Air Products & Chemicals, Inc. - Annual Report: 2015 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

OR

Commission file number 1-4534

AIR PRODUCTS AND CHEMICALS, INC.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

The aggregate market value of the voting stock held by non-affiliates of the registrant on 31 March 2015 was approximately $32.4 billion. For purposes of the foregoing calculations all directors and/or executive officers have been deemed to be affiliates, but the registrant disclaims that any such director and/or executive officer is an affiliate.

The number of shares of common stock outstanding as of 31 October 2015 was 215,426,569.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on 28 January 2016 are incorporated by reference into Part III.

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AIR PRODUCTS AND CHEMICALS, INC.

ANNUAL REPORT ON FORM 10-K

For the fiscal year ended 30 September 2015

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PART I

General Description of Business

Air Products and Chemicals, Inc. (“we,” “our,” “us,” the “Company,” “Air Products,” or “registrant”), a Delaware corporation originally founded in 1940, serves energy, electronics, chemicals, metals, and manufacturing customers globally with a unique portfolio of products, services, and solutions that include atmospheric gases, process and specialty gases, electronics and performance materials, equipment, and services. The Company is the world’s largest supplier of hydrogen and has built leading positions in growth markets such as helium, refinery hydrogen, semiconductor materials, natural gas liquefaction, and advanced coatings and adhesives. As used in this report, unless the context indicates otherwise, the terms “we,” “our,” “us,” the “Company,” or “registrant” include controlled subsidiaries, affiliates, and predecessors of Air Products and its controlled subsidiaries and affiliates.

The Company manufactures and distributes products in two principal lines of business: Industrial Gases and Materials Technologies. Industrial Gases’ primary products are atmospheric gases, process gases, and equipment for air separation. Materials Technologies’ primary products are performance materials and chemicals, such as epoxy amine curing agents, polyurethane catalysts, additives, and specialty surfactants, and electronics materials such as specialty gases, chemical mechanical planarization slurries, and specialty chemicals. The Company also designs and manufactures equipment for natural gas liquefaction and helium distribution and is constructing waste-to-energy facilities for the production of electricity.

On 1 October 2014, the Company reorganized its business into seven reporting segments under which it manages its operations, assesses performance and reports earnings: Industrial Gases – Americas; Industrial Gases – EMEA (Europe, Middle East, and Africa); Industrial Gases – Asia; Industrial Gases – Global; Materials Technologies; Energy-from-Waste; and Corporate and other. Previously, we organized our operations into four reportable business segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy. Refer to Note 26, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments and segment reorganization.

On 16 September 2015, the Company announced that its Board of Directors approved a preliminary plan to spin off its Materials Technologies business, subject to customary conditions including regulatory approvals, into a standalone, publicly traded corporation via a distribution to its shareholders. The targeted completion and final approval of the spin-off is prior to September 2016, subject to approvals. The distribution is intended to be tax-free to the Company and its shareholders for U.S. federal income tax purposes. The results of operations, financial condition and cash flows for the Materials Technologies business to be included in the spin-off are, and will continue to be, presented within the Company’s consolidated financial statements as continuing operations until the spin-off is complete, at which time the financial presentation of the historical results of this business will be reflected as a discontinued operation.

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Narrative Description of Business by Segments

Industrial Gases Business

The Company’s Industrial Gases business produces atmospheric gases (oxygen, nitrogen, argon, and rare gases), process gases (hydrogen, helium, carbon dioxide, carbon monoxide, syngas and specialty gases) and equipment for the production or processing of gases such as air separation units and non-cryogenic generators. Atmospheric gases are produced through various air separation processes of which cryogenic is the most prevalent. Process gases are produced by methods other than air separation. For example, hydrogen is produced by steam methane reforming of natural gas or by purifying byproduct sources obtained from the chemical and petrochemical industries; and helium is produced mainly as a byproduct of natural gas production and purified before resale. The Company has recently pioneered new technology for extracting helium from a carbon dioxide steam.

The Company’s Industrial Gases business is organized and operated regionally. The regional Industrial Gases segments (Americas, EMEA, and Asia) include the results of our regional Industrial Gases businesses, which supply gases and related equipment in the relevant region to diversified customers in many industries, including those in metals, glass, chemical processing, electronics, energy production and refining, food processing, metallurgical industries, medical, and general manufacturing. Hydrogen is used by refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of gasoline and diesel fuels. The chemicals industry uses hydrogen, oxygen, nitrogen, carbon monoxide and syngas as feedstocks in the production of many basic chemicals. The energy production industry uses nitrogen injection for enhanced recovery of oil and natural gas and oxygen for gasification. Oxygen is used in combustion and industrial heating applications, including in the steel, certain nonferrous metals, glass and cement industries. Nitrogen applications are used in food processing for freezing and preserving flavor and nitrogen for inerting is used in various fields, including the metallurgical, chemical, and semiconductor industries. Helium is used in laboratories and healthcare for cooling and in other industries for pressurizing, purging and lifting. Argon is used in the metals and other industries for its unique inerting, thermal conductivity and other properties. Industrial gases are also used in welding and providing healthcare and are utilized in various manufacturing processes to make them more efficient and to optimize performance.

We distribute gases to our customers through a variety of supply modes:

Liquid Bulk—Product is delivered in bulk (in liquid or gaseous form) by tanker or tube trailer and stored, usually in its liquid state, in equipment designed and installed typically by the Company at the customer’s site for vaporizing into a gaseous state as needed. Liquid bulk sales are usually governed by three- to five-year contracts.

Packaged Gases—Small quantities of product are delivered in either cylinders or dewars. The Company operates packaged gas businesses in Europe, Asia, and Latin America. In the United States, the Company’s packaged gas business sells products only for the electronics and magnetic resonance imaging (principally helium) industries.

On-Site Gases—Large quantities of hydrogen, carbon monoxide, nitrogen, oxygen, and syngas (a mixture of hydrogen and carbon monoxide) are provided to customers, principally the energy production and refining, chemical, and metallurgical industries worldwide who require large volumes of gases that have relatively constant demand. Gases are produced at large facilities located adjacent to customers’ facilities or by pipeline systems from centrally located production facilities and are generally governed by 15- to 20- year contracts. The Company also delivers small quantities of product through small on-site plants (cryogenic or non-cryogenic generators), typically either via a 10- to 15- year sale of gas contract or through the sale of the equipment to the customer.

Electricity is the largest cost component in the production of atmospheric gases, and natural gas is the principal raw material for hydrogen, carbon monoxide, and syngas production. We mitigate energy and natural gas price fluctuations contractually through pricing formulas, surcharges, and cost pass-through arrangements. During fiscal year 2015, no significant difficulties were encountered in obtaining adequate supplies of power and natural gas.

The regional Industrial Gases segments also include our share of the results of several joint ventures accounted for by the equity method. The largest of these joint ventures operate in Mexico, Italy, South Africa, India, Saudi Arabia, and Thailand.

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Each of the regional Industrial Gases segments competes against three global industrial gas companies: Air Liquide S.A., Linde AG, and Praxair, Inc.; as well as regional competitors, including Airgas, Inc. Competition in Industrial Gases is based primarily on price, reliability of supply, and the development of industrial gas applications. In locations where we have pipeline networks, which enable us to provide reliable and economic supply of products to larger customers, we derive a competitive advantage.

Overall regional industrial gases sales constituted approximately 76% of consolidated sales in fiscal year 2015, 77% in fiscal year 2014, and 78% in fiscal year 2013. Sales of tonnage hydrogen and related products constituted approximately 19% of consolidated sales in fiscal year 2015, 22% in fiscal year 2014 and 21% in fiscal year 2013. Sales of atmospheric gases constituted approximately 35% of consolidated sales in fiscal year 2015, 33% in fiscal year 2014 and 35% in fiscal year 2013.

Industrial Gases Equipment

The Company designs and manufactures equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and liquid helium and liquid hydrogen transport and storage. The Industrial Gases – Global segment includes cryogenic and non-cryogenic equipment for air separation. The equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery, and processing and steel and primary metals processing. Other activities, which are managed globally instead of regionally, are also part of this segment, such as technology development for air separation. The Corporate and other segment includes two global equipment businesses, our LNG sale of equipment business and our liquid helium and liquid hydrogen transport and storage containers business. Steel, aluminum, and capital equipment subcomponents (compressors, etc.) are the principal raw materials in the manufacturing of equipment in this business segment. Adequate raw materials for individual projects are acquired under firm purchase agreements. Equipment is produced at the Company’s manufacturing sites with certain components being procured from subcontractors and vendors. Competition in the equipment business is based primarily on technological performance, service, technical know-how, price and performance guarantees.

The backlog of equipment orders (including letters of intent believed to be firm) was approximately $1.9 billion on 30 September 2015 (as compared with a total backlog of approximately $520 million on 30 September 2014). The increase in the sales backlog primarily results from a new multi-year contract with a joint venture in Jazan, Saudi Arabia for the construction of an industrial gas facility that will supply gases to Saudi Aramco. Revenue from this contract is recognized under the percent complete method based on costs incurred to date compared with total costs to be incurred. The Company estimates that up to 85% of the total sales backlog as of 30 September 2015 will not be recognized as revenue during fiscal year 2016, dependent on execution schedules of the relevant projects.

