Air Products & Chemicals, Inc. - Annual Report: 2016 (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 2016 was approximately $31.0 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 2016 was 217,375,097.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on 26 January 2017 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 2016

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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.

During its fiscal year ended 30 September 2016 (“fiscal year 2016”), the Company manufactured and distributed products in two principal lines of business: Industrial Gases and Materials Technologies. Industrial Gases’ primary products were atmospheric gases, process gases, and equipment for air separation. Materials Technologies’ primary products were performance materials and chemicals, such as epoxy amine curing agents, polyurethane catalysts, additives, and specialty surfactants, and electronic 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.

At the beginning of the fiscal year, the Company reported its business in seven reporting segments under which it managed its operations, assessed performance, and reported 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. On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste business based on continued difficulties encountered in making its two Energy-from-Waste projects operational and the Company’s conclusion, based on testing and analysis completed during the second quarter of fiscal year 2016, that significant additional time and resources would be required to make the projects operational. The Energy-from-Waste segment is now presented as a discontinued operation. Refer to Note 26, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments.

On 16 September 2015, the Company announced that its Board of Directors approved a preliminary plan to spin off its Materials Technologies business, which contained the Electronic Materials and Performance Materials businesses. On 6 May 2016, the Company entered into an agreement to sell certain subsidiaries and assets comprising the Performance Materials business to Evonik Industries AG for $3.8 billion in cash and the assumption of certain liabilities. The Company also announced its intention to proceed with the spin-off of the Electronic Materials business. In preparation for the spin-off, Air Products transferred operations, employees, assets, and liabilities of the Electronic Materials business to its wholly owned subsidiary, Versum Materials, Inc. (Versum). On 1 October 2016, Air Products distributed all of the shares of Versum Materials, Inc. to its shareholders, creating a new publicly traded corporation. As of 30 September 2016, the results of operations, financial condition, and cash flows for the Electronic Materials and Performance Materials businesses are presented within the Company’s consolidated financial statements as continuing operations. Beginning with the first quarter of fiscal year 2017, the historical results of Electronic Materials will be presented as a discontinued operation. The historical results of Performance Materials will be reflected as a discontinued operation when it becomes probable for the sale to occur and actions required to meet the plan of sale indicate that it is unlikely that significant changes will occur.

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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 as a byproduct of gases extracted from underground reservoirs, primarily natural gas, but also carbon dioxide purified before resale.

The Company’s Industrial Gases business is organized and operated regionally. The regional Industrial Gases segments (Americas, EMEA, and Asia) 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, nitrogen, oxygen, carbon monoxide, 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 2016, 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. 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 2016, 76% in fiscal year 2015, and 77% in fiscal year 2014. Sales of tonnage hydrogen and related products constituted approximately 17% of consolidated sales in fiscal year 2016, 19% in fiscal year 2015, and 22% in fiscal year 2014. Sales of atmospheric gases constituted approximately 36% of consolidated sales in fiscal year 2016, 35% in fiscal year 2015 and 33% in fiscal year 2014.

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 was approximately $1.1 billion on 30 September 2016 (as compared with a total backlog of approximately $1.5 billion on 30 September 2015) and primarily contains Air Products’ share of the 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 Arabian Oil Company (Saudi Aramco). Revenue from this contract is recognized under the percent complete method based on costs incurred to date compared with total expected costs to be incurred. The Company estimates that between 60-70% of the total sales backlog as of 30 September 2016 will be recognized as revenue during fiscal year 2017, dependent on execution schedules of the relevant projects.

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 Electronic Materials, which is focused on supplying critical materials and equipment to the semiconductor industry. The Company completed the spin-off of the Electronic Materials business on 1 October 2016 and has entered into an agreement for the sale of the Performance Materials business, which is subject to regulatory approval and other conditions.

The Performance Materials business has 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.

The Electronic Materials business maintained critical competencies in molecular design, formulation expertise, and ultra-high purity chemistry. This division provided the semiconductor industry with high purity process materials for deposition, metallization, chamber cleaning and etching, chemicals mechanical planarization slurries,

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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 2016, 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 2016, 21% of consolidated sales in fiscal year 2015, and 20% in fiscal year 2014. Performance Materials Division sales constituted approximately 11% of consolidated sales in fiscal year 2016, 11% in fiscal year 2015, and 11% in fiscal year 2014, and Electronic Materials Division sales constituted approximately 10% of consolidated sales in fiscal year 2016, 10% of consolidated sales in fiscal year 2015, and 9% in fiscal year 2014.

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 $307.7 million, $398.8 million, and $378.7 million in fiscal years 2016, 2015, and 2014, 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.

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

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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 $132.0 million during fiscal year 2016, $137.1 million during fiscal year 2015, and $139.8 million in fiscal year 2014. In addition, the Company expended approximately $1 million on customer sponsored research activities during fiscal year 2016, $6 million during fiscal year 2015, and $19 million in fiscal year 2014.

The Company owns approximately 970 United States patents, approximately 3,900 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 legal 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 $27.0 million in fiscal year 2016, $28.3 million in fiscal 2015, and $35.1 million in 2014. 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 $7 million in 2016, $4 million in 2015 and $5 million in 2014 on capital projects to control pollution. Capital expenditures to control pollution in future years are estimated to be approximately $3 million in both 2017 and 2018.

Employees

On 30 September 2016, the Company (including majority-owned subsidiaries) had approximately 18,600 employees, of whom approximately 18,300 were full-time employees and of whom approximately 11,800 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

Our working capital balance was a positive $1,034 at 30 September 2016. The cash and cash items balance is higher than our historical trend and primarily results from transactions related to the anticipated spin-off of Versum and positive operating cash flows.

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 gas, 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 21 November 2016 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, Customer Vitality—A weakening economy or product supply versus demand imbalance in 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 flows. Cyclical downturns in the industries served by our customers or adverse economic events or conditions affecting specific customers can in turn have an adverse effect on our business.

Demand for the Company’s products and services depends in part on the general economic conditions affecting the countries and markets 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 or to a particular customer, affect our margins, constrain our operating flexibility, impact utilization of the Company’s manufacturing capacity, 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.

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. A decline in the industries served by our customers or adverse events or circumstances affecting individual customers can impair the ability of such customers to satisfy their obligations to the Company, resulting in uncollected receivables, unanticipated contract terminations, project delays, or inability to recover plant investments negatively impacting our financial results.

Weak overall demand or specific customer conditions may also cause elimination of product lines, customer shutdowns or default, or other inabilities to profitably operate facilities and may force sale or abandonment of facilities and equipment or projects not to reach on-stream. 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.

Operational, Economic, Political, and Legal Risks of International Operations—The Company’s foreign operations can be adversely impacted by operational, economic, political and legal risks that could impact our profitability. 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, including joint ventures and other alliances. The Company’s operations in certain foreign jurisdictions may be subject to project delays due to unanticipated government actions, inadequate investment in infrastructure, undeveloped property rights and legal systems, or political instability. Some of the Company’s contractual relationships within these jurisdictions are subject to cancellation without full compensation for loss. Economic and political conditions within foreign jurisdictions, nationalization and expropriation risk, social unrest, strained relations between countries, or imposition of international sanctions 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 flows.

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

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to manage the risks inherent in operating in a developing market, including unfamiliar regulatory environments, relationships with local partners, language and cultural differences, and tailoring products for acceptance by local markets.

Further, our operations outside the United States require us to comply with a number of United States and international regulations, including anti-corruption laws such as the United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, and the China Anti-Unfair Competition Law, as well as U.S. and international economic sanctions. We have 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, these cannot eliminate the risk that violations could be committed by our employees, agents or joint venture partners. Violations of such laws and regulations could result in disruptive investigations of the Company, significant fines and sanctions which could adversely affect our consolidated results of operations.

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 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 Performance Materials 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, 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.

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 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 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 flows.

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.

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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.

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.

We may not be able to successfully control or reduce costs to improve productivity and streamline operations. Reorganization and cost reduction efforts can disrupt operations.

Achieving our financial goals including continued profitability and margin growth depends significantly on our efforts to control or reduce our operating costs, including our ability to eliminate stranded costs related to our divested businesses. 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 and repositioning actions. 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.

Ongoing restructuring and cost reduction actions may reduce our available talent and other resources, impact our ability to attract and retain key employees, 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.

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

At 30 September 2016, the Company had total consolidated debt of $6,225.2 million (including Versum debt of $997.2 million), of which $1,307.1 million (including Versum debt of $5.8 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.

We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as planned.

We regularly review our portfolio of businesses and pursue growth through acquisitions and seek to divest non-core businesses. We may not be able to complete transactions on favorable terms, on a timely basis or at all. In

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addition, our results of operations and cash flows may be adversely impacted by the failure of acquired businesses to meet expected returns, the failure to integrate acquired businesses, the inability to dispose of non-core assets and businesses on satisfactory terms and conditions, and the discovery of unanticipated liabilities or other problems in acquired businesses for which we lack contractual protections or insurance. With respect to divested businesses, our results may be impacted by claims by purchasers to whom we have provided contractual indemnification.

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 flows.

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 flows. 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 potential loss or disclosure of such information or data as a result of fraud, trickery, or other forms of deception,

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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 investigations and 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 flows in any particular period.

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.

The results of the United Kingdom’s (“UK”) European Union (“EU”) membership referendum could adversely affect customer demand, our relationships with customers and suppliers and our business and financial statements.

The results of the UK’s EU membership referendum, advising for the exit of the UK from the EU, has caused and may continue to cause significant volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty, which could adversely affect customer demand, our relationships with customers and suppliers and our business and financial statements.

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.

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We could incur significant liability if the distribution of Versum common stock to our stockholders is determined to be a taxable transaction.

We have received an opinion from outside tax counsel to the effect that the spin-off of Versum qualifies as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code. The opinion relies on certain facts, assumptions, representations and undertakings from Versum and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, our shareholders and we may not be able to rely on the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding the opinion of tax counsel we have received, the IRS could determine on audit that the spin-off is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion. If the spin-off is determined to be taxable for U.S. federal income tax purposes, our shareholders that are subject to U.S. federal income tax and we could incur significant U.S. federal income tax liabilities.

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 six business segments and the Energy-from-Waste business discontinued operation. 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, Pennsylvania, and China.

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

Helium is processed at multiple sites in the U.S. and then distributed to/from transfill sites globally.

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 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.

Hydrogen fueling stations built by the Company support commercial markets in California and Japan as well as demonstration projects in Europe and other parts of Asia.

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.

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Industrial Gases – Asia

Industrial Gases – Asia currently operates from over 150 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

This business segment was comprised of two divisions, Electronic Materials and Performance Materials, prior to the 1 October 2016 spin-off of Electronic Materials.

The Electronic Materials portion of this segment was spun off into the separate legal entity, Versum Materials, Inc., along with its production, equipment manufacturing, and distribution operations at 24 sites in the United States, Europe, and Asia (1/3rd 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 headquarters for this new entity will be based in Tempe, Arizona with supporting administration and research and development activities at 4 locations in Taiwan, 2 locations in South Korea, Singapore, China, the Netherlands, and Pennsylvania in the United States.

The Performance Materials portion of this segment is under an announced Purchase Agreement for the sale of this division, including its operations at 12 production sites globally, 50% of which are owned.

This segment conducts R&D related activities at 8 locations worldwide, including: Pennsylvania, California, and Wisconsin in the United States, the Netherlands, China, Japan, and multiple sites in Germany.

The management and sales support for Performance Materials is currently based in our Trexlertown offices referred to above, and at offices located in Utrecht, the Netherlands, Shanghai, China, Kawasaki, Japan, and Singapore.

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

On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste business. As a result, the Energy-from-Waste segment is presented as a discontinued operation. The real estate interests for this business, which are comprised of a leased office, two leased production sites, and rights for utility infrastructure, will be exited with the assets of this business.

In the normal course of business, the Company and its subsidiaries are involved in various legal proceedings, including contract, product liability, intellectual property, insurance, and regulatory 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.

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

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state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently there are approximately 33 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 environmental 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 $55 million at 30 September 2016) 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.

Other than this matter, we do not currently believe there are any legal proceedings, individually or in the aggregate, that are reasonably possible to have a material impact on our financial condition, results of operations, or 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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Not applicable

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 31 October 2016, there were 5,974 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. It is our expectation that we will continue to pay cash dividends in the future at comparable or increased levels. The Board of Directors determines whether to declare dividends and the timing and amount based on financial condition and other factors it deems relevant.

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 2016. At 30 September 2016, $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 (EPS) 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 which, when viewed together with our financial results reported in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 35-40. Descriptions of the excluded items appear on pages 27-29.

BUSINESS OVERVIEW

Air Products and Chemicals, Inc. is a world-leading Industrial Gases company in operation for over 75 years. 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 industry.

With operations in over 50 countries, in 2016 we had sales of $9.5 billion, assets of $18.1 billion, and a worldwide workforce of approximately 18,600 employees.

As of 30 September 2016, our operations were organized into six reportable business segments: Industrial Gases- Americas, Industrial Gases- EMEA (Europe, Middle East, and Africa), Industrial Gases- Asia, Industrial Gases- Global, Materials Technologies, and Corporate and other. The financial statements and analysis that follow discuss our results based on these operations.

During the second quarter of fiscal year 2016, we committed to exit the Energy-from-Waste (EfW) business. The EfW segment is presented as a discontinued operation. Accordingly, prior year EfW business segment information has been reclassified to conform to current year presentation.

The Company’s Materials Technologies business contains the Electronic Materials Division (EMD) and Performance Materials Division (PMD). We completed the spin-off of EMD as Versum Materials, Inc. on 1 October 2016. PMD is under a sales agreement subject to regulatory approval.

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Refer to Note 26, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments and Note 3, Materials Technologies Separation, for additional information on EMD and PMD.

2016 IN SUMMARY

In 2016, we delivered strong results driven by cost improvement actions despite weakness in the worldwide economy and currency headwinds. We made significant progress on our strategy by focusing on our core industrial gases business and have significantly improved our profitability as measured by operating margin, adjusted operating margin, and adjusted EBITDA margin which all increased by at least 400 bp versus the prior year. During the year, we committed to exit our EfW business and completed the spin-off of our Electronic Materials division as a publicly traded company on 1 October 2016. We improved our focus on safety, delivered on our cost reduction targets, and increased accountability by aligning pay with performance. These changes drove increased profitability as we delivered operating margins of 22.1%, adjusted operating margins of 23.1%, and adjusted EBITDA margins of 34.4%. Also, EPS of $6.94 increased 17% from the prior year. On a non-GAAP basis, EPS of $7.55 increased 14%.

Highlights for 2016

For a discussion of the challenges, risks, and opportunities on which management is focused, refer to our 2017 Outlook below.

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Changes in Diluted Earnings per Share Attributable to Air Products

2017 OUTLOOK

For 2017, we intend to remain focused on key actions we can control to continue to drive earnings growth. We intend to accomplish this by bringing new industrial gas plant investments on-stream, making progress on the Jazan sale of equipment project, and continuing to deliver on cost reduction actions. We expect continued weakness in new LNG equipment orders primarily driven by low oil and natural gas prices.

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On 1 October 2016, we completed the separation of our Electronic Materials division through the spin-off of Versum Materials, Inc. We continue to make progress on the sale of our Performance Materials division and are targeting to close on the sale in fiscal year 2017. Fiscal 2017 earnings will be lower due to the separation of Electronic Materials. If we are able to close on the sale of Performance Materials and it becomes a discontinued operation in fiscal 2017, we expect earnings will be reduced further.

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

RESULTS OF OPERATIONS

Discussion of Consolidated Results

2016 vs. 2015

Sales of $9,524.4 decreased 4%, or $370.5. Underlying sales increased 2% primarily due to higher volumes in Industrial Gases – Global and Industrial Gases – Asia, partially offset by lower volumes in all other segments. Price was flat as increases in the Industrial Gases – Americas and Industrial Gases – EMEA segments were offset by lower prices in Industrial Gases – Asia. Underlying sales growth was more than offset by lower energy contractual cost pass-through to customers of 3% and unfavorable currency of 3%.

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 base business 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%.

Operating Income and Margin

2016 vs. 2015

On a GAAP basis, operating income of $2,106.0 increased 23%, or $397.7, as lower operating costs of $271, lower business restructuring and cost reduction actions of $174, favorable pricing, net of energy, fuel, and raw material costs, of $84, and lower pension settlement losses of $15, were partially offset by unfavorable currency impacts of $46, higher business separation costs of $45, and lower volumes of $4. In addition, the prior year included a gain on land sales of $34 and a gain of $18 on a previously held equity interest. Operating costs decreased due to benefits from our cost reduction actions of $132, lower pension expense of $38, lower maintenance expense of $34, and lower other costs of $67.

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Operating margin of 22.1% increased 480 bp, primarily due to favorable costs and favorable pricing, net of energy, fuel, and raw material costs.

On a non-GAAP basis, operating income of $2,198.5 increased 16%, or $305.3, and operating margin of 23.1% increased 400 bp.

2015 vs. 2014

On a GAAP basis, operating income of $1,708.3 increased 28%, or $369.2, primarily from higher volumes of $144, favorable pricing, net of energy and fuel costs, of $105, and favorable cost performance across most segments of $92, partially offset by unfavorable currency impacts of $115. In addition, operating income in 2015 included a charge for business reorganization and cost reduction actions of $208, a pension settlement loss of $21, business separation costs of $8, gains on land sales of $34, and a gain of $18 on revaluing a previously held equity interest upon purchase of our partner’s shares. Operating income in 2014 included a goodwill and intangible asset charge of $310, a business restructuring and cost reduction charge of $13, and a pension settlement loss of $6. The favorable operating costs of $92 included benefits from our cost reduction actions of $170 and lower maintenance expense of $33, partially offset by higher incentive compensation of approximately $100 due to improved results. Operating margin of 17.3% increased 450 bp.

On a non-GAAP basis, operating income of $1,893.2 increased 14%, or $225.8. 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 $92, partially offset by unfavorable currency of $115. Costs were lower as benefits from 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 19.1% increased 310 bp due to favorable costs, higher volumes, and higher pricing.

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.

2016 vs. 2015

Adjusted EBITDA of $3,273.0 increased $288.9, or 10%, primarily due to favorable costs and favorable pricing, net of energy, fuel, and raw material costs. Adjusted EBITDA margin of 34.4% increased 420 bp.

2015 vs. 2014

Adjusted EBITDA of $2,984.1 increased $208.4, or 8%, due to higher volumes, higher pricing, and favorable costs. Adjusted EBITDA margin of 30.2% increased 360 bp.

Equity Affiliates’ Income

2016 vs. 2015

Income from equity affiliates of $148.6 decreased $5.9, as lower income from Industrial Gases – Americas and Industrial Gases – EMEA affiliates was partially offset by higher income from Industrial Gases – Asia affiliates.

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.

Cost of Sales and Gross Margin

2016 vs. 2015

Cost of sales of $6,402.7 decreased $536.3, or 8%, primarily due to lower energy costs of $271, lower operating costs of $239, and a favorable currency impact of $202, partially offset by higher costs attributable to sales volumes of $176. Operating costs included favorable impacts from cost reduction actions of $57, lower maintenance costs of $34, lower pension expense of $24, as well as the benefits of other operational improvements and productivity. Costs associated with volumes were higher primarily due to the Jazan sale of equipment activity.

Gross margin of 32.8% increased 290 bp, primarily due to lower costs.

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2015 vs. 2014

Cost of sales of $6,939.0 decreased $690.9, 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 29.9% increased 300 bp, due to lower costs of 120 bp, higher price, net of raw materials, of 100 bp, and higher volumes of 80 bp.

Selling and Administrative Expense

2016 vs. 2015

Selling and administrative expense of $849.3 decreased $90.0, or 10%, primarily due to the benefits of cost reduction actions of $68 and favorable currency effects of $28, partially offset by higher other costs of $6. Selling and administrative expense as a percent of sales decreased to 8.9% from 9.5%.

2015 vs. 2014

Selling and administrative expense of $939.3 decreased $115.4, or 11%, primarily due to the benefits of cost reduction actions of $122 and favorable currency effects of $62, partially offset by higher other costs of $69, driven by higher incentive compensation. Selling and administrative expense as a percent of sales decreased to 9.5% from 10.1%.

Research and Development

2016 vs. 2015

Research and development expense of $132.0 decreased $5.1, or 4%. Fiscal year 2016 and 2015 research and development expense as a percent of sales was 1.4%.

2015 vs. 2014

Research and development expense of $137.1 decreased $2.7, or 2%. Fiscal year 2015 and 2014 research and development expense as a percent of sales was 1.4% and 1.3%, respectively.

Business Separation Costs

On 16 September 2015, the Company announced plans to separate its Materials Technologies business, which contains two divisions, Electronic Materials (EMD) and Performance Materials (PMD), into an independent publicly traded company and distribute to Air Products shareholders all of the shares of the new public company in a tax free distribution (a “spin-off”). Versum Materials, LLC, or Versum, was formed as the new company to hold the Materials Technologies business subject to the spin-off. On 6 May 2016, the Company entered into an agreement to sell certain subsidiaries and assets comprising the PMD division to Evonik Industries AG for $3.8 billion in cash and the assumption of certain liabilities. As a result, the Company moved forward with the planned spin-off of Versum containing only the EMD division.

On 1 October 2016, Air Products completed the separation of its EMD division through the spin-off of Versum. As a result, the historical results of EMD will be presented as a discontinued operation beginning in fiscal year 2017. We continue to evaluate the progress of the sale of the PMD division to determine when it should be presented as a discontinued operation.

In fiscal year 2016, we incurred separation costs of $52.2 ($48.3 after-tax, or $.22 per share), primarily related to legal, advisory, and indirect tax costs associated with these transactions. The costs are reflected on the consolidated income statements as “Business separation costs.” A significant portion of these costs were not tax deductible because they were directly related to the plan for the tax-free spin-off of Versum. Our income tax provision includes additional tax expense related to the separation of $51.8 ($.24 per share), of which $45.7 resulted from a dividend declared during the third quarter of 2016 to repatriate $443.8 from a subsidiary in South Korea to the U.S. Previously, most of these foreign earnings were considered to be indefinitely reinvested.

We expect to incur additional legal and advisory fees in fiscal 2017.

On 30 September 2016, in anticipation of the spin-off, Versum entered into certain financing transactions to allow for a cash distribution of $550.0 and a distribution in-kind of notes issued by Versum with an aggregate principal amount of $425.0 to Air Products. Air Products then exchanged these notes with certain financial institutions for

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$418.3 of Air Products’ outstanding commercial paper. The exchange resulted in a loss of $6.9 ($4.3 after-tax, or $.02 per share) and has been reflected on the consolidated income statements as “Loss on extinguishment of debt.” This loss is deductible for tax purposes.

Business Restructuring and Cost Reduction Actions

We recorded charges in 2016, 2015, and 2014 for business restructuring and cost reduction actions. The charges for these actions are excluded from segment operating income.

Cost Reduction Actions

In fiscal year 2016, we recognized an expense of $33.9 ($24.0 after-tax, or $.11 per share) for severance and other benefits related to cost reduction actions resulting from the elimination of approximately 700 positions. The expense related primarily to the Industrial Gases – Americas and the Industrial Gases – EMEA segments.

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 at the time resulted in the largest transformational change in the history of the Company. As a result of this reorganization, we incurred 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 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.

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 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. We recognized $6.4 ($4.1 after-tax, or $.02 per share), $21.2 ($13.7 after-tax, or $.06 per share), and $5.5 ($3.6 after-tax, or $.02 per share) of settlement charges in 2016, 2015, and 2014, respectively. The settlement accelerated the 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

During the fourth quarter of 2014, we concluded that the goodwill and indefinite-lived intangible assets (primarily acquired trade names) associated with our Latin America reporting unit of our Industrial Gases – Americas segment were impaired and recorded a noncash impairment charge of $310.1 ($275.1 attributable to Air Products after-tax, or $1.27 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.

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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.

2016 vs. 2015

Other income (expense), net of $58.1 increased $10.8 primarily due to lower foreign exchange losses, favorable contract settlements, and receipt of a government subsidy. The prior year included a gain of $33.6 ($28.3 after-tax, or $.13 per share) resulting from the sale of two parcels of land. No other individual items were significant in comparison to the prior year.

2015 vs. 2014

Other income (expense), net of $47.3 decreased $5.5 and included 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 fiscal year 2014.

Interest Expense

2016 vs. 2015

Interest incurred decreased $4.2. The decrease primarily resulted from a stronger U.S. dollar on the translation of foreign currency interest of $6, partially offset by a higher average debt balance of $2. The change in capitalized interest was driven by a decrease in the carrying value of projects under construction, primarily as a result of our exit from the Energy-from-Waste business.

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.

Loss on Extinguishment of Debt

On 30 September 2016, in anticipation of the Versum spin-off, Versum issued $425.0 of notes to Air Products, who then exchanged these notes with certain financial institutions for $418.3 of Air Products’ outstanding commercial paper. The exchange resulted in a loss of $6.9 ($4.3 after-tax, or $.02 per share).

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).

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.

2016 vs. 2015

On a GAAP basis, the effective tax rate was 27.5% and 24.0% in 2016 and 2015, respectively. The change included a 240 bp impact from tax costs associated with business separation, primarily resulting from a dividend declared in 2016 to repatriate cash from a foreign subsidiary, as discussed above in “Business Separation Costs.” The remaining 110 bp change was primarily due to the increase in mix of income in jurisdictions with a higher effective tax rate and the impact of business separation costs for which a tax benefit was not available. On a non-GAAP basis, the effective tax rate increased from 24.2% in 2015 to 24.8% in 2016, primarily due to the increase in and mix of income in jurisdictions with a higher effective tax rate.

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2015 vs. 2014

On a GAAP basis, the effective tax rate was 24.0% and 27.1% in 2015 and 2014, respectively. The effective tax rate was higher in fiscal year 2014 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 24.1% in 2015 and 2014, respectively.

Discontinued Operations

On 29 March 2016, the Board of Directors approved the Company’s exit of its Energy-from-Waste (EfW) business. As a result, efforts to start up and operate its two EfW projects located in Tees Valley, United Kingdom, have been discontinued. The decision to exit the business and stop development of the projects was based on continued difficulties encountered and the Company’s conclusion, based on testing and analysis completed during the second quarter of fiscal year 2016, that significant additional time and resources would be required to make the projects operational. In addition, the decision allows the Company to execute its strategy of focusing resources on its core Industrial Gases business. The EfW segment has been presented as a discontinued operation. Prior year EfW business segment information has been reclassified to conform to current year presentation.

In fiscal 2016, our loss from discontinued operations, net of tax, of $884.2 primarily resulted from the write down of assets to their estimated net realizable value and to record a liability for plant disposition and other costs. Income tax benefits related only to one of the projects, as the other did not qualify for a local tax deduction. The loss from discontinued operations also includes land lease costs, commercial and administrative costs, and costs incurred for ongoing project exit activities.

We expect additional exit costs of $50 to $100 to be recorded in future periods.

In fiscal 2015, our loss from discontinued operations, net of tax, related to EfW was $6.8. This resulted from costs for land leases and commercial and administrative expenses.

In fiscal 2014, our loss from discontinued operations, net of tax, was $2.9. This included a loss, net of tax, of $7.5 for the cost of EfW land leases and commercial and administrative expenses. This loss was partially offset by a gain of $3.9 for the sale of the remaining Homecare business and settlement of contingencies related to a sale of a separate portion of the business to The Linde Group in 2012.

Refer to Note 4, Discontinued Operations, for additional details.

Segment Analysis

Industrial Gases – Americas

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Industrial Gases – Americas Sales

2016 vs. 2015

Underlying sales decreased 1% from lower volumes of 2%, partially offset by higher pricing of 1%. Volumes were down due to weakness in Latin America and lower steel demand in North America. Pricing was higher due to the benefit of pricing actions, mainly the recovery of inflationary and power cost increases in Latin America. Lower energy contractual cost pass-through to customers, primarily natural gas, decreased sales by 6%. Currency decreased sales by 2% primarily due to the impacts of the Chilean Peso, Brazilian Real, and Canadian Dollar.

Operating income of $895.2 increased 11%, or $86.8, due to lower operating costs of $108 and higher pricing, net of energy and fuel costs, of $26, partially offset by lower volumes of $33 and unfavorable currency impacts of $14. Operating costs were lower due to benefits from cost reduction actions. Operating margin increased 490 bp from the prior year, primarily due to the lower costs, with additional benefits from lower energy pass-through and higher pricing.

Equity affiliates’ income of $52.7 decreased $11.9 primarily due to unfavorable currency impacts and higher maintenance expense.

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.

Industrial Gases – EMEA

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2016 vs. 2015

Underlying sales decreased 1% as lower volumes of 2% were partially offset by higher pricing of 1%. Volumes decreased primarily due to continued weakness in the European economy. Lower energy and natural gas contractual cost pass-through to customers decreased sales by 4%. Unfavorable currency effects from the Euro and the British Pound Sterling reduced sales by 4%. Other than the impact on currency, the Brexit vote did not have a notable impact on our business.

Operating income of $382.8 increased 16%, or $52.1, primarily due to favorable operating costs of $59 and higher pricing, net of energy and fuel costs, of $20, partially offset by unfavorable currency impacts of $18 and lower volumes of $9. Operating margin increased 480 bp from the prior year primarily due to favorable cost performance, higher pricing, and lower energy pass-through.

Equity affiliates’ income of $36.5 decreased $5.9 primarily due to unfavorable currency impacts.

As a result of our exit from the Energy-from-Waste segment, the Company is evaluating the disposition of an air separation unit in the Industrial Gases – EMEA segment that was constructed primarily to provide oxygen to one of the Tees Valley plants. The current value of this asset is approximately £40 million ($52 million).

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 2014 primarily due to the lower costs.

Equity affiliates’ income of $42.4 decreased $1.7.

Industrial Gases – Asia

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2016 vs. 2015

Underlying sales increased by 10% from higher volumes of 11%, partially offset by lower pricing of 1%. Volumes were higher primarily from new plants in China and higher merchant volumes across Asia. Pricing was down due to continued pricing pressure on merchant products in China and helium oversupply into Asia. Unfavorable currency impacts, primarily from the Chinese Renminbi, Korean Won, and Taiwanese Dollar decreased sales by 5%.

Operating income of $449.1 increased 18%, or $68.6, primarily due to higher volumes of $66 and lower operating costs of $34, partially offset by an unfavorable currency impact of $19 and unfavorable pricing, net of energy and fuel costs, of $12. The lower operating costs were driven by our operational improvements. Operating margin increased 300 bp, due to favorable cost performance and higher volumes.

Equity affiliates’ income of $57.8 increased $11.7 primarily due to favorable contract and insurance settlements, higher volumes, and improved cost performance.

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 on-site 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.

Industrial Gases – Global

The Industrial Gases – Global segment includes sales of cryogenic and gas processing equipment for air separation and centralized global costs associated with management of all the Industrial Gases segments.

2016 vs. 2015

Sales of $498.8 increased $212.0, or 74%. The increase in sales was driven by a sale of equipment contract for multiple air separation units that will serve Saudi Aramco’s Jazan oil refinery and power plant in Saudi Arabia which more than offset the decrease in small equipment and other air separation unit sales. In 2016, we recognized approximately $300 of sales related to the Jazan project.

Operating loss of $21.3 decreased 59%, or $30.3, primarily from income on the Jazan project and benefits from the cost reduction actions, partially offset by lower other sale of equipment project activity and a gain associated with the cancellation of a sale of equipment contract that was recorded in the prior year.

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 cost reduction actions and a gain associated with the cancellation of a sale of equipment contract, partially offset by less profitable business mix, unfavorable project costs, and bad debt expense.

Materials Technologies

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Materials Technologies Sales

2016 vs. 2015

Underlying sales decreased by 2% from lower volumes. Electronic Materials underlying sales decreased 2% primarily from lower delivery systems volumes, partially offset by higher pricing. Performance Materials underlying sales decreased 2% primarily due to lower price, which was down due to lower raw material costs, partially offset by higher volumes. Unfavorable currency impacts decreased sales by 1%.

Operating income of $530.2 increased 11%, or $53.5, as higher pricing, net of raw material costs, of $51 and lower costs of $15 were partially offset by unfavorable currency impacts of $11. The lower costs include the benefits of business restructuring and cost reduction actions.

Operating margin increased 350 bp, primarily from favorable pricing, net of raw material costs, and improved cost performance.

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%. Electronic 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 production and supply chain networks and benefits of cost reduction actions. Operating margin increased 440 bp, from higher pricing, higher volumes, and lower operating costs.

Corporate and other

The Corporate and other segment consists of our liquefied natural gas (LNG) and helium container businesses, as well as corporate costs which are not business-specific.

2016 vs. 2015

Sales of $246.1 decreased $78.6, or 24%, primarily due to lower LNG sale of equipment activity.

Operating loss of $37.5 decreased 27%, or $14.0, due to benefits from our recent cost reduction actions and lower foreign exchange losses, partially offset by lower LNG activity.

2015 vs. 2014

Sales of $324.7 increased $2.5, or 1%, primarily due to higher 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 $51.5 decreased 34%, or $27.0, primarily due to higher LNG project activity and the benefits of our cost reduction actions.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

The Company has presented certain financial measures on a non-GAAP (“adjusted”) basis and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. The Company believes these non-GAAP measures provide investors, potential investors, securities analysts, and others with useful information to evaluate the performance of the business because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.

In many cases, our non-GAAP measures are determined by adjusting the most directly comparable GAAP financial measure to exclude certain disclosed items (“non-GAAP adjustments”) that we believe are not representative of the underlying business performance. For example, Air Products is currently executing its strategic plan to restructure the Company and to focus on the Company’s core Industrial Gases businesses, which has and will continue to result in significant disclosed items that we believe are important for investors to understand separately from the performance of the underlying business. The tax impact of our non-GAAP adjustments reflects the expected current and deferred income tax expense impact of the transactions and is impacted primarily by the statutory tax rate of the various relevant jurisdictions and the taxability of the adjustments in those jurisdictions. 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. Investors should also consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.

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

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CONSOLIDATED RESULTS

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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 summary of segment operating income: