased 61%, or $74.8, driven by a higher average interest rate on variable-rate instruments in our debt portfolio as well as a higher debt balance from U.S. Dollar- and Euro-denominated fixed-rate notes issued in March 2023 under our new Green Finance Framework. Capitalized interest increased $40.8 due to a higher carrying value of projects under construction.

Other Non-Operating Income (Expense), net

Other non-operating expense was $26.2 versus income of $42.2 in the prior year primarily due to higher non-service pension costs in 2023, 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 $1,644.2 decreased 2%, or $29.3, primarily due to the charge for business and asset actions, higher non-service pension costs, and higher other costs, partially offset by higher pricing, net of power and fuel costs. Net income margin of 17.5% decreased 80 bp.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA of $3,442.5 increased 11%, or $340.1, primarily due to higher pricing, net of power and fuel costs, partially offset by higher costs. Adjusted EBITDA margin of 36.6% increased 260 bp.

Effective Tax Rate

Our effective tax rate was 19.4% and 18.1% for the nine months ended 30 June 2023 and 2022, respectively.

During the first nine months of fiscal year 2023, we recorded a charge for business and asset actions of $244.6 ($204.9 attributable to Air Products after tax). 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 $36.0. 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 effective tax rate for the current year was higher due to lower excess tax benefits on share-based compensation and the discrete tax impact of our business and asset actions discussed above. 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 income. Our current rate is also higher due to nonrecurring benefits in several foreign jurisdictions due to the impact of tax rate changes and productivity credit claims in the prior year.

Our adjusted effective tax rate, which does not include the impact of our business and asset actions discussed above, was 19.1% and 18.0% for the nine months ended 30 June 2023 and 2022, respectively.

Discussion of First Nine Months Results by Business Segment

Americas

						Nine Months Ended
						30 June												Changes
						2023						2022						$						%/bp
Sales						$4,018.0						$3,827.0						$191.0						5		%
Operating income						1,042.0						841.6						200.4						24		%
Operating margin						25.9		%				22.0		%										390		bp
Equity affiliates’ income						$74.4						$75.7						($1.3)						(2		%)
Adjusted EBITDA						1,597.2						1,386.8						210.4						15		%
Adjusted EBITDA margin						39.8		%				36.2		%										360 bp

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

Volume			7		%
Price			7		%
Energy cost pass-through to customers			(8		%)
Currency			(1		%)
Total Americas sales change			5		%

Sales of $4,018.0 increased 5%, or $191.0, due to higher volumes of 7% and higher pricing of 7%, partially offset by lower energy cost pass-through to customers of 8% and an unfavorable currency impact of 1%. The volume improvement was primarily attributable to our on-site business, including better demand for hydrogen. Additionally, we recovered higher costs in our merchant business through continued focus on pricing actions. Energy cost pass-through to our on-site customers was lower driven by lower natural gas prices.

Operating income of $1,042.0 increased 24%, or $200.4, due to positive pricing, net of power and fuel costs, of $244 and favorable volumes of $58, partially offset by higher costs of $95 and an unfavorable currency impact of $7. Higher costs were driven by inflation, planned maintenance, and higher incentive compensation. Operating margin of 25.9% increased 390 bp from 22.0% in the prior year, primarily due to the pricing improvement and lower energy cost pass-through to customers, partially offset by the impact of higher costs.

Equity affiliates’ income of $74.4 decreased 2%, or $1.3.

Asia

						Nine Months Ended
						30 June												Changes
						2023						2022						$						%/bp
Sales						$2,414.6						$2,283.0						$131.6						6		%
Operating income						709.7						635.3						74.4						12		%
Operating margin						29.4		%				27.8		%										160		bp
Equity affiliates’ income						$22.2						$18.5						$3.7						20		%
Adjusted EBITDA						1,052.1						984.0						68.1						7		%
Adjusted EBITDA margin						43.6		%				43.1		%										50		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			(7		%)
Total Asia sales change			6		%

Sales of $2,414.6 increased 6%, or $131.6, 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 7%. The volume improvement was primarily driven by our on-site business, including several traditional industrial gas plants that were brought on-stream across the region. Higher power costs across the region were recovered by our merchant pricing actions. In our on-site business, the higher power costs increased 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 $709.7 increased 12%, or $74.4, due to higher volumes of $83 and positive pricing, net of power and fuel costs, of $56, partially offset by an unfavorable currency impact of $48 and higher costs of $17 driven by project development, higher planned maintenance, and inflation. Operating margin of 29.4% increased 160 bp from 27.8% in the prior year due to the volume improvement and positive pricing, partially offset by higher costs.

Equity affiliates’ income of $22.2 increased 20%, or $3.7.

Europe

						Nine Months Ended
						30 June												Changes
						2023						2022						$						%/bp
Sales						$2,251.4						$2,222.4						$29.0						1		%
Operating income						495.1						353.0						142.1						40		%
Operating margin						22.0		%				15.9		%										610		bp
Equity affiliates’ income						$76.0						$57.8						$18.2						31		%
Adjusted EBITDA						712.3						559.8						152.5						27		%
Adjusted EBITDA margin						31.6		%				25.2		%										640		bp

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

Volume			(1		%)
Price			10		%
Energy cost pass-through to customers			(3		%)
Currency			(5		%)
Total Europe sales change			1		%

Sales of $2,251.4 increased 1%, or $29.0, due to higher pricing of 10%, partially offset by an unfavorable impact from currency of 5%, lower energy cost pass-through to customers of 3%, and lower volumes of 1%. We recovered higher costs in our merchant business through continued focus on pricing actions. Currency negatively impacted sales due to the strengthening of the U.S. Dollar against the Euro and the British Pound Sterling. Energy cost pass-through to our on-site customers was lower, reflecting lower natural gas prices across the region. Volumes declined slightly as lower demand for merchant products was partially offset by improvement in hydrogen in our on-site business.

Operating income of $495.1 increased 40%, or $142.1, as higher pricing, net of power and fuel costs, of $224 was partially offset by higher costs of $58 driven by inflation, higher incentive compensation, and planned maintenance, an unfavorable currency impact of $18, and lower volumes of $6. Operating margin of 22.0% increased 610 bp from 15.9% in the prior year primarily due to the pricing improvement, partially offset by higher costs.

Equity affiliates’ income of $76.0 increased 31%, or $18.2, driven by an affiliate in Italy.

Middle East and India

						Nine Months Ended
						30 June												Changes
						2023						2022						$						%
Sales						$125.9						$88.0						$37.9						43		%
Operating income						13.8						16.5						(2.7)						(16		%)
Equity affiliates' income						258.5						230.6						27.9						12		%
Adjusted EBITDA						292.5						266.9						25.6						10		%

Sales of $125.9 increased 43%, or $37.9, driven by higher merchant volumes. Despite higher sales, operating income of $13.8 decreased 16%, or $2.7, primarily due to higher costs for business development and planned maintenance. Equity affiliates' income of $258.5 increased 12%, or $27.9. 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. The resulting higher contribution from JIGPC was partially offset by 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

						Nine Months Ended
						30 June												Changes
						2023						2022						$						%
Sales						$598.8						$708.2						($109.4)						(15		%)
Operating loss						(260.0)						(134.1)						(125.9)						(94		%)
Adjusted EBITDA						(211.6)						(95.1)						(116.5)						(123		%)

Sales of $598.8 decreased 15%, or $109.4, and operating loss of $260.0 increased $125.9, 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 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 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 30 June
Q3 2023 vs. Q3 2022			Operating Income			Equity Affiliates' Income			Other Non-Operating Income/Expense, Net			Income Tax Provision			Net Income Attributable to Air Products			Diluted EPS
Q3 2023 GAAP			$644.2			$165.0			($11.7)			$139.6			$595.6			$2.67
Q3 2022 GAAP			627.4			116.1			10.5			134.2			582.1			2.62
$ Change GAAP																		$0.05
% Change GAAP																		2		%
Q3 2023 GAAP			$644.2			$165.0			($11.7)			$139.6			$595.6			$2.67
Business and asset actions			59.0			—			—			7.8			51.2			0.23
Non-service pension cost, net			—			—			22.0			5.4			16.6			0.07
Q3 2023 Non-GAAP ("Adjusted")			$703.2			$165.0			$10.3			$152.8			$663.4			$2.98
Q3 2022 GAAP			$627.4			$116.1			$10.5			$134.2			$582.1			$2.62
Non-service pension benefit, net			—			—			(9.5)			(2.3)			(7.2)			(0.03)
Q3 2022 Non-GAAP ("Adjusted")			$627.4			$116.1			$1.0			$131.9			$574.9			$2.58
$ Change Non-GAAP ("Adjusted")																		$0.40
% Change Non-GAAP ("Adjusted")																		16		%

			Nine Months Ended 30 June
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			$1,756.0			$440.9			($26.2)			$397.0			$1,607.6			$7.22
2022 GAAP			1,712.3			384.7			42.2			370.2			1,673.0			7.52
$ Change GAAP																		($0.30)
% Change GAAP																		(4		%)
2023 GAAP			$1,756.0			$440.9			($26.2)			$397.0			$1,607.6			$7.22
Business and asset actions(A)			244.6			—			—			34.7			204.9			0.92
Non-service pension cost, net			—			—			64.4			16.0			48.4			0.22
2023 Non-GAAP ("Adjusted")			$2,000.6			$440.9			$38.2			$447.7			$1,860.9			$8.36
2022 GAAP			$1,712.3			$384.7			$42.2			$370.2			$1,673.0			$7.52
Non-service pension benefit, net			—			—			(33.4)			(8.1)			(25.3)			(0.11)
2022 Non-GAAP ("Adjusted")			$1,712.3			$384.7			$8.8			$362.1			$1,647.7			$7.41
$ Change Non-GAAP ("Adjusted")																		$0.95
% Change Non-GAAP ("Adjusted")																		13		%
(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 30 June																		Nine Months Ended 30 June
			2023									2022									2023									2022
			$			Margin						$			Margin						$			Margin						$			Margin
Sales			$3,033.9									$3,189.3									$9,408.7									$9,128.6
Net income and net income margin			$610.5			20.1		%				$587.1			18.4		%				$1,644.2			17.5		%				$1,673.5			18.3		%
Add: Interest expense			47.4			1.6		%				32.7			1.0		%				129.5			1.4		%				95.5			1.0		%
Less: Other non-operating income (expense), net			(11.7)			(0.4		%)				10.5			0.3		%				(26.2)			(0.3		%)				42.2			0.5		%
Add: Income tax provision			139.6			4.6		%				134.2			4.2		%				397.0			4.2		%				370.2			4.1		%
Add: Depreciation and amortization			339.9			11.2		%				337.2			10.6		%				1,001.0			10.6		%				1,005.4			11.0		%
Add: Business and asset actions			59.0			1.9		%				—			—		%				244.6			2.6		%				—			—		%
Adjusted EBITDA and adjusted EBITDA margin			$1,208.1			39.8		%				$1,080.7			33.9		%				$3,442.5			36.6		%				$3,102.4			34.0		%
Change GAAP
Net income $ change			$23.4																		($29.3)
Net income % change			4%																		(2%)
Net income margin change			170 bp																		(80) bp
Change Non-GAAP
Adjusted EBITDA $ change			$127.4																		$340.1
Adjusted EBITDA % change			12%																		11%
Adjusted EBITDA margin change			590 bp																		260 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 nine months ended 30 June 2023 and 2022:

Americas

			Three Months Ended																		Nine Months Ended
			30 June									Changes vs. Prior Year									30 June									Changes vs. Prior Year
			2023			2022						$			%/bp						2023			2022						$			%/bp
Sales			$1,260.7			$1,416.3						($155.6)			(11		%)				$4,018.0			$3,827.0						$191.0			5		%
Operating income			$374.8			$298.9						$75.9			25		%				$1,042.0			$841.6						$200.4			24		%
Operating margin			29.7		%	21.1		%							860		bp				25.9		%	22.0		%							390		bp
Reconciliation of GAAP to Non-GAAP:
Operating income			$374.8			$298.9															$1,042.0			$841.6
Add: Depreciation and amortization			163.1			160.5															480.8			469.5
Add: Equity affiliates' income			29.9			21.4															74.4			75.7
Adjusted EBITDA			$567.8			$480.8						$87.0			18		%				$1,597.2			$1,386.8						$210.4			15		%
Adjusted EBITDA margin			45.0		%	33.9		%							1,110		bp				39.8		%	36.2		%							360		bp

Asia

			Three Months Ended																		Nine Months Ended
			30 June									Changes vs. Prior Year									30 June									Changes vs. Prior Year
			2023			2022						$			%/bp						2023			2022						$			%/bp
Sales			$822.9			$751.4						$71.5			10		%				$2,414.6			$2,283.0						$131.6			6		%
Operating income			$240.8			$210.6						$30.2			14		%				$709.7			$635.3						$74.4			12		%
Operating margin			29.3		%	28.0		%							130		bp				29.4		%	27.8		%							160		bp
Reconciliation of GAAP to Non-GAAP:
Operating income			$240.8			$210.6															$709.7			$635.3
Add: Depreciation and amortization			108.3			107.6															320.2			330.2
Add: Equity affiliates' income			7.5			5.7															22.2			18.5
Adjusted EBITDA			$356.6			$323.9						$32.7			10		%				$1,052.1			$984.0						$68.1			7		%
Adjusted EBITDA margin			43.3		%	43.1		%							20		bp				43.6		%	43.1		%							50		bp

Europe

			Three Months Ended																		Nine Months Ended
			30 June									Changes vs. Prior Year									30 June									Changes vs. Prior Year
			2023			2022						$			%/bp						2023			2022						$			%/bp
Sales			$706.6			$739.6						($33.0)			(4		%)				$2,251.4			$2,222.4						$29.0			1		%
Operating income			$176.1			$137.4						$38.7			28		%				$495.1			$353.0						$142.1			40		%
Operating margin			24.9		%	18.6		%							630		bp				22.0		%	15.9		%							610		bp
Reconciliation of GAAP to Non-GAAP:
Operating income			$176.1			$137.4															$495.1			$353.0
Add: Depreciation and amortization			48.6			48.9															141.2			149.0
Add: Equity affiliates' income			28.8			20.6															76.0			57.8
Adjusted EBITDA			$253.5			$206.9						$46.6			23		%				$712.3			$559.8						$152.5			27		%
Adjusted EBITDA margin			35.9		%	28.0		%							790		bp				31.6		%	25.2		%							640		bp

Middle East and India

			Three Months Ended																		Nine Months Ended
			30 June									Changes vs. Prior Year									30 June									Changes vs. Prior Year
			2023			2022						$			%/bp						2023			2022						$			%/bp
Sales			$39.7			$35.4						$4.3			12		%				$125.9			$88.0						$37.9			43		%
Operating income			$5.8			$6.9						($1.1)			(16		%)				$13.8			$16.5						($2.7)			(16		%)
Reconciliation of GAAP to Non-GAAP:
Operating income			$5.8			$6.9															$13.8			$16.5
Add: Depreciation and amortization			7.0			6.8															20.2			19.8
Add: Equity affiliates' income			95.5			67.2															258.5			230.6
Adjusted EBITDA			$108.3			$80.9						$27.4			34		%				$292.5			$266.9						$25.6			10		%

Corporate and other

			Three Months Ended																		Nine Months Ended
			30 June									Changes vs. Prior Year									30 June									Changes vs. Prior Year
			2023			2022						$			%/bp						2023			2022						$			%/bp
Sales			$204.0			$246.6						($42.6)			(17		%)				$598.8			$708.2						($109.4)			(15		%)
Operating loss			($94.3)			($26.4)						($67.9)			(257		%)				($260.0)			($134.1)						($125.9)			(94		%)
Reconciliation of GAAP to Non-GAAP:
Operating loss			($94.3)			($26.4)															($260.0)			($134.1)
Add: Depreciation and amortization			12.9			13.4															38.6			36.9
Add: Equity affiliates' income			3.3			1.2															9.8			2.1
Adjusted EBITDA			($78.1)			($11.8)						($66.3)			(562		%)				($211.6)			($95.1)						($116.5)			(123		%)

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 30 June						Nine Months Ended 30 June
			2023			2022			2023			2022
Income tax provision			$139.6			$134.2			$397.0			$370.2
Income before taxes			750.1			721.3			2,041.2			2,043.7
Effective tax rate			18.6		%	18.6		%	19.4		%	18.1		%
Income tax provision			$139.6			$134.2			$397.0			$370.2
Business and asset actions			7.8			—			34.7			—
Non-service pension tax impact			5.4			(2.3)			16.0			(8.1)
Adjusted income tax provision			$152.8			$131.9			$447.7			$362.1
Income before taxes			$750.1			$721.3			$2,041.2			$2,043.7
Business and asset actions			59.0			—			244.6			—
Non-service pension cost (benefit), net			22.0			(9.5)			64.4			(33.4)
Adjusted income before taxes			$831.1			$711.8			$2,350.2			$2,010.3
Adjusted effective tax rate			18.4		%	18.5		%	19.1		%	18.0		%

CAPITAL EXPENDITURES

We define capital expenditures as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), investment in and advances to unconsolidated affiliates, and investment in financing receivables on our consolidated statement of cash flows. Beginning in fiscal year 2023, we 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 joint venture partners' equity contributions to NGHC as well as non-recourse project financing obtained 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:

						Nine Months Ended
						30 June
						2023			2022
Cash used for investing activities						$4,399.8			$2,844.1
Proceeds from sale of assets and investments						13.3			32.8
Purchases of investments						(443.4)			(1,247.9)
Proceeds from investments						766.0			2,219.2
Other investing activities						4.8			6.9
NGHC expenditures not funded by Air Products' equity						(656.0)			—
Capital expenditures						$4,084.5			$3,855.1

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. 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 30 June 2023, we had $1,533.4 of foreign cash and cash items compared to total cash and cash items of $1,637.7. 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

Nine Months Ended 30 June			2023			2022
Net income attributable to Air Products			$1,607.6			$1,673.0
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization			1,001.0			1,005.4
Deferred income taxes			(14.1)			69.0
Business and asset actions			244.6			—
Undistributed earnings of equity method investments			(130.1)			(184.8)
Gain on sale of assets and investments			(5.2)			(21.4)
Share-based compensation			45.8			37.0
Noncurrent lease receivables			60.9			65.5
Other adjustments			152.3			(139.2)
Changes in working capital accounts			(759.4)			(291.3)
Cash Provided by Operating Activities			$2,203.4			$2,213.2

For the first nine months of fiscal year 2023, cash provided by operating activities was $2,203.4. Business and asset actions of $244.6 includes noncash charges to write off assets related to our exit from certain projects previously under construction as well as an expense for severance and other benefits. Refer to Note 4, Business and Asset Actions, to the consolidated financial statements for additional information. Other adjustments of $152.3 primarily included adjustments for noncash currency impacts of intercompany balances. The working capital accounts were a use of cash of $759.4, primarily driven by $375.4 from payables and accrued liabilities, $133.5 from inventories, $98.5 from other receivables, $102.8 from other working capital, and $49.2 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 inventories primarily relates to purchases of helium. The use of cash within other working capital primarily relates to the timing of income tax payments. The use of cash within trade receivables primarily relates to the timing of milestone invoices on sale of equipment projects.

For the first nine months of fiscal year 2022, cash provided by operating activities was $2,213.2. The working capital accounts were a use of cash of $291.3, primarily driven by a use of cash of $389.7 from trade receivables, less allowances, $118.1 from other working capital, and $80.8 from inventory partially offset by a source of cash of $320.1 from payables and accrued liabilities. The use of cash within trade receivables includes the impacts of higher underlying sales and higher natural gas costs passed through to our on-site customers. The source of cash within payables and accrued liabilities primarily resulted from customer advances for sale of equipment projects and higher natural gas costs. 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

Nine Months Ended 30 June			2023			2022
Additions to plant and equipment, including long-term deposits			($3,163.5)			($2,139.1)
Acquisitions, less cash acquired			—			(65.1)
Investment in and advances to unconsolidated affiliates			(912.0)			(1,650.9)
Investment in financing receivables			(665.0)			—
Proceeds from sale of assets and investments			13.3			32.8
Purchases of investments			(443.4)			(1,247.9)
Proceeds from investments			766.0			2,219.2
Other investing activities			4.8			6.9
Cash Used for Investing Activities			($4,399.8)			($2,844.1)

For the first nine months of fiscal year 2023, cash used for investing activities was $4,399.8. The use of cash primarily resulted from additions to plant and equipment, including long-term deposits, of $3,163.5, investment in and advances to unconsolidated affiliates of $912.0, and an investment in financing receivables of $665.0. Refer to the Capital Expenditures section below for further detail. Proceeds from investments of $766.0 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 $443.4.

For the first nine months of fiscal year 2022, cash used for investing activities was $2,844.1. Capital expenditures primarily included $2,139.1 for additions to plant and equipment, including long-term deposits and $1,650.9 for investment in and advances to unconsolidated affiliates. Proceeds from investments of $2,219.2 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 $1,247.9.

Capital Expenditures

We define capital expenditures as cash flows for additions to plant and equipment, including long-term deposits, acquisitions (less cash acquired), investment in and advances to unconsolidated affiliates, and investment in financing receivables on our consolidated statement of cash flows. Beginning in fiscal year 2023, we 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 joint venture partners' equity contributions to NGHC as well as non-recourse project financing obtained 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 57.

						Nine Months Ended
						30 June
						2023			2022
Additions to plant and equipment, including long-term deposits						$3,163.5			$2,139.1
Acquisitions, less cash acquired						—			65.1
Investment in and advances to unconsolidated affiliates						912.0			1,650.9
Investment in financing receivables						665.0			—
NGHC expenditures not funded by Air Products' equity						(656.0)			—
Capital Expenditures						$4,084.5			$3,855.1

Capital expenditures for the first nine months of fiscal year 2023 totaled $4,084.5 compared to $3,855.1 for the first nine 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. The investment in financing receivables of $665.0 primarily includes progress payments towards the purchase of a natural gas-to-syngas processing facility in Uzbekistan. Refer to Note 18, Supplemental Information, 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 $5.0 billion to $5.5 billion.

Cash Flows From Financing Activities

Nine Months Ended 30 June			2023			2022
Long-term debt proceeds			$2,116.3			$357.0
Payments on long-term debt			(605.8)			(400.0)
Net increase in commercial paper and short-term borrowings			567.3			255.0
Dividends paid to shareholders			(1,107.9)			(1,023.9)
Proceeds from stock option exercises			19.5			16.3
Investments by noncontrolling interests			188.8			21.0
Other financing activities			(79.3)			(37.5)
Cash Provided by (Used for) Financing Activities			$1,098.9			($812.1)

For the first nine months of fiscal year 2023, cash provided by financing activities was $1,098.9. The source of cash was primarily driven by long-term debt proceeds of $2,116.3, and an increase in commercial paper and short-term borrowings of $567.3, partially offset by dividend payments to shareholders of $1,107.9 and payments on long-term debt of $605.8. Refer to the Credit Facilities section below and Note 11, Debt, to the consolidated financial statements for additional information.

For the first nine months of fiscal year 2022, cash used for financing activities was $812.1. The use of cash was primarily driven by dividend payments to shareholders of $1,023.9 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 long-term debt proceeds and short-term borrowings of $357.0 and $255.0, respectively.

Financing and Capital Structure

Debt

Capital needs in the first nine months of fiscal year 2023 were satisfied with our cash balance, cash from operations, commercial paper and long-term borrowings. Total debt increased from $7,644.8 as of 30 September 2022 to $9,391.9 as of 30 June 2023, primarily due to U.S. Dollar- and Euro-denominated fixed-rate notes that were issued in the second quarter of fiscal year 2023 and an increase in outstanding commercial paper. Total debt includes related party debt of $327.3 and $781.0 as of 30 June 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 30 June 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 30 June 2023 and 30 September 2022, expressed as a percentage of total capitalization, was 37.9% and 35.8%, respectively. No borrowings were outstanding under the 2021 Credit Agreement as of 30 June 2023.

We also have credit facilities available to certain of our foreign subsidiaries totaling $1,621.8, of which $1,031.1 was borrowed and outstanding as of 30 June 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.

In May 2023, NGHC secured non-recourse project financing of approximately $6.1 billion, which is expected to fund about 73% of the NEOM Green Hydrogen project over the construction period. Under this financing, the assets of NGHC can only be used to settle obligations of the joint venture, and creditors of NGHC do not have recourse to the general credit of Air Products. As of 30 June 2023, no borrowings were outstanding. In July 2023, the joint venture completed its first drawdown on the project financing of $1.3 billion. Refer to Note 3, Variable Interest Entities, to the consolidated financial statements for additional information.

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 nine months of fiscal years 2023 or 2022. As of 30 June 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. In January 2023, the Board of Directors approved an increase to our quarterly dividend of 8%, or $0.13 per share, marking the 41st consecutive year that we have increased our quarterly dividend. We expect to continue to pay cash dividends in the future at comparable or increased levels.

Dividends are paid quarterly, usually during the sixth week after the close of the fiscal quarter. On 21 July 2023, the Board of Directors declared a quarterly dividend of $1.75 per share that is payable on 13 November 2023 to shareholders of record at the close of business on 2 October 2023.

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									Nine Months Ended
			30 June									30 June
			2023			2022						2023			2022
Service cost			$5.7			$9.9						$17.5			$30.3
Non-service cost (benefit)			22.0			(9.5)						64.4			(33.4)
Other			0.2			0.2						0.7			1.2
Net Periodic Cost (Benefit)			$27.9			$0.6						$82.6			($1.9)

Net periodic cost was $27.9 and $82.6 for the three and nine months ended 30 June 2023, respectively, versus a cost (benefit) of $0.6 and ($1.9) for the three and nine months ended 30 June 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 nine 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 nine months ended 30 June 2023 and 2022, our cash contributions to funded pension plans and benefit payments for unfunded pension plans were $22.0 and $31.7, 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 nine 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 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 $45 and $105 for the three and nine months ended 30 June 2023. There were no other changes to our estimates during the first nine months of fiscal year 2023 that had a significant impact on our financial condition, change in financial condition, liquidity, or results of operations.