Energy-from-Waste

The Energy-from-Waste business consists of two projects that are under construction in Tees Valley, United Kingdom. These projects are designed to process waste materials and generate renewable power for customers under long-term contracts. In November 2015, the Company suspended construction of the second project until certain design issues of the first project are understood, remediated, and can be efficiently integrated into the design of the second project.

Materials Technologies

Materials Technologies is a global business that delivers innovation-driven solutions for specific customer applications within niche markets. This segment employs applications technology to provide solutions to a broad range of global industries through chemical synthesis, analytical technology, process engineering, and surface science. It is comprised of two business divisions: Performance Materials, which is focused on a portfolio of additives products that provide high value properties at low cost across a variety of industries, and Electronics Materials, which is focused on supplying critical materials and equipment to the semiconductor industry.

The Performance Materials Division is based on critical competencies in specialty amines, alkoxylates and silicone chemistries. The business provides a range of products concentrated in the areas of epoxy curing agents, accelerators and catalysts, polyurethane catalysts, surfactants and curatives and specialty additives, including surfactants, wetting agents, dispersants and de-foaming agents. The products are used in a variety of industry applications, including coatings, inks, adhesives, construction and civil engineering, personal care, institutional and industrial cleaning, mining, oil refining, and polyurethanes. The Performance Materials businesses focus on the development of new additive materials aimed at providing unique technologies and functionality.

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The Electronics Materials Division maintains critical competencies in molecular design, formulation expertise and ultra-high purity chemistry. This division provides the semiconductor industry with high purity process materials for deposition, metallization, chamber cleaning and etching, chemicals mechanical planarization slurries, organosilanes, organometalics and liquid dopants for thin film deposition, formulated chemical products for post-etch cleaning and delivery equipment and services primarily for the manufacture of silicon and compound semiconductors and thin film transistor liquid crystal displays.

Both businesses are based on strong customer relationships and collaborative development, technology and innovation leadership, unique product positioning, and a strong global infrastructure with in-region flexible manufacturing capabilities. The segment maintains manufacturing operations in North America, Europe and Asia and manages a complex global supply chain. Products are delivered in bulk containers of different sizes, some of which are returnable.

Materials Technologies uses a wide variety of raw materials including amines and amine derivatives, alcohols and surfactants, tungsten powder, ethylene oxide, and ketones. During fiscal year 2015, no significant difficulties were encountered in obtaining adequate supplies of energy or raw materials.

Materials Technologies faces competition on a product-by-product basis against competitors ranging from niche suppliers with a single product to larger and more vertically integrated companies. Competition is principally conducted on the basis of price, quality, product performance, reliability of product supply, technical innovation, service, and global infrastructure.

Total sales from Materials Technologies constituted approximately 21% of consolidated sales in fiscal year 2015, 20% in fiscal year 2014, and 18% in fiscal year 2013. Performance Materials Division sales constituted approximately 11% of consolidated sales in fiscal year 2015, 11% in fiscal year 2014 and 10% in fiscal year 2013, and Electronics Materials Division sales constituted approximately 10% of consolidated sales in fiscal year 2015, 9% in fiscal year 2014 and 8% in fiscal year 2013.

Narrative Description of the Company’s Business Generally

The Company, through subsidiaries, affiliates, and less-than-controlling interests, conducts business in 50 countries outside the United States. Its international businesses are subject to risks customarily encountered in foreign operations, including fluctuations in foreign currency exchange rates and controls; import and export controls; and other economic, political, and regulatory policies of local governments.

The Company has majority or wholly owned foreign subsidiaries that operate in Canada, 17 European countries (including the United Kingdom, the Netherlands, and Spain), 11 Asian countries (including China, Korea, and Taiwan), 7 Latin American countries (including Chile and Brazil), 2 African countries, and 1 Middle Eastern country. The Company also owns less-than-controlling interests in entities operating in Europe, Asia, Africa, the Middle East, and Latin America (including Italy, Germany, China, India, Saudi Arabia, Singapore, Thailand, United Arab Emirates, South Africa, and Mexico).

Financial information about the Company’s foreign operations and investments is included in Note 8, Summarized Financial Information of Equity Affiliates; Note 23, Income Taxes; and Note 26, Business Segment and Geographic Information, to the consolidated financial statements included under Item 8, herein. Information about foreign currency translation is included under “Foreign Currency” in Note 1, Major Accounting Policies, and information on the Company’s exposure to currency fluctuations is included in Note 13, Financial Instruments, to the consolidated financial statements, included under Item 8, below, and in “Foreign Currency Exchange Rate Risk,” included under Item 7A, below. Export sales from operations in the United States to third-party customers amounted to $398.8 million, $378.7 million, and $410.3 million in fiscal years 2015, 2014, and 2013, respectively.

Technology Development

The Company pursues a market-oriented approach to technology development through research and development, engineering, and commercial development processes. It conducts research and development principally in its laboratories located in the United States (Trexlertown, Pennsylvania; Carlsbad, California; Milton, Wisconsin; and Phoenix, Arizona), Canada (Vancouver), the United Kingdom (Basingstoke and Carrington), Germany (Hamburg), the Netherlands (Utrecht), Spain (Barcelona), Japan (Kawasaki), China (Shanghai), Korea (Giheung), and Taiwan (Chupei and Hsinchu City). The Company also funds and cooperates in research and development programs conducted by a number of major universities and undertakes research work funded by others—principally the United States government.

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The Company’s research groups are aligned with and support the research efforts of various businesses throughout the Company. Development of technology for use within the Industrial Gases business focuses primarily on new and improved processes and equipment for the production and delivery of industrial gases and new or improved applications for industrial gas products. Research and technology development for Materials Technologies supports development of new products and applications to strengthen and extend the Company’s present positions as well as to lower processing costs and develop new processes for the new products.

Research and development expenditures were $138.8 million during fiscal year 2015, $141.4 million in fiscal year 2014, and $133.7 million in fiscal year 2013. In addition, the Company expended $6.0 million on customer-sponsored research activities during fiscal year 2015, $18.9 million in fiscal year 2014, and $45.5 million in fiscal year 2013.

The Company owns approximately 1,000 United States patents, approximately 4,000 foreign patents, and is a licensee under certain patents owned by others. While the patents and licenses are considered important, the Company does not consider its business as a whole to be materially dependent upon any particular patent, patent license, or group of patents or licenses.

Environmental Controls

The Company is subject to various environmental laws and regulations in the countries in which it has operations. Compliance with these laws and regulations results in higher capital expenditures and costs. In the normal course of business, the Company is involved in proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the federal Superfund law; Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Additional information with respect to these proceedings is included under Item 3, Legal Proceedings, below. The Company’s accounting policy for environmental expenditures is discussed in Note 1, Major Accounting Policies, and environmental loss contingencies are discussed in Note 17, Commitments and Contingencies, to the consolidated financial statements, included under Item 8, below.

The amounts charged to income from continuing operations related to environmental matters totaled $28.3 million in fiscal 2015, $35.1 million in 2014, and $37.1 million in 2013. These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal Company standards. Refer to Note 17, Commitments and Contingencies, to the consolidated financial statements for additional information.

The Company estimates that we spent $4.0 million in 2015 and $5.0 million in 2014 on capital projects to control pollution. Capital expenditures to control pollution in future years are estimated to be approximately $4.0 million in both 2016 and 2017.

Employees

On 30 September 2015, the Company (including majority-owned subsidiaries) had approximately 19,700 employees, of whom approximately 19,400 were full-time employees and of whom approximately 12,500 were located outside the United States. The Company has collective bargaining agreements with unions at various locations that expire on various dates over the next four years. The Company considers relations with its employees to be satisfactory.

Available Information

All periodic and current reports, registration statements, and other filings that the Company is required to file with the Securities and Exchange Commission (SEC), including the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the 1934 Act Reports), are available free of charge through the Company’s Internet website at www.airproducts.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. All 1934 Act Reports filed during the period covered by this report were available on the Company’s website on the same day as filing.

The public may also read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

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Seasonality

Although the Company’s businesses are not subject to seasonal fluctuations to any material extent, Materials Technologies is susceptible to the cyclical nature of the electronics industry and to seasonal fluctuations in underlying end-use performance materials markets.

Working Capital

Due to the anticipated spin-off of our Materials Technologies business in 2016, our debt portfolio has a higher balance of short-term borrowings and long-term debt due within the next 12 months, which has resulted in negative working capital as of 30 September 2015. Maintaining the short-term borrowing balance at its current level provides flexibility in how we manage cash flows associated with the anticipated spin-off.

The Company maintains inventory where required to facilitate the supply of products to customers on a reasonable delivery schedule. Industrial Gases’ inventory consists primarily of industrial, specialty gas, and crude helium inventories supplied to customers through liquid bulk and packaged gases supply modes. Materials Technologies’ inventories consist primarily of bulk and packaged specialty gases and chemicals, bulk and packaged performance chemical solutions and also include inventories to support sales of equipment and services.

Customers

We do not have a homogeneous customer base or end market, and no single customer accounts for more than 10% of our consolidated revenues. We do have concentrations of customers in specific industries, primarily refining, chemicals, and electronics. Within each of these industries, the Company has several large-volume customers with long-term contracts. A negative trend affecting one of these industries, or the loss of one of these major customers, although not material to our consolidated revenue, could have an adverse impact on the affected segment.

Governmental Contracts

No segment’s business is subject to a government entity’s renegotiation of profits or termination of contracts that would be material to our business as a whole.

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Executive Officers of the Company

The Company’s executive officers and their respective positions and ages on 24 November 2015 follow.

Information with respect to offices held is stated in fiscal years.

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In conjunction with evaluating an investment in the Company and the forward-looking information contained in this Annual Report on Form 10-K or presented elsewhere by management from time to time, you should carefully read the following risk factors. Any of the following risks could have a material adverse effect on our business, operating results, financial condition, and the actual outcome of matters as to which forward-looking statements are made and could adversely affect the value of an investment in our common stock as well. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that adversely affect our business, performance, or financial condition in the future that are not presently known, are not currently believed to be significant, or are not identified below because they are common to all businesses.

Overall Economic and Supply/Demand Conditions—A weakening or reversal of economic recovery or product supply versus demand imbalance in certain markets in which the Company does business may decrease the demand for its goods and services and adversely impact its revenues, operating results, and cash flow.

Demand for the Company’s products and services depends in part on the general economic conditions affecting the countries and industries in which the Company does business. In the past few years, uncertain economic conditions in certain geographies and changing supply and demand balances in markets served by the Company have impacted and may in the future impact demand for the Company’s products and services, in turn negatively impacting the Company’s revenues and earnings. Unfavorable conditions can depress sales in a given market, affect our margins, constrain our operating flexibility, impact new project on-stream timing, or result in charges which are unusual or nonrecurring. Excess capacity in the Company’s or its competitors’ manufacturing facilities could decrease the Company’s ability to maintain pricing and generate profits. Unanticipated contract terminations or project delays by current customers can also negatively impact financial results. Our operating results in one or more segments may also be affected by uncertain or deteriorating economic conditions particularly germane to that segment or to particular customer markets within that segment.

Operational, Political, and Legal Risks of International Operations—The Company’s foreign operations can be adversely impacted by nationalization or expropriation of property, undeveloped property rights and legal systems, or political instability. Developing market operations present special risks.

The Company has extensive international operations. In addition, the Company is actively investing significant capital and other resources in emerging markets. The Company’s operations in certain foreign jurisdictions may be subject to project delays due to unanticipated government actions and to nationalization and expropriation risk, and some of its contractual relationships within these jurisdictions are subject to cancellation without full compensation for loss. Economic and political conditions within foreign jurisdictions, social unrest, or strained relations between countries can cause fluctuations in demand, price volatility, supply disruptions, or loss of property. The occurrence of any of these risks could have a material adverse impact on the Company’s financial condition, results of operation, and cash flow.

Our developing market operations may be subject to greater risks than those faced by our operations in mature economies, including geopolitical, legal, economic and talent risks. Our success will depend, in part, on our ability to manage the risks inherent in operating in a developing market, including unfamiliar regulatory environments, new relationships with local partners, language and cultural differences, and tailoring products for acceptance by local markets.

Currency Fluctuations—Changes in foreign currencies may adversely affect the Company’s financial results.

The majority of the Company’s revenue is generated from sales outside the United States, exposing it to risks related to fluctuations in foreign currency exchange rates. Our Industrial Gases business is primarily exposed to translational currency risk as the results of its foreign operations are translated into U.S. dollars at current exchange rates throughout the fiscal period. Our Materials Technologies business is also significantly exposed to transactional currency impacts as many of its products are manufactured in one country and sold in another.

The Company uses certain financial instruments to mitigate some of these effects. The Company’s policy is to minimize cash flow volatility from changes in currency exchange rates. The Company chooses not to hedge the translation of its foreign subsidiaries’ earnings into dollars. Accordingly, reported sales, net earnings, cash flows,

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and fair values have been and in the future will be affected by changes in foreign exchange rates. For a more detailed discussion of currency exposure, see Item 7A, below.

Interest Rate Increases—The Company’s earnings, cash flow, and financial position can be impacted by interest rate increases and access to credit.

At 30 September 2015, the Company had total consolidated debt of $5,879.0 million, of which $1,929.9 million will mature in the next twelve months. The Company expects to continue to incur indebtedness to fund new projects and replace maturing debt. Although the Company actively manages its interest rate risk through the use of derivatives and diversified debt obligations, not all borrowings at variable rates are hedged, and new debt will be priced at market rates. If interest rates increase, the Company’s interest expense could increase significantly, affecting earnings and reducing cash flow available for working capital, capital expenditures, acquisitions, and other purposes. In addition, changes by any rating agency to the Company’s outlook or credit ratings could increase the Company’s cost of borrowing and weaken our ability to access capital and credit markets on terms commercially acceptable to us. For a more detailed discussion of interest rate risk, see Item 7A, below.

New Technologies—New technologies create performance risks that could impact our financial results or reputation.

A number of new technologies and new product offerings are being developed or implemented by the Company. Some of our existing technologies are being implemented in products and designs beyond our experience base. These technological expansions can create nontraditional performance risks to our operations. Failure of the technologies to work as predicted or unintended consequences of new designs or uses, could lead to cost overruns, project delays, financial penalties, damage to our reputation, or impairment of assets. In particular, the Company has invested approximately $1 billion to date into two waste-to-energy projects in Tees Valley, United Kingdom, which rely on technological processes that have not been commercialized to date at the same scale or in the same combination. The Company has experienced technical challenges and on-stream delays in starting up the first of these projects and, as a result, additional capital investments are expected.

Our restructuring actions could have long-term adverse effects on our business.

We reorganized the Company effective 1 October 2014. This reorganization and our cost reduction measures may reduce our available talent and other resources, impact our ability to attract and retain key employees, could slow improvements in our products and services, and adversely affect our ability to respond to customers. Failure to achieve targeted improvements may diminish the operational and financial benefits we realize from such actions. These circumstances could adversely impact our business and financial statements.

Raw Material and Energy Cost and Availability—Interruption in ordinary sources of supply or an inability to recover increases in energy and raw material costs from customers could result in lost sales or reduced profitability.

Hydrocarbons, including natural gas, are the primary feedstock for the production of hydrogen, carbon monoxide, and syngas. Energy, including electricity, natural gas, and diesel fuel for delivery trucks, is the largest cost component of the Company’s business. Because the Company’s industrial gas facilities use substantial amounts of electricity, energy price fluctuations could materially impact the Company’s revenues and earnings. A disruption in the supply of energy, components, or raw materials, whether due to market conditions, legislative or regulatory actions, natural events, or other disruption, could prevent the Company from meeting its contractual commitments, harming its business and financial results.

The Company’s supply of crude helium for purification and resale is largely dependent upon natural gas production by crude helium suppliers. Lower natural gas production (which may result from natural gas pricing or supplier operating issues) or interruptions in sales from other crude helium suppliers, can reduce the Company’s supplies of crude helium available for processing and resale to its customers.

The Materials Technologies segment uses a wide variety of raw materials, including alcohols, ethyleneamines, cyclohexylamine, acrylonitriles, and glycols. Shortages or price escalation in these materials could negatively impact financial results.

The Company typically contracts to pass through cost increases in energy and raw materials to its customers, but cost variability can still have a negative impact on its results. The Company may not be able to raise prices as quickly as costs rise, or competitive pressures may prevent full recovery. Increases in energy or raw material

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costs that cannot be passed on to customers for competitive or other reasons would negatively impact the Company’s revenues and earnings. Even where costs are passed through, price increases can cause lower sales volume.

Regulatory Compliance—The Company is subject to extensive government regulation in jurisdictions around the globe in which it does business. Changes in regulations addressing, among other things, environmental compliance, import/export restrictions, anti-bribery and corruption, and taxes, can negatively impact the Company’s financial condition, results of operation and cash flow.

The Company is subject to government regulation in the United States and foreign jurisdictions in which it conducts its business. The application of laws and regulations to the Company’s business is sometimes unclear. Compliance with laws and regulations may involve significant costs or require changes in business practice that could result in reduced profitability. Determination of noncompliance can result in penalties or sanctions that could also impact financial results. Compliance with changes in laws or regulations can require additional capital expenditures or increase operating costs. Export controls or other regulatory restrictions could prevent the Company from shipping its products to and from some markets or increase the cost of doing so. Export restrictions continue to attract external focus by multiple customs and export enforcement authorities. Changes in tax laws and regulations and international tax treaties could affect the financial results of the Company’s businesses. Increasingly aggressive enforcement of anti-bribery and anti-corruption requirements, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act and the China Anti-Unfair Competition Law, could subject the Company to criminal or civil sanctions if a violation occurs. We have internal control policies and procedures to foster compliance with these laws, including compliance and training programs for our employees and established due diligence procedures with regard to third parties; however, the foregoing cannot eliminate the risk that violations could be committed by our employees, agents or joint venture partners.

Greenhouse Gases—Legislative and regulatory responses to global climate change create financial risk.

Some of the Company’s operations are within jurisdictions that have or are developing regulatory regimes governing emissions of greenhouse gases (GHG). These include existing coverage under the European Union Emission Trading Scheme, California’s cap and trade scheme, Alberta’s Emission Reduction Program, China’s Emission Trading Scheme pilots, South Korea’s Emission Trading Scheme, and mandatory reporting and anticipated constraints on GHG emissions under an Ontario cap and trade scheme, nation-wide expansion of the China Emission Trading Scheme, and federal emission performance standards in Canada. In addition, the U.S. Environmental Protection Agency (EPA) requires mandatory reporting of GHG emissions and is regulating GHG emissions for new construction and major modifications to existing facilities. Moreover, some jurisdictions have various mechanisms to target the power sector (e.g. U.S. EPA Clean Power Plan) to achieve emission reductions. These reductions often result in higher power costs.

Increased public concern may result in more international, U.S. federal, and/or regional requirements to reduce or mitigate the effects of GHG. Although uncertain, these developments could increase the Company’s costs related to consumption of electric power, hydrogen production, and fluorinated gases production. The Company believes it will be able to mitigate some of the increased costs through its contractual terms, but the lack of definitive legislation or regulatory requirements prevents an accurate estimate of the long-term impact on the Company. Any legislation that limits or taxes GHG emissions could impact the Company’s growth, increase its operating costs, or reduce demand for certain of its products.

Environmental Compliance—Costs and expenses resulting from compliance with environmental regulations may negatively impact the Company’s operations and financial results.

The Company is subject to extensive federal, state, local, and foreign environmental and safety laws and regulations concerning, among other things, emissions in the air; discharges to land and water; and the generation, handling, treatment, and disposal of hazardous waste and other materials. The Company takes its environmental responsibilities very seriously, but there is a risk of environmental impact inherent in our manufacturing operations and transportation of chemicals. Future developments and more stringent environmental regulations may require the Company to make additional unforeseen environmental expenditures. In addition, laws and regulations may require significant expenditures for environmental protection equipment, compliance, and remediation. These additional costs may adversely affect financial results. For a more detailed description of these matters, see “Narrative Description of the Company’s Business Generally—Environmental Controls,” above.

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We may not be able to successfully control or reduce costs to improve productivity and streamline operations.

Achieving our financial goals depends significantly on our efforts to control or reduce our operating costs. Because many of our costs are affected by factors outside or substantially outside our control, we generally must seek to control or reduce costs through operating efficiency. If we are not able to identify and execute efforts designed to control or reduce costs and increase operating efficiency, our ability to attain our goals could be adversely impacted.

Catastrophic Events—Catastrophic events could disrupt the Company’s operations or the operations of its suppliers or customers, having a negative impact on the Company’s business, financial results, and cash flow.

The Company’s operations could be impacted by catastrophic events outside the Company’s control, including severe weather conditions such as hurricanes, floods, earthquakes, storms, epidemics, or acts of war and terrorism. Any such event could cause a serious business disruption that could affect the Company’s ability to produce and distribute its products and possibly expose it to third-party liability claims. Additionally, such events could impact the Company’s suppliers or customers, in which event energy and raw materials may be unavailable to the Company, or its customers may be unable to purchase or accept the Company’s products and services. Any such occurrence could have a negative impact on the Company’s operations and financial results.

Operational Risks—Operational and execution risks may adversely affect the Company’s operations or financial results.

The Company’s operation of its facilities, pipelines, and delivery systems inherently entails hazards that require continuous oversight and control, such as pipeline leaks and ruptures, fire, explosions, toxic releases, mechanical failures, or vehicle accidents. If operational risks materialize, they could result in loss of life, damage to the environment, or loss of production, all of which could negatively impact the Company’s ongoing operations, reputation, financial results, and cash flow. In addition, the Company’s operating results are dependent on the continued operation of its production facilities and its ability to meet customer requirements, which depends, in part, on the Company’s ability to properly maintain and replace aging assets. Operating results are also dependent on the Company’s ability to complete new construction projects on time, on budget, and in accordance with performance requirements, which depends, in part, on the availability of adequate sources of labor in the geographies where the Company intends to build new plants. Failure to do so may expose the Company to loss of revenue, potential litigation, and loss of business reputation.

Information Security—The security of the Company’s Information Technology systems could be compromised, which could adversely affect its ability to operate.

We depend on information technology to enable us to operate efficiently and interface with customers as well as to maintain financial accuracy and efficiency. Our information technology capabilities are delivered through a combination of internal and external services and services providers. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to our confidential business information or multiple site impact through a security breach. As with all large systems, our information systems could be penetrated by outside parties intent on extracting information, corrupting information, disrupting business processes, or causing harm to persons or property. The Company’s systems have in the past been and likely will in the future be subject to sophisticated cyber security threats. To date, the Company is not aware of any significant impact on its operations or financial results from such attempts; however, unauthorized access could disrupt our business operations, result in the loss of assets, and have a material adverse effect on our business, financial condition, or results of operations.

The Company’s business involves the use, storage, and transmission of information about its employees, vendors, and customers. The protection of such information, as well as the Company’s information, is critical to the Company. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. The Company has established policies and procedures to help protect the security and privacy of this information. The Company also, from time to time, exports sensitive customer data and technical information to recipients outside the United States. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the

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potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception, could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business.

Litigation and Regulatory Proceedings—The Company’s financial results may be affected by various legal and regulatory proceedings, including those involving antitrust, tax, environmental, or other matters.

The Company is subject to litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. While the Company seeks to limit its liability in its commercial contractual arrangements, there are no guarantees that each contract will contain suitable limitations of liability or that limitations of liability will be enforceable at law. Also, the outcome of existing legal proceedings may differ from the Company’s expectations because the outcomes of litigation, including regulatory matters, are often difficult to predict reliably. Various factors or developments can lead the Company to change current estimates of liabilities and related insurance receivables, where applicable, or make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments, or changes in applicable law. A future adverse ruling, settlement, or unfavorable development could result in charges that could have a material adverse effect on the Company’s financial condition, results of operations and cash flow in any particular period. For a more detailed discussion of the legal proceedings involving the Company, see Item 3, below.

Our reputation, ability to do business, and results of operations may be impaired by improper conduct by any of our employees, agents, or business partners.

While we strive to maintain high standards, we cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners that would violate U.S. and/or non-U.S. laws or fail to protect our confidential information. Any such violations of law or improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, lead to substantial civil or criminal, monetary and non-monetary penalties, and increased costs of compliance, and damage our reputation.

Asset Impairments—The Company may be required to record impairment on its long-lived assets.

Weak demand may cause underutilization of the Company’s manufacturing capacity or elimination of product lines; contract terminations, customer shutdowns or default, or other inability to profitably operate facilities may force sale or abandonment of facilities and equipment or projects not to reach on-stream; and contractual provisions may allow customer buyout of facilities or equipment. These or other events associated with weak economic conditions or specific end market, product, or customer events may require the Company to record an impairment on tangible assets, such as facilities and equipment, or intangible assets, such as intellectual property or goodwill, which would have a negative impact on its financial results. If the Company is unable to recover its investment in the Tees Valley waste-to-energy projects, the Company may record an impairment on those investments.

Competition—Inability to compete effectively in a segment could adversely impact sales and financial performance.

The Company faces strong competition from several large global competitors and many smaller regional ones in many of its business segments. Introduction by competitors of new technologies, competing products, or additional capacity could weaken demand for or impact pricing of the Company’s products, negatively impacting financial results. In addition, competitors’ pricing policies could affect the Company’s profitability or its market share.

The proposed spin-off of our Materials Technologies business may not be completed on the currently contemplated timeline or terms, or at all, and may not achieve the intended benefits.

There can be no assurance that the spin-off of Materials Technologies will be completed in the contemplated manner or timeframe or at all. If the spin-off transaction is not completed in the contemplated manner or timeframe or not completed at all, among other things, the price of the Company’s stock may decline.

We cannot predict with certainty when the benefits expected from the proposed transaction will occur or the extent to which they will be achieved, if at all. For example, there can be no assurance that analysts and investors will place values on each of the independent companies that combined will equal the current trading value of the

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Company. In addition, if the proposed spin-off is consummated, our operational and financial profile will change and we will face new risks, including the possibility of reduced financial resources and less diversification of our revenue sources which could adversely impact our future results. Also, the changes in our operational and financial profile may not coincide with some of our shareholders’ investment strategies, which could cause investors to sell their shares and otherwise decrease demand for the Company’s common stock. Excess selling could cause the relative market price of our common stock to decrease and be subject to greater volatility following the consummation of the proposed spin-off.

If the spin-off of the Materials Technologies business, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, the Company and its shareholders could be subject to significant tax liabilities.

A condition to the spin-off of the Materials Technologies business is the receipt by us of an opinion of tax counsel, substantively to the effect that, among other things, the distribution of shares to our shareholders, will qualify as tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. Notwithstanding receipt of an opinion of tax counsel, the U.S. Internal Revenue Service could determine on audit that the distribution is taxable if it determines that any of the facts, assumptions, representations or undertakings underlying the opinion are not correct or have been violated or if it disagrees with the conclusions in the opinion. In addition, we intend for certain related transactions to qualify for tax-free treatment under federal, state and local tax law and/or foreign tax law.

If the distribution is determined to be taxable for U.S. federal income tax purposes, the Company and its shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities. For example, if the distribution fails to qualify for tax-free treatment, we would, for U.S. federal income tax purposes, be treated as if we had sold the common stock of the new company in a taxable sale for its fair market value, and our shareholders who are subject to U.S. federal income tax would be treated as receiving a taxable distribution in an amount equal to the fair market value of the common stock received in the distribution. In addition, if certain related transactions fail to qualify for tax-free treatment under federal, state, and local tax law and/or foreign tax law, the Company could incur significant tax liabilities under U.S. federal, state, local and/or foreign tax law.

We have not received any written comments from the Commission staff that remain unresolved.

Air Products and Chemicals, Inc. owns its principal administrative offices, which are the Company’s headquarters located in Trexlertown, Pennsylvania, as well as Hersham, England and Santiago, Chile. The Company leases administrative offices in Spain, Malaysia, and China for its Global Business Support organization.

The following is a description of the properties used by our seven business segments. We believe that our facilities are suitable and adequate for our current and anticipated future levels of operation.

Industrial Gases – Global

Management, sales, and engineering support for this business segment is based in our principal administrative offices noted above, and an office in India.

Air separation equipment is manufactured in Missouri, Utah, Pennsylvania, and China.

Research and development (R&D) activities for this business segment are conducted at 3 owned locations in the U.S. and Europe and 4 leased locations in Canada, Europe, and Asia.

Hydrogen fueling stations built by the Company support demonstration projects in California, Europe, and Asia.

Helium is processed at sites in Kansas, Wyoming, Colorado, and Texas; and then distributed to/from transfill sites in the U.S., Canada, Europe, and Asia.

Industrial Gases – Americas

This business segment currently operates from over 295 production and distribution facilities in North and South America (approximately 1/4^th of which are located on owned property), and 10% of which are integrated sites that serve dedicated customers as well as merchant customers. The Company has sufficient property rights and

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permits for the ongoing operation of our pipeline systems in the Gulf Coast, California, and Arizona in the United States and Alberta and Ontario, Canada. Management and sales support is based in our Trexlertown and Santiago offices referred to above, and at 10 leased properties located throughout North and South America.

Industrial Gases – EMEA

This business segment currently operates from over 150 production and distribution facilities in Europe, the Middle East, and Africa (approximately 1/3^rd of which are on owned property). The Company has sufficient property rights and permits for the ongoing operation of our pipeline systems in the Netherlands, the United Kingdom, Belgium, France, and Germany. Management and sales support for this business segment is based in Hersham, England referred to above, Barcelona, Spain and at 12 leased office sites located throughout the region.

Industrial Gases – Asia

Industrial Gases – Asia currently operates from over 160 production and distribution facilities within Asia (approximately 1/4^th of which are on owned property or long duration term grants). The Company has sufficient property rights and permits for the ongoing operation of our pipeline systems in China, Korea, Taiwan, Malaysia, Singapore, and Indonesia. Management and sales support for this business segment is based in Shanghai, China and Kuala Lumpur, Malaysia, and in 7 leased office locations throughout the region.

Materials Technologies

The Electronics Materials portion of this business segment has production, equipment manufacturing, and distribution operations at 24 sites in the United States, Europe, and Asia (1/3^rd of which are owned sites, and the remainder of which are on leased sites or on sites where long duration term grants have been obtained).

The Performance Materials portion of this business segment operates at 12 production sites globally, 50% of which are owned.

This business segment conducts R&D related activities at 11 locations worldwide, including: Pennsylvania, California, Wisconsin, and Arizona in the United States, the Netherlands, China, Japan, and multiple sites in Germany and Taiwan.

The management and sales support for Materials Technologies is based in our Trexlertown offices referred to above, Utrecht, the Netherlands, Shanghai, China, Kawasaki, Japan, Singapore, Seoul, Korea, and Hsin Chu, Taiwan.

Corporate and other

Corporate administrative functions are based in the Company’s administrative offices referred to above.

The Gardner Cryogenic business operates at facilities in Pennsylvania and Kansas in the United States and in France.

The LNG business has owned manufacturing facilities in Pennsylvania and Florida in the United States with management, engineering, and sales support based in the Trexlertown offices referred to above and a nearby leased office.

Energy-from-Waste

The Energy-from-Waste business is constructing two renewable energy facilities in Tees Valley, United Kingdom on properties under long-term leases. The management, engineering, and sales support staff for this business segment are located in the Trexlertown and Hersham offices referred to above and in Tees Valley.

In the normal course of business, the Company and its subsidiaries are involved in various legal proceedings, including contract, product liability, intellectual property, and insurance matters. Although litigation with respect to these matters is routine and incidental to the conduct of our business, such litigation could result in large monetary awards, especially if a civil jury is allowed to determine compensatory and/or punitive damages. However, we believe that litigation currently pending to which we are a party will be resolved without any material adverse effect on our financial position, earnings, or cash flows.

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From time to time, we are also involved in proceedings, investigations, and audits involving governmental authorities in connection with environmental, health, safety, competition, and tax matters.

The Company is a party to proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently there are approximately 37 sites on which a final settlement has not been reached where the Company, along with others, has been designated a potentially responsible party by the Environmental Protection Agency or is otherwise engaged in investigation or remediation, including cleanup activity at certain of its current and former manufacturing sites. We do not expect that any sums we may have to pay in connection with these matters would have a material adverse impact on our consolidated financial position. Additional information on the Company’s environmental exposure is included under “Narrative Description of the Company’s Business Generally—Environmental Controls.”

In September 2010, the Brazilian Administrative Council for Economic Defense (CADE) issued a decision against our Brazilian subsidiary, Air Products Brasil Ltda., and several other Brazilian industrial gas companies for alleged anticompetitive activities. CADE imposed a civil fine of R$179.2 million (approximately $45 million at 30 September 2015) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of the Company’s total revenue in Brazil in 2003.

We have denied the allegations made by the authorities and filed an appeal in October 2010 to the Brazilian courts. On 6 May 2014, our appeal was granted and the fine against Air Products Brasil Ltda. was dismissed. CADE has appealed that ruling and the matter remains pending. The Company, with advice of its outside legal counsel, has assessed the status of this matter and has concluded that, although an adverse final judgment after exhausting all appeals is possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements.

While we do not expect that any sums we may have to pay in connection with these or any other legal proceeding would have a material adverse effect on our consolidated financial position or net cash flows, a future charge for regulatory fines or damage awards could have a significant impact on our net income in the period in which it is recorded.

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PART II

Our common stock (ticker symbol APD) is listed on the New York Stock Exchange. Our transfer agent and registrar is Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342, Brentwood, New York 11717, telephone (844) 318-0129 (U.S.) or (720) 358-3595 (all other locations); Internet website, http://shareholder.broadridge.com/airproducts; and e-mail address, shareholder@broadridge.com. As of 30 October 2015, there were 6,333 record holders of our common stock. Quarterly stock prices, as reported on the New York Stock Exchange composite tape of transactions, and dividend information for the last two fiscal years appear below. Cash dividends on the Company’s common stock are paid quarterly. Our objective is to pay dividends consistent with the reinvestment of earnings necessary for long-term growth. It is our expectation that we will continue to pay comparable cash dividends in the future.

Quarterly Stock Information

Purchases of Equity Securities by the Issuer

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1.0 billion of our outstanding common stock. This program does not have a stated expiration date. We repurchase shares pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, through repurchase agreements established with several brokers. There were no purchases of stock during fiscal year 2015. At 30 September 2015, $485.3 million in share repurchase authorization remained. Additional purchases will be completed at the Company’s discretion while maintaining sufficient funds for investing in its businesses and growth opportunities.

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Performance Graph

The performance graph below compares the five-year cumulative returns of the Company’s common stock with those of the Standard & Poor’s 500 Index (S&P 500 Index) and the Standard & Poor’s 500 Materials Index (S&P 500 Materials Index). The figures assume an initial investment of $100 and the reinvestment of all dividends.

COMPARISON OF FIVE YEAR CUMULATIVE SHAREHOLDER RETURN

Air Products, S&P 500 Index, and S&P 500 Materials Index

Comparative Growth of a $100 Investment

(Assumes Reinvestment of All Dividends)

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The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this report. All comparisons in the discussion are to the corresponding prior year unless otherwise stated. All amounts presented are in accordance with U.S. generally accepted accounting principles (GAAP), except as noted. All amounts are presented in millions of dollars, except for share data, unless otherwise indicated.

Items such as income from continuing operations attributable to Air Products, net income attributable to Air Products, and diluted earnings per share attributable to Air Products are simply referred to as “income from continuing operations,” “net income,” and “diluted earnings per share” throughout this Management’s Discussion and Analysis, unless otherwise stated.

The discussion of results that follows includes comparisons to non-GAAP financial measures. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures that our management uses internally to evaluate our performance. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 34-38. Descriptions of the excluded items appear on pages 27-28.

BUSINESS OVERVIEW

Air Products and Chemicals, Inc. is a world-leading Industrial Gases company celebrating 75 years of operation. The Company’s core Industrial Gases business provides atmospheric and process gases and related equipment to manufacturing markets, including refining and petrochemical, metals, electronics, and food and beverage. Air Products is also the world’s leading supplier of liquefied natural gas process technology and equipment. The Company’s Materials Technologies business serves the semiconductor, polyurethanes, cleaning and coatings, and adhesives industries. With operations in over 50 countries, in 2015 we had sales of $9.9 billion, assets of $17.4 billion, and a worldwide workforce of approximately 19,700 employees.

Effective 1 October 2014, we began operating under a new organizational structure that is aligned with the regional nature of the industrial gases business. We began reporting our results under the following seven new segments: Industrial Gases – Americas, Industrial Gases – EMEA (Europe, Middle East, and Africa), Industrial Gases – Asia, Industrial Gases – Global, Materials Technologies, Energy-from-Waste, and Corporate and other. The financial statements and analysis that follow discuss our results based on these operations. Prior year segment information has been restated to conform with the fiscal year 2015 presentation.

Refer to Note 26, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments and segment reorganization beginning in fiscal year 2015.

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2015 IN SUMMARY

In 2015, we made significant progress in focusing on our core industrial gases business, we reorganized the Company into a more decentralized structure, including realignment of our businesses into new reporting segments, and announced our intention to spin-off the Materials Technologies business by September 2016. We also began changing our culture, improved our focus on safety, implemented a more rigorous capital review process, delivered on our cost reduction targets, and aligned employee rewards to performance at the business unit level. These changes drove increased profitability as we delivered earnings per share growth of 28% and increased operating margin by 450 basis points (bp) to 17.2%, despite significant unfavorable currency impacts. On a non-GAAP basis, earnings per share growth increased 14% and operating margin increased by 310 bp to 19.0%.

Highlights for 2015

For a discussion of the challenges, risks, and opportunities on which management is focused, refer to our 2016 Outlook below.

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Changes in Diluted Earnings per Share Attributable to Air Products

2016 OUTLOOK

For 2016, we intend to remain focused on key actions we can control to continue to improve cash flow and drive earnings growth. We intend to accomplish this by bringing new projects on-stream, realizing full year benefits of our fiscal year 2015 cost reduction actions, and continued operational improvement actions. We expect overall economic growth to be modest in 2016, which may limit opportunities for underlying growth. Additionally, we expect lower LNG results due to delays in customer investment decisions. We expect to complete the separation of our Materials Technologies segment via a spin-off into a standalone company to be distributed to shareholders by September 2016.

The above guidance should be read in conjunction with the section entitled “Forward-Looking Statements.”

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RESULTS OF OPERATIONS

Discussion of Consolidated Results

2015 vs. 2014

Sales of $9,894.9 decreased 5%, or $544.1. Underlying sales were up 3% from higher volumes of 2% and higher pricing of 1%. Volumes increased primarily from new plant on-streams in Industrial Gases – Asia and growth in Materials Technologies. The favorable pricing was primarily driven by price increases in the Industrial Gases – Americas and Materials Technologies segments. Currency unfavorably impacted sales by 5% and lower energy and raw material contractual cost pass-through to customers decreased sales by 3%.

2014 vs. 2013

Sales of $10,439.0 increased 3%, or $258.6. Underlying business increased 2%, primarily due to higher volumes in the Materials Technologies and Industrial Gases – Americas segments, partially offset by the exit of our polyurethane intermediates (PUI) business which reduced sales by 1%. Higher energy and raw material contractual cost pass-through to customers increased sales by 1%. Currency was flat as the impacts from a stronger Euro were offset by a weaker Chilean Peso.

Operating Income and Margin

2015 vs. 2014

On a GAAP basis, operating income of $1,699.1 increased 28%, or $370.9. Current year operating income included a charge for business reorganization and cost reduction actions of $207.7, a pension settlement loss of $21.2, business separation costs of $7.5, gain on land sales of $33.6, and a gain of $17.9 on revaluing a previously held equity interest upon purchase of our partner’s shares. Prior year operating income included a goodwill and intangible asset charge of $310.1, a business restructuring and cost reduction charge of $12.7, and a pension settlement loss of $5.5. Operating margin of 17.2% increased 450 bp.

On a non-GAAP basis, operating income of $1,884.0 increased 14%, or $227.5. The increase was primarily due to higher volumes of $144, favorable pricing net of energy and fuel costs of $105, and favorable cost performance across most segments of $94, partially offset by unfavorable currency of $115. Costs were lower as benefits from our cost reduction actions of approximately $170 and lower maintenance expense of $33 were offset by higher incentive compensation of approximately $100 due to improved results. Non-GAAP operating margin of 19.0% increased 310 bp due to favorable costs, higher volumes, and higher pricing.

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2014 vs. 2013

On a GAAP basis, operating income of $1,328.2 increased $3.8. Operating income in 2014 was reduced by $310.1 for a goodwill and intangible asset impairment charge, $12.7 for a business reorganization and cost reduction charge, and $5.5 for pension settlement losses. Operating income in 2013 was reduced by a charge of $231.6 for a business restructuring and cost reduction charge and $10.1 for advisory costs. On a non-GAAP basis, operating income of $1,656.5 increased 6%, or $90.4. The increase in operating income was primarily due to higher volumes of $140, partially offset by lower recovery of raw material costs in pricing of $29 and higher operating costs of $9. Operating income in 2013 included $10 for gains from the sale of assets and investments.

Adjusted EBITDA

We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, income tax provision, and depreciation and amortization expense. We believe Adjusted EBITDA provides a useful metric for management to assess operating performance.

2015 vs. 2014

Adjusted EBITDA of $2,974.9 increased $210.1, or 8%, due to higher volumes, higher pricing, and favorable costs. Adjusted EBITDA margin of 30.1% increased 360 bp.

2014 vs. 2013

Adjusted EBITDA of $2,764.8 increased $123.9, or 5%, primarily due to the increase in volumes.

Equity Affiliates’ Income

2015 vs. 2014

Income from equity affiliates of $154.5 increased $3.1, primarily due to higher volumes and favorable cost performance in our Industrial Gases – Asia and Industrial Gases – Americas affiliates.

2014 vs. 2013

Income from equity affiliates of $151.4 decreased $16.4, due to higher costs from maintenance outages and an unfavorable arbitration award, unfavorable currency impacts, and weaker oil field services volume in Mexico.

Cost of Sales and Gross Margin

2015 vs. 2014

Cost of sales of $6,944.1 decreased $690.5, or 9%, primarily due to a favorable currency impact of $368, lower energy costs of $313, and lower operating costs of $102, partially offset by costs attributable to higher sales volumes of $92. Operating costs included favorable impacts from cost reduction actions of $48 and lower other costs, including maintenance, of $115, partially offset by higher incentive compensation of $61.

Gross margin of 29.8% increased 290 bp, primarily due to lower costs of 120 bp, higher price, net of raw materials, of 100 bp, and higher volumes of 80 bp.

2014 vs. 2013

Cost of sales of $7,634.6 increased $162.5, primarily due to higher energy costs of $104, higher operating costs, including maintenance, of $72, and an unfavorable currency impact of $24, partially offset by favorable volume mix of $37.

Gross margin of 26.9% increased 30 bp, primarily due to favorable volume mix of 100 bp and higher price, net of raw materials, of 20 bp, partially offset by higher operating costs of 90 bp.

Selling and Administrative Expense

2015 vs. 2014

Selling and administrative expense of $941.7 decreased $117.6, or 11%, primarily due to the benefits of our cost reduction actions of $122 and favorable currency effects of $62, partially offset by higher costs of $66, driven by higher incentive compensation. Selling and administrative expense as a percent of sales decreased to 9.5% from 10.1%.

2014 vs. 2013

Selling and administrative expense of $1,059.3 decreased $7.0, or 1%, as productivity, including the benefits of recent cost reduction actions, and favorable currency effects more than offset other cost increases. Selling and administrative expense as a percent of sales decreased to 10.1% from 10.5%.

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Research and Development

2015 vs. 2014

Research and development expense of $138.8 decreased $2.6, or 2%. Fiscal year 2015 and 2014 research and development expense as a percent of sales was 1.4%.

2014 vs. 2013

Research and development expense of $141.4 increased $7.7, or 6%, primarily due to lower government grants and other cost increases. Research and development expense as a percent of sales increased to 1.4% from 1.3%.

Business Restructuring and Cost Reduction Actions

We recorded charges in 2015, 2014, and 2013 for business restructuring and cost reduction actions. The charges for these actions are excluded from segment operating income.

Business Realignment and Reorganization

On 18 September 2014, we announced plans to reorganize the Company, including realignment of our businesses in new reporting segments and other organizational changes, effective as of 1 October 2014, which resulted in the largest transformational change in the history of the Company. As a result of this reorganization, we have incurred ongoing severance and other charges.

In fiscal year 2015, we recognized an expense of $207.7 ($153.2 after-tax, or $.71 per share). Severance and other benefits totaled $151.9 and related to the elimination of approximately 2,000 positions. Asset and associated contract actions totaled $55.8 and related primarily to a plant shutdown in the Corporate and other segment and the exit of product lines within the Industrial Gases – Global and Materials Technologies segments.

During the fourth quarter of 2014, an expense of $12.7 ($8.2 after-tax, or $.04 per share) was incurred relating to the elimination of approximately 50 positions.

2013 Plan

During the fourth quarter of 2013, we recorded an expense of $231.6 ($157.9 after-tax, or $.74 per share) reflecting actions to better align our cost structure with current market conditions. The charge included asset and contract actions that primarily related to the Electronics Materials business due to continued weakness in the photovoltaic (PV) and light-emitting diode (LED) markets. In addition, the charge included severance, benefits, and other contractual obligations primarily related to our Industrial Gases businesses and corporate functions in response to weaker than expected conditions in Europe and Asia, reorganization of our operations and functional areas, and senior executive changes.

Refer to Note 5, Business Restructuring and Cost Reduction Actions, to the consolidated financial statements for additional details on these actions.

Pension Settlement Loss

Certain of our pension plans provide for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after the retirement date. Pension settlements are immediately recognized when cash payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. The participant’s vested benefit is considered fully settled upon cash payment of the lump sum. We recognized $21.2 ($13.7 after-tax, or $.06 per share), $5.5 ($3.6 after-tax, or $.02 per share) and $12.4 ($7.8 after-tax, or $.04 per share) of settlement charges in 2015, 2014, and 2013, respectively, to accelerate recognition of a portion of actuarial losses deferred in accumulated other comprehensive loss primarily related to our U.S. Supplementary Pension Plan.

Goodwill and Intangible Asset Impairment Charge

In July 2012, we acquired a controlling interest in the outstanding shares of Indura S.A., a Latin American industrial gases company. In connection with this acquisition, we recorded $626.2 of goodwill, which is incorporated into the Latin American reporting unit of our Industrial Gases – Americas segment. During the fourth quarter of 2014, we concluded that the goodwill and indefinite-lived intangible assets (primarily acquired trade names) associated with this reporting unit were impaired and recorded a noncash impairment charge of $310.1 ($275.1 attributable to Air Products after-tax, or $1.27 per share). Refer to the Critical Accounting Policies and Estimates section below for additional details.

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Business Separation Costs

On 16 September 2015, the Company announced that it intends to separate its Materials Technologies business via a spin-off. During the fourth quarter, we incurred legal and other advisory fees of $7.5 ($.03 per share).

Gain on Previously Held Equity Interest

On 30 December 2014, we acquired our partner’s equity ownership interest in a liquefied atmospheric industrial gases production joint venture in North America for $22.6 which increased our ownership from 50% to 100%. The transaction was accounted for as a business combination, and subsequent to the acquisition, the results are consolidated within our Industrial Gases – Americas segment. The assets acquired, primarily plant and equipment, were recorded at their fair value as of the acquisition date.

The acquisition date fair value of the previously held equity interest was determined using a discounted cash flow analysis under the income approach. During the first quarter of 2015, we recorded a gain of $17.9 ($11.2 after-tax, or $.05 per share) as a result of revaluing our previously held equity interest to fair value as of the acquisition date.

Advisory Costs

During the fourth quarter of 2013, we incurred legal and other advisory fees of $10.1 ($6.4 after-tax, or $.03 per share) in connection with our response to the rapid acquisition of a large position in shares of our common stock by Pershing Square Capital Management LLC and its affiliates.

Other Income (Expense), Net

Items recorded to other income (expense), net arise from transactions and events not directly related to our principal income earning activities. The detail of other income (expense), net is presented in Note 24, Supplemental Information, to the consolidated financial statements.

2015 vs. 2014

Other income (expense), net of $47.3 decreased $5.5. The current year includes a gain of $33.6 ($28.3 after-tax, or $.13 per share) resulting from the sale of two parcels of land. The gain was partially offset by unfavorable foreign exchange impacts and lower gains on other sales of assets and emissions credits. No other individual items were significant in comparison to the prior year.

2014 vs. 2013

Other income (expense), net of $52.8 decreased $17.4, primarily due to higher gains from the sale of a number of small assets and investments, higher government grants, and a favorable commercial contract settlement in 2013. Otherwise, no individual items were significant in comparison to 2013.

Interest Expense

2015 vs. 2014

Interest incurred decreased $5.5. The decrease was driven by the impact of a stronger U.S. dollar on the translation of foreign currency interest of $12, partially offset by a higher average debt balance of $7. The change in capitalized interest was driven by a higher carrying value in construction in progress.

2014 vs. 2013

Interest incurred decreased $9.5. The decrease was primarily due to a lower average interest rate on the debt portfolio which reduced interest by $13, partially offset by a higher average debt balance which increased interest by $6. The change in capitalized interest was driven by a higher carrying value in construction in progress.

Loss on early retirement of debt

In September 2015, we made a payment of $146.6 to redeem 3,000,000 Unidades de Fomento (“UF”) Series E 6.30% Bonds due 22 January 2030 that had a carrying value of $130.0 and resulted in a net loss of $16.6 ($14.2 after-tax, or $.07 per share).

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Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Refer to Note 23, Income Taxes, to the consolidated financial statements for details on factors affecting the effective tax rate.

2015 vs. 2014

On a GAAP basis, the effective tax rate was 24.0% and 27.0% in 2015 and 2014, respectively. The effective tax rate was higher in the prior year primarily due to the goodwill impairment charge of $305.2, which was not deductible for tax purposes, and the Chilean tax reform enacted in September 2014 which increased income tax expense by $20.6. These impacts were partially offset by an income tax benefit of $51.6 associated with losses from transactions and a tax election in a non-U.S. subsidiary. Refer to Note 10, Goodwill, and Note 23, Income Taxes, to the consolidated financial statements for additional information. On a non-GAAP basis, the effective tax rate was 24.2% and 24.0% in 2015 and 2014, respectively.

2014 vs. 2013

On a GAAP basis, the effective tax rate was 27.0% and 22.8% in 2014 and 2013, respectively. As discussed above, the effective tax rate was higher in 2014 primarily due to the goodwill impairment charge and the Chilean tax rate change, which were partially offset by a tax benefit associated with losses from transactions and a tax election in a non-U.S. subsidiary. The 2013 rate included income tax benefits of $73.7 related to the business restructuring and cost reduction plan and $3.7 for the advisory costs. On a non-GAAP basis, the effective tax rate was 24.0% and 24.2% in 2014 and 2013, respectively.

Discontinued Operations

During the second quarter of 2012, the Board of Directors authorized the sale of our Homecare business, which has been accounted for as a discontinued operation.

In 2012, we sold the majority of our Homecare business to The Linde Group and recognized a gain of $207.4. In addition, an impairment charge of $33.5 was recorded to write down the remaining business, which was primarily in the United Kingdom and Ireland, to its estimated net realizable value. In 2013, we recorded an additional charge of $18.7 to update our estimate of the net realizable value. In 2014, a gain of $3.9 was recognized for the sale of the remaining Homecare business and settlement of contingencies on the sale to The Linde Group.

Segment Analysis

Industrial Gases – Americas

Industrial Gases – Americas Sales

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2015 vs. 2014

Underlying sales increased 2% from higher pricing. Volumes were flat as growth in liquid oxygen and nitrogen and gaseous hydrogen were offset by lower helium and gaseous oxygen demand. Pricing was higher due to strength in helium and price increases to recover higher costs. Currency decreased sales by 3% primarily due to the impacts of the Chilean Peso, Brazilian Real, and Canadian Dollar. Lower energy contractual cost pass-through to customers, primarily natural gas, decreased sales by 8%.

Operating income of $808.4 increased 6%, or $45.8, due to higher pricing net of energy and fuel costs of $65 and favorable volume mix impacts of $6, partially offset by unfavorable currency impacts of $21 and higher costs of $4 mainly due to higher incentive compensation mostly offset by the benefits of our recent restructuring actions. Operating margin increased 320 bp from the prior year, primarily due to the higher pricing and lower energy contractual cost pass-through to customers.

Equity affiliates’ income of $64.6 increased $3.7 due to improved performance in our Mexican equity affiliate.

2014 vs. 2013

Underlying sales increased 3% from higher volumes of 1% and higher pricing of 2%. Volumes increased 1% as higher liquid oxygen, nitrogen, and argon volumes and strong demand in the United States Gulf Coast hydrogen system were partially offset by lower helium volumes due to supply limitations. Pricing was higher due to improved pricing in liquid oxygen, liquid nitrogen, and helium. Higher energy contractual cost pass-through to customers increased sales by 4%. Currency decreased sales by 2%, primarily due to impacts of the Brazilian Real and Chilean Peso.

Operating income of $762.6 decreased 2%, or $14.1, primarily from higher operating costs of $29, driven by maintenance, and unfavorable currency impacts of $12, partially offset by higher pricing net of energy and fuel costs of $16 and volumes of $11. Operating margin decreased 140 bp from the prior year, due to the higher operating costs and higher energy contractual cost pass-through.

Equity affiliates’ income of $60.9 decreased $10.0 primarily from unfavorable currency impacts and lower oil field services volume in Mexico.

Industrial Gases – EMEA

2015 vs. 2014

Underlying sales increased 1% from pricing improvement in both packaged gas and liquid bulk. Volumes were flat as higher liquid oxygen and nitrogen volumes were offset by lower cylinder and helium volumes. Unfavorable currency effects, primarily from the Euro, the British Pound Sterling, and the Polish Zloty, reduced sales by 13%. Lower energy contractual cost pass-through to customers decreased sales by 1%.

Operating income of $330.7 decreased 6%, or $20.5, due to unfavorable currency impacts of $44, partially offset by lower costs of $13 resulting from restructuring actions, favorable volume mix impacts of $5, and higher pricing net of energy and fuel costs of $5. Operating margin increased 140 bp from the prior year primarily due to the lower costs.

Equity affiliates’ income of $42.4 decreased $1.7.

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2014 vs. 2013

Underlying sales decreased 1% from lower volumes. Volumes decreased as higher liquid oxygen, nitrogen, and argon volumes were more than offset by lower helium, cylinder, and tonnage volumes. Lower energy and contractual cost pass-through to customers decreased sales by 1%. Favorable currency impacts increased sales by 4%, primarily from the Euro and the British Pound Sterling.

Operating income of $351.2 increased 6%, or $20.0, primarily due to favorable currency impacts of $10, favorable volume mix of $7, higher price of $2, and lower operating costs of $1. Operating margin increased 50 bp from the prior year, due to the favorable volume mix.

Equity affiliates’ income of $44.1 decreased $3.6 primarily due to a favorable contractual settlement in 2013.

Industrial Gases – Asia

Industrial Gases – Asia Sales

2015 vs. 2014

Underlying sales increased by 10% from higher volumes of 12%, partially offset by lower pricing of 2%. Volumes were higher primarily from new plants, and in particular, a large onsite project in China. Pricing was down due to continued pricing pressure on merchant products in China. Unfavorable currency impacts decreased sales by 4%. Higher energy contractual cost-pass through to customers increased sales by 1%.

Operating income of $380.5 increased 23%, or $70.1, primarily due to higher volumes of $76 and lower costs of $42 resulting from restructuring and underlying productivity, partially offset by lower pricing net of energy and fuel costs of $35 and an unfavorable currency impact of $13. Operating margin increased 290 bp, primarily due to favorable cost performance and higher volumes, partially offset by lower pricing.

Equity affiliates’ income of $46.1 increased $8.1 primarily due to higher volumes and favorable cost performance.

2014 vs. 2013

Underlying sales decreased by 4% due to lower tonnage and helium volumes, partially offset by higher liquid oxygen, nitrogen, and argon volumes. Sales decreased 2% due to lower contractual cost pass-through to customers. Favorable currency impacts increased sales by 1%.

Operating income of $310.4 decreased 6%, or $18.9, primarily due to lower pricing net of energy and fuel costs of $22 and higher operating costs of $21, partially offset by favorable volume mix of $22 and favorable currency impacts of $2. Operating margin decreased 10 bp from the prior year as lower pricing net of energy and fuel costs and higher operating costs, were mostly offset by favorable volume mix and lower energy contractual pass-through to customers.

Equity affiliates’ income of $38.0 decreased $7.0 primarily due to unfavorable currency impacts and an unfavorable arbitration award.

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Industrial Gases – Global

2015 vs. 2014

Sales of $286.8 decreased $9.2, or 3%, due to unfavorable currency impacts. Operating loss of $51.6 decreased 10%, or $5.7, primarily due to benefits of our recent cost reduction actions and a gain associated with the cancellation of a sale of equipment contract, partly offset by less profitable business mix, unfavorable project costs, and bad debt expense.

2014 vs. 2013

Sales of $296.0 decreased $13.0, or 4%, due to lower air separation unit (ASU) project activity. Operating loss of $57.3 increased $.8 as favorable volume mix was offset by higher operating costs.

Materials Technologies

Materials Technologies Sales

2015 vs. 2014

Underlying sales increased by 5% from higher volumes of 3% and positive pricing of 2%. Unfavorable currency impacts decreased sales by 4%. Electronics Materials underlying sales increased 10% from positive volume and price from new products and memory market demand, partially offset by lower delivery systems activity. Performance Materials underlying sales were flat as higher volumes of 1% were offset by lower pricing of 1%.

Operating income of $476.7 increased 26%, or $97.7, due to favorable price and mix, net of raw material costs, of $70, higher volumes of $40, and lower costs of $13, partially offset by unfavorable currency impacts of $25. The cost improvement came primarily from optimization of our production and supply chain network and benefits of our cost reduction actions. Operating margin increased 440 bp, from higher pricing, higher volumes and lower operating costs.

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2014 vs. 2013

Underlying sales increased 10%, as higher volumes of 11% were partially offset by lower pricing of 1%. Electronics Materials underlying sales increased 10%, as higher delivery systems equipment sales and materials volumes of 11% were partially offset by lower pricing of 1%. Performance Materials underlying sales increased 10%, as higher volumes of 11% were partially offset by lower pricing of 1%. The higher volumes were across all product lines and major regions. The lower pricing was primarily due to unfavorable mix impacts.

Operating income of $379.0 increased 36%, or $99.5, primarily from higher volumes of $91, lower operating costs of $30, and favorable currency impacts of $4, partially offset by unfavorable price and mix impacts of $25. Operating margin of 18.4% increased 350 bp, primarily due to improved loading and leverage from the higher volumes and improved cost performance, partially offset by the unfavorable pricing impacts.

Energy-from-Waste

The Energy-from-Waste segment consists of two projects that are under construction in Tees Valley, United Kingdom. These projects are designed to process municipal solid waste to generate renewable power for customers under long-term contracts. Costs being expensed during project construction include land leases and commercial management.

Despite technical challenges and on-stream delays, the Company remains focused on efforts to bring the first project on-stream. In November 2015, the Company suspended construction of the second project until certain design issues of the first project are understood, remediated, and can be efficiently integrated into the design of the second project. We are evaluating the incremental costs associated with idling the project, including the impact on capitalized interest. Future actions and assessments could impact the disposition of the investment.

Corporate and other

2015 vs. 2014

Sales of $324.7 increased $2.5, or 1%, primarily due to higher liquefied natural gas (LNG) project activity, mostly offset by lower helium container sales and the impact of exiting our PUI business which was completed as of the end of the first quarter of 2014. Operating loss of $50.6 decreased 34%, or $26.4, primarily due to higher LNG project activity and the benefits of our cost reduction actions.

2014 vs. 2013

Sales of $322.2 decreased $96.1, or 23%, due to the exit of our PUI business, partially offset by higher LNG project activity. Operating loss of $77.0 decreased $7.3, or 9%, from the higher LNG project activity.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Millions of dollars unless otherwise indicated, except for share data)

The discussion of our annual results includes comparisons to non-GAAP financial measures, including Adjusted EBITDA. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures which management uses internally to evaluate our operating performance.

We use non-GAAP measures to assess our operating performance by excluding certain disclosed items that we believe are not representative of our underlying business. We believe non-GAAP financial measures provide investors with meaningful information to understand our underlying operating results and to analyze financial and business trends. Non-GAAP financial measures, including Adjusted EBITDA, should not be viewed in isolation, are not a substitute for GAAP measures, and have limitations which include but are not limited to:

A reader may find any one or all of these items important in evaluating our performance. Management compensates for the limitations of using non-GAAP financial measures by using them only to supplement our GAAP results to provide a more complete understanding of the factors and trends affecting our business. In evaluating these financial measures, the reader should be aware that we may incur expenses similar to those eliminated in this presentation in the future.

In 2013, we had pension settlement losses of $12.4 ($7.8 after-tax, or $.04 per share). These impacts were included in the non-GAAP operating performance measures for fiscal year 2013.

Presented below are reconciliations of the reported GAAP results to the non-GAAP measures:

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CONSOLIDATED RESULTS

^(A) Reflected on the consolidated income statements in “Other income (expense), net.”

^(B) Income from continuing operations before taxes impact of $16.6.

^(C) Noncontrolling interests impact of $33.7 and tax impact of $1.3.

^(D) Operating margin is calculated by dividing operating income by sales.

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ADJUSTED EBITDA

We define Adjusted EBITDA as income from continuing operations (including noncontrolling interests) excluding certain disclosed items, which the Company does not believe to be indicative of underlying business trends, before interest expense, income tax provision, and depreciation and amortization expense. Adjusted EBITDA provides a useful metric for management to assess operating performance.

Below is a reconciliation of Income from Continuing Operations on a GAAP basis to Adjusted EBITDA:

^(A) Includes net income attributable to noncontrolling interests.

^(B) Reflected on the consolidated income statements in “Other income (expense), net.”

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Below is a reconciliation of segment Operating Income to Adjusted EBITDA: