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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 30 September 2014
 

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 

Commission file number 1-4534

AIR PRODUCTS AND CHEMICALS, INC.

 

7201 Hamilton Boulevard

 

State of incorporation: Delaware

Allentown, Pennsylvania, 18195-1501

 

I.R.S. identification number: 23-1274455

Tel. (610) 481-4911

 

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

 

Title of Each Class:

 

Registered on:

Common Stock, par value $1.00 per share

 

New York

Preferred Stock Purchase Rights

 

New York

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES  x         NO  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES  ¨         NO  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x         NO  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x         NO  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

x

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.

 

Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨   Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES  ¨         NO  x

The aggregate market value of the voting stock held by non-affiliates of the registrant on 31 March 2014 was approximately $25.3 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 2014 was 213,710,798.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on 22 January 2015 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 2014

TABLE OF CONTENTS

 

ITEM 1.   BUSINESS     3   
ITEM 1A.   RISK FACTORS     9   
ITEM 1B.   UNRESOLVED STAFF COMMENTS     13   
ITEM 2.   PROPERTIES     13   
ITEM 3.   LEGAL PROCEEDINGS     15   
ITEM 4.   NOT APPLICABLE     15   
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES     16   
ITEM 6.   SELECTED FINANCIAL DATA     18   
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     19   
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     45   
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     47   
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     102   
ITEM 9A.   CONTROLS AND PROCEDURES     102   
ITEM 9B.   OTHER INFORMATION     102   
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     102   
ITEM 11.   EXECUTIVE COMPENSATION     102   
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     103   
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     104   
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES     104   
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     104   
SIGNATURES     105   

 

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PART I

 

  ITEM 1. BUSINESS  

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, performance materials, equipment, and services. The Company is the world’s largest supplier of hydrogen and helium and has built leading positions in growth markets such as 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 and predecessors of Air Products and its subsidiaries.

Financial Information about Segments

We organized our operations into four reportable business segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy through 30 September 2014. The discussion that follows is based on those operations. On 18 September 2014, we announced a major company reorganization that includes geographic alignment of our gases businesses effective as of 1 October 2014. Refer to Note 25, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments and segment reorganization.

Narrative Description of Business by Segments

Merchant Gases

Merchant Gases provides atmospheric gases, such as oxygen, nitrogen, and argon (primarily recovered by the cryogenic distillation of air); process gases such as hydrogen, helium (purchased or refined from crude helium), and carbon dioxide; specialty gases; temporary gas supply services; and equipment, throughout the world to customers in diversified industries, including metals, glass, electronics, chemical processing, food processing, healthcare, general manufacturing, and petroleum and natural gas industries.

Merchant Gases supplies the following types of products:

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 by the Company at the customer’s site for vaporizing into a gaseous state as needed. Liquid bulk sales are typically 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.

Small on-site plants —Customers receive product through small on-sites (cryogenic or noncryogenic generators), either by a sale of gas contract or the sale of the equipment to the customer.

Electric power is the largest cost component in the production of atmospheric gases—oxygen, nitrogen, and argon. Natural gas is also an energy source at a number of the Company’s Merchant Gases facilities. The Company mitigates energy and natural gas price increases through pricing formulas and surcharges. Helium is primarily produced as a by-product of natural gas production. We purchase crude helium for purification and resale. During fiscal year 2014, we experienced shortages in helium supply due to industry-wide sourcing shortfalls, and the supply/demand dynamics in this product continue to evolve. No other significant difficulties were encountered in obtaining adequate supplies of energy or raw materials during the year.

Merchant Gases competes worldwide against three global industrial gas companies: L’Air Liquide S.A.; Linde AG; and Praxair, Inc.; and several regional sellers (including Airgas, Inc., primarily with respect to liquid bulk sales). Competition in industrial gases is based primarily on price, reliability of supply, and the development of industrial gas applications.

Merchant Gases sales constituted 41% of consolidated sales in fiscal year 2014, 40% in fiscal year 2013, and 38% in fiscal year 2012. Sales of atmospheric gases (oxygen, nitrogen, and argon) via the Liquid bulk, Packaged gases

 

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and Small on-site plants supply modes constituted approximately 49% of the Merchant Gases segment in fiscal year 2014, 48% in fiscal year 2013, and 54% in fiscal year 2012. These sales constituted approximately 20% of the total Company consolidated sales in fiscal year 2014, 19% in fiscal year 2013, and 21% in fiscal year 2012.

The Company owns a 67.3% controlling interest in the outstanding shares of Indura S.A., an industrial gas company in South America which produces packaged and liquid bulk gases and sells related hard goods. Indura S.A. is accounted for as part of the Merchant Gases operating segment. The Merchant Gases segment also includes the Company’s 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, Saudi Arabia, India, and Thailand.

Tonnage Gases

Tonnage Gases provides hydrogen, carbon monoxide, nitrogen, oxygen, and syngas (a hydrogen-carbon monoxide mixture) principally to the energy production and refining, chemical, and metallurgical industries worldwide. 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 contracts with 15- to 20- year terms. The Company is the world’s largest provider of hydrogen, which is used by oil refiners to facilitate the conversion of heavy crude feedstock and lower the sulfur content of gasoline and diesel fuels to reduce smog and ozone depletion. The energy production industry uses nitrogen injection for enhanced recovery of oil and natural gas and oxygen for gasification. The metallurgical industry uses nitrogen for inerting and oxygen for the manufacture of steel and certain nonferrous metals. The chemical industry uses hydrogen, oxygen, nitrogen, carbon monoxide, and syngas as feedstocks in the production of many basic chemicals. The Company delivers product through pipelines from centrally located facilities in or near the United States Gulf Coast; Los Angeles, California; Alberta, Canada; Rotterdam, the Netherlands; the United Kingdom; Western Belgium; Ulsan, Korea; Nanjing, China; Tangshan, China; Kuan Yin, Taiwan; and Singapore. The Company also owns less than controlling interests in pipelines located in Thailand and South Africa.

Natural gas is the principal raw material for hydrogen, carbon monoxide, and syngas production. Electric power is the largest cost component in the production of atmospheric gases. The Company mitigates energy and natural gas price increases through long-term cost pass-through provisions in its contracts. During fiscal year 2014, no significant difficulties were encountered in obtaining adequate supplies of power and natural gas, however we experienced interruptions in availability of syngas, which affected our hydrogen and carbon monoxide sales in the United States Gulf Coast.

Tonnage Gases competes against three global industrial gas companies: L’Air Liquide S.A.; Linde AG; Praxair, Inc.; and several regional competitors. Competition is based primarily on price, reliability of supply, the development of applications that use industrial gases, and, in some cases, provision of other services or products such as power and steam generation. We also have a competitive advantage in regions where we have pipeline networks, which enable us to provide a reliable and economic supply of products to customers.

Tonnage Gases sales constituted approximately 32% of consolidated sales in fiscal year 2014, 33% in fiscal year 2013, and 33% in fiscal year 2012. Sales of hydrogen and related products constituted approximately 68% of the Tonnage Gases segment in fiscal year 2014, 62% in fiscal year 2013, and 57% in fiscal year 2012. These sales constituted approximately 22% of the total Company consolidated sales in fiscal year 2014, 21% in fiscal year 2013, and 19% in fiscal year 2012.

Electronics and Performance Materials

Electronics and Performance Materials employs applications technology to provide solutions to a broad range of global industries through chemical synthesis, analytical technology, process engineering, and surface science. This segment provides the electronics industry with specialty gases (such as nitrogen trifluoride, arsine, phosphine, white ammonia, silicon tetrafluoride, carbon tetrafluoride, hexafluoroethane, tungsten hexafluoride, and critical etch gases), tonnage gases (primarily nitrogen), chemicals mechanical planarization slurries, specialty chemicals, services, and equipment primarily for the manufacture of silicon and compound semiconductors and thin film transistor liquid crystal displays. These products are delivered through various supply chains, including bulk delivery or distribution by pipelines such as those located in California’s Silicon Valley; Phoenix, Arizona; Tainan, Taiwan; Gumi and Giheung, Korea; and Tianjin, China.

Electronics and Performance Materials also provides performance materials for a wide range of products, including coatings, inks, adhesives, civil engineering, personal care, institutional and industrial cleaning, mining, oil refining, and polyurethanes, and focuses on the development of new materials aimed at providing unique functionality to emerging markets. Principal performance materials include polyurethane catalysts and other additives for

 

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polyurethane foam, epoxy amine curing agents and auxiliary products for epoxy systems, specialty surfactants for formulated systems, and functional additives for industrial cleaning and mining industries.

The Electronics and Performance Materials segment uses a wide variety of raw materials, including ammonia, tungsten powder, hydrogen fluoride, amines, alcohols, epoxides, organic acids, and ketones. During fiscal year 2014, no significant difficulties were encountered in obtaining adequate supplies of energy or raw materials.

The Electronics and Performance Materials segment 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 Electronics and Performance Materials constituted approximately 23% of total Company consolidated sales in fiscal year 2014, 22% in fiscal year 2013, and 24% in fiscal year 2012.

Equipment and Energy

Equipment and Energy designs and manufactures cryogenic equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and helium distribution (cryogenic transportation containers), and serves energy markets in a variety of ways.

Equipment is sold globally to customers in the chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing industries. This business segment also provides a broad range of plant design, engineering, procurement, and construction management services to its customers.

Energy markets are served through the Company’s operation and partial ownership of cogeneration and flue gas desulfurization facilities. In addition, we are developing hydrogen as an energy carrier, energy-from-waste facilities to produce electricity (Tees Valley), carbon capture technologies for a variety of industrial and power applications, and oxygen-based technologies to serve energy markets in the future. The Company operates and owns a 48.8% interest in a 112-megawatt gas-fueled power generation facility in Thailand. The Company also operates and owns a 70% interest in a flue gas desulfurization facility in Indiana.

Steel, aluminum, and capital equipment subcomponents (compressors, etc.) are the principal raw materials in the construction of equipment in this business segment. Adequate raw materials for individual projects are acquired under firm purchase agreements. The Company mitigates these cost components, in part, through long-term cost pass-through provisions in contracts. During fiscal year 2014, no significant difficulties were encountered in obtaining adequate supplies of raw materials.

Equipment and Energy competes with a great number of firms for all of its offerings, except LNG heat exchangers, for which there are fewer competitors due to the limited market size and proprietary technologies. Competition is based primarily on technological performance, service, technical know-how, price, and performance guarantees.

The backlog of equipment orders (including letters of intent believed to be firm) from third-party customers was approximately $520 million on 30 September 2014, approximately 12% of which is for cryogenic equipment and 75% of which is for LNG heat exchangers, as compared with a total backlog of approximately $402 million on 30 September 2013. The Company expects that approximately $320 million of the backlog on 30 September 2014 will be completed during fiscal year 2015.

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, 18 European countries (including the United Kingdom, the Netherlands, and Spain), 11 Asian countries (including China, Korea, and Taiwan), 8 Latin American countries (including Chile and Brazil) and 2 African countries. 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 7, Summarized Financial Information of Equity Affiliates; Note 22, Income Taxes; and Note 25, Business Segment and Geographic

 

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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 12, 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 $378.7 million, $410.3 million, and $521.1 million in fiscal years 2014, 2013, and 2012, 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 corporate research groups, which include science and process technology centers, support the research efforts of various businesses throughout the Company. Development of technology for use within Merchant Gases, Tonnage Gases, and Equipment and Energy focuses primarily on new and improved processes and equipment for the production and delivery of industrial gases and new or improved applications for industrial gas products. Research and technology development for Electronics and Performance Materials 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 $141.4 million during fiscal year 2014, $133.7 million in fiscal year 2013, and $126.4 million in fiscal year 2012. In addition, the Company expended $18.9 million on customer-sponsored research activities during fiscal year 2014, $45.5 million in fiscal year 2013, and $45.4 million in fiscal year 2012.

The Company owns approximately 1,000 United States patents, 3,700 foreign patents, and is a licensee under certain patents owned by others. While the patents and licenses are considered important, the Company does not consider its business as a whole to be materially dependent upon any particular patent, patent license, or group of patents or licenses.

Environmental Controls

The Company is subject to various environmental laws and regulations in the countries in which it has operations. Compliance with these laws and regulations results in higher capital expenditures and costs. In the normal course of business, the Company is involved in proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA: the federal Superfund law); Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Additional information with respect to these proceedings is included under Item 3, Legal Proceedings, below. The Company’s accounting policy for environmental expenditures is discussed in Note 1, Major Accounting Policies, and environmental loss contingencies are discussed in Note 16, 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 $35.1 million in fiscal 2014, $37.1 million in 2013, and $44.7 million in 2012. These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal Company standards. Refer to Note 16, Commitments and Contingencies, to the consolidated financial statements for additional information.

The Company estimates that we spent $5 million in 2014 and $4 million in 2013 on capital projects to control pollution. Capital expenditures to control pollution in future years are estimated to be approximately $5 million in both 2015 and 2016.

Employees

On 30 September 2014, the Company (including majority-owned subsidiaries) had approximately 21,200 employees, of whom approximately 20,900 were full-time employees and of whom approximately 13,250 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.

 

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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.

Seasonality

Although none of the four business segments are subject to seasonal fluctuations to any material extent, the Electronics and Performance Materials segment is susceptible to the cyclical nature of the electronics industry and to seasonal fluctuations in underlying end-use performance materials markets.

Working Capital

The Company maintains inventory where required to facilitate the supply of products to customers on a reasonable delivery schedule. Merchant Gases inventory consists primarily of industrial, specialty gas, and crude helium inventories supplied to customers through liquid bulk and packaged gases supply modes. Electronics and Performance Materials 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. Tonnage Gases and Equipment and Energy have limited inventory.

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. The Tonnage Gases and Electronics and Performance Materials segments do have concentrations of customers in specific industries, primarily refining, chemicals, and electronics. Within each of these industries, the Company has several large-volume customers with long-term contracts. A negative trend affecting one of these industries, or the loss of one of these major customers, although not material to our consolidated revenue, could have an adverse impact on the affected segment.

Governmental Contracts

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

 

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Executive Officers of the Company

The Company’s executive officers and their respective positions and ages on 24 November 2014 follow. Information with respect to offices held is stated in fiscal years.

 

Name    Age        Office
M. Scott Crocco      50         Senior Vice President and Chief Financial Officer (became Senior Vice President and Chief Financial Officer in 2013 and Vice President and Corporate Controller in 2008).

Seifi Ghasemi

                (A)(B)

     70         Chairman, President, and Chief Executive Officer (became Chairman, President and Chief Executive Officer in 2014 and Chairman and Chief Executive Officer of Rockwood Holdings, Inc. in 2001).
Guillermo Novo      52         Executive Vice President Materials Technology (became Executive Vice President Materials Technology in 2015 and Senior Vice President and General Manager – Electronics, Performance Materials, Strategy and Technology in 2012; Group Vice President, Dow Coating Materials at Dow Chemical Company in 2010; and Vice President, Polyurethanes Business at Dow Chemical Company in 2009).
Corning F. Painter      52         Executive Vice President Industrial Gases (became Executive Vice President Industrial Gases in 2015; Senior Vice President and General Manager – Merchant Gases in 2014: Senior Vice President – Supply Chain in 2012; Senior Vice President – Corporate Strategy and Technology in 2011; and Vice President and General Manager, Global Electronics in 2007).
John D. Stanley      56         Senior Vice President, General Counsel and Chief Administrative Officer (became Senior Vice President, General Counsel and Chief Administrative Officer in 2013; and Senior Vice President and General Counsel in 2009).

 

  (A) Member, Board of Directors  
  (B) Member, Executive Committee of the Board of Directors  

 

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  ITEM 1A. RISK FACTORS  

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

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

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

Reorganization—Our ability to successfully manage ongoing organizational change could impact our business results.

The Board of Directors recently elected a new chairman, president and chief executive officer who has implemented other senior leadership changes and refocused our strategic goals. We have begun and will continue to execute a number of significant business and organization changes to support our new strategic objectives. We expect these changes, which may include staffing adjustments and reassignment of responsibilities as well as employee departures, to continue for the foreseeable future. Successfully managing these changes, including successfully transitioning and stabilizing key business and functional processes, is critical to our business success. Failure or delay in transitioning key processes could result in disruptions to our business.

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

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

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

 

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

At 30 September 2014, the Company had total consolidated debt of $6,118.5 million, of which $1,672.9 million will mature in the next twelve months. The Company expects to continue to incur indebtedness to fund new projects and replace maturing debt. Although the Company actively manages its interest rate risk through the use of derivatives and diversified debt obligations, not all borrowings at variable rates are hedged, and new debt will be priced at market rates. If interest rates increase, the Company’s interest expense could increase significantly, affecting earnings and reducing cash flow available for working capital, capital expenditures, acquisitions, and other purposes. In addition, changes by any rating agency to the Company’s outlook or credit ratings could increase the Company’s cost of borrowing and weaken our ability to access capital and credit markets on terms commercially acceptable to us. For a more detailed discussion of interest rate risk, see Item 7A, below.

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

A number of new technologies and new product offerings are being developed or implemented by the Company. Some of our existing technologies are being implemented in products and designs beyond our experience base. These technological expansions can create nontraditional performance risks to our operations. Failure of the technologies to work as predicted or unintended consequences of new designs or uses, could lead to cost overruns, project delays, financial penalties, or damage to our reputation. In particular, the Company’s Tees Valley projects contain some processes that have not been demonstrated to date at the same scale or in the same combination, and, although such projects include processes that have been demonstrated previously by others, such processes are new to the Company.

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

The Company typically contracts to pass through cost increases in energy and raw materials to its customers, but cost variability can still have a negative impact on its results. The Company may not be able to raise prices as quickly as costs rise, or competitive pressures may prevent full recovery. Increases in energy or raw material costs that cannot be passed on to customers for competitive or other reasons would negatively impact the Company’s revenues and earnings. Even where costs are passed through, price increases can cause lower sales volume.

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

The Company is subject to government regulation in the United States and foreign jurisdictions in which it conducts its business. The application of laws and regulations to the Company’s business is sometimes unclear. Compliance with laws and regulations may involve significant costs or require changes in business practice that could result in

 

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

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

Some of the Company’s operations are within jurisdictions that have or are developing regulatory regimes governing emissions of greenhouse gases (GHG). These include existing coverage under the European Union Emissions Trading Scheme, California’s cap and trade scheme, Alberta’s Emission Reduction Program and China’s Emission Trading Scheme Pilots and mandatory reporting and anticipated constraints on GHG emissions in Ontario, Canada, South Korea and China. In addition, the U.S. Environmental Protection Agency 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. Chile’s tax on carbon dioxide from power producers) to motivate emission reductions. These reductions often involve higher power costs.

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

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

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

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

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

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

The majority of the Company’s sales are derived from outside the United States and denominated in foreign currencies. The Company also has significant production facilities that are located outside of the United States. Financial results therefore will be affected by changes in foreign currency rates. The Company uses certain financial instruments to mitigate these effects, but it is not cost-effective to hedge foreign currency exposure in a manner that

 

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would entirely eliminate the effects of changes in foreign exchange rates on earnings, cash flows, and fair values of assets and liabilities. 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.

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

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

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

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

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

We depend on information technology to enable us to operate efficiently and interface with customers as well as to maintain financial accuracy and efficiency. Our information technology capabilities are delivered through a combination of internal and outsourced service 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 through a security breach. As with all large systems, our information systems could be penetrated by outside parties intent on extracting information, corrupting information, or disrupting business processes. 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 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, 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.

 

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

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

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

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

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.

Pension Liabilities—The Company’s results of operations and financial condition could be negatively impacted by its pension plans.

Adverse equity market conditions and volatility in the credit markets may have an unfavorable impact on the value of the Company’s pension trust assets and its future estimated pension liabilities, significantly affecting the net periodic benefit costs of its pension plans and ongoing funding requirements for these plans. As a result, the Company’s financial results and cash flow in any period could be negatively impacted. For information about potential impacts from pension funding and the use of certain assumptions regarding pension matters, see the discussion in Note 15, Retirement Benefits, to the consolidated financial statements, included in Item 8, below.

 

  ITEM 1B. UNRESOLVED STAFF COMMENTS  

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

 

  ITEM 2. PROPERTIES  

Air Products owns its principal administrative offices, which are the Company’s headquarters located in Trexlertown, Pennsylvania, as well as administrative offices in Hersham, U.K. and Santiago, Chile. The principal operating offices for the Company’s businesses are located: in respect of the Americas region, in Canada and Brazil; in respect of Europe, in the U.K., Belgium, France, Spain, the Netherlands, Germany, Russia, and Poland; and in respect of Asia, in China, Taiwan, Malaysia, Japan, South Korea and Singapore. The Company leases administrative offices in Spain, Malaysia and China for its Global Business Support Services organization.

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

 

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Merchant Gases

Merchant Gases currently operates 300 production and distribution facilities in North and South America (98 are located on owned property), 155 facilities in Europe, the Middle East and Africa (over 50 are on owned property) and 82 facilities within Asia (7 are on owned property). The production and distribution facilities include approximately 30 integrated sites that also serve the Tonnage Gases or Electronics businesses. Helium is processed at sites in Kansas, Wyoming and Texas and then distributed to/from transfill sites in the U.S., Canada, Europe and Asia. A new helium extraction facility is under construction in southwest Colorado. Sales support offices are located at our principal operating office centers referred to above, at 9 leased properties in the U.S. and Canada, at 9 leased sites and at production plant sites in Europe, at 10 leased sites and at production plant sites in Asia and at regional production plant sites in South America.

Research and development (R&D) activities for this business segment are conducted in: Trexlertown, Pennsylvania; Barcelona, Spain, Basingstoke and Carrington in the U.K.; a leased site in British Columbia, Canada; and a leased site in Shanghai, China.

Tonnage Gases

Tonnage Gases operates over 60 plants (9 are located on owned property) in North and South America that produce over 300 standard tons per day of product. Over 40 of these facilities produce or recover hydrogen. Many of the hydrogen facilities support the major pipeline systems located in Los Angeles, California and Alberta, Canada; and along the United States Gulf Coast through the Gulf Coast Connection Pipeline, which interconnects the Texas and Louisiana pipeline networks. The segment also operates 39 tonnage plants in Europe, the Middle East and Africa and 28 tonnage plants in Asia. The majority of the sites in this segment are under structured long-term leasehold type agreements. Sales support offices are located at our headquarters in Trexlertown, Pennsylvania and leased offices in Texas, Louisiana, California, Calgary, Alberta, Hersham, U.K., Rotterdam, the Netherlands, Moscow, Russia, Shanghai, China, Singapore, Bahrain and Doha, Qatar.

Electronics and Performance Materials

The Electronics portion of this business segment produces, packages and stores nitrogen, specialty gases and electronic chemicals and manufactures equipment at 38 sites in the United States (9 of which are owned and the majority of the remaining are located on customer sites), nine leased facilities in Europe and the Middle East, and 50 facilities in Asia (15 of which are owned, 23 of which are located on customer sites and the remainder of which are leased or term grants).

The Performance Materials portion of this business segment operates 5 production facilities in the United States, 3 in Europe and 4 in Asia. Seven of the Performance Materials facility sites are owned.

This business segment conducts R&D related activities at 11 locations worldwide, including: Trexlertown, Pennsylvania; Carlsbad, California; Tempe, Arizona; Milton, Wisconsin; Utrecht, the Netherlands; Hamburg and Marl, Germany; Chubei and Hsin Chu, Taiwan; Shanghai, China; and Kawasaki, Japan.

Equipment and Energy

The Equipment portion of this business segment operates at eight facilities in the U.S., one in Europe and three in Asia. We manufacture a significant portion of the world’s supply of LNG equipment at our Wilkes-Barre, Pennsylvania site and our new LNG manufacturing facility at the Port of Manatee, Florida, which opened in early 2014. Air separation columns and cold boxes for Company-owned facilities and third-party sales are produced by operations in Caojing, China and Tanjung Langsat, Malaysia as well as in the Wilkes-Barre, Pennsylvania facility. Cryogenic transportation containers for liquid helium are manufactured and reconstructed at facilities in eastern Pennsylvania; Liberal, Kansas; and Istres, France.

Equipment commercial and engineering team members are located at offices in: Allentown and Bethlehem, Pennsylvania; Hersham, U.K.; Pune, India; Xi’an and Shanghai, China.

The Energy portion of this business segment produces electric power at various facilities globally, including a gas-fueled power generation facility in Thailand, in which the Company has a 48.8% interest. Flue gas desulfurization operations are conducted at the Pure Air facility in Chesterton, Indiana. The Company is constructing two renewable energy facilities in Tees Valley, U.K. on land for which we have long-term leases. Commercial and engineering team members are located in Trexlertown, Pennsylvania and Hersham and Tees Valley, U.K.

The Company or its affiliates own 6 of the Equipment and Energy properties described above and lease the remaining locations.

 

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  ITEM 3. LEGAL PROCEEDINGS  

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

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); the Resource Conservation and Recovery Act (RCRA); and similar state and foreign environmental laws relating to the designation of certain sites for investigation or remediation. Presently there are approximately 36 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 or former manufacturing sites. We do not expect that any sums we may have to pay in connection with these matters would have a material adverse effect 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 $73 million at 30 September 2014) on Air Products Brasil Ltda. This fine was based on a recommendation by a unit of the Brazilian Ministry of Justice, whose investigation began in 2003, alleging violation of competition laws with respect to the sale of industrial and medical gases. The fines are based on a percentage of the Company’s total revenue in Brazil in 2003.

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

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

 

  ITEM 4. NOT APPLICABLE  

 

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PART II

 

  ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES  

Our common stock (ticker symbol APD) is listed on the New York Stock Exchange. Our transfer agent and registrar is American Stock Transfer & Trust Company, 6201 15 th Avenue, Brooklyn, New York 11219, telephone (800) 937-5449 (U.S. and Canada) or (718) 921-8124 (all other locations); Internet website www.amstock.com; and e-mail address info@amstock.com. As of 31 October 2014, there were 6,634 record holders of our common stock. Quarterly stock prices, as reported on the New York Stock Exchange composite tape of transactions, and dividend information for the last two fiscal years appear below. Cash dividends on the Company’s common stock are paid quarterly. Our objective is to pay dividends consistent with the reinvestment of earnings necessary for long-term growth. It is our expectation that we will continue to pay comparable cash dividends in the future.

Quarterly Stock Information

 

2014    High        Low        Close        Dividend  

First

     $113.99           $102.23           $111.78           $0.71   

Second

     124.40           102.73           119.04           0.77   

Third

     131.48           114.28           128.62           0.77   

Fourth

     137.45           126.82           130.18           0.77   
                    $3.02   
2013    High        Low        Close        Dividend  

First

     $86.31           $76.78           $84.02           $0.64   

Second

     90.34           84.15           87.12           0.71   

Third

     97.12           84.04           91.57           0.71   

Fourth

     114.75           90.12           106.57           0.71   
                    $2.77   

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 2014. At 30 September 2014, $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), the Peer Group Index used in 2013, 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.

Air Products has changed the benchmark for the five-year cumulative return from a defined peer group to the S&P 500 Materials Index. The use of the S&P 500 Materials Index provides a more transparent and recognizable benchmark against which to measure our Company.

COMPARISON OF FIVE YEAR CUMULATIVE SHAREHOLDER RETURN

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

Comparative Growth of a $100 Investment

(Assumes Reinvestment of All Dividends)

 

LOGO

 

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  ITEM 6. SELECTED FINANCIAL DATA  

 

(Millions of dollars, except per share)   2014   (A)     2013  (A)     2012  (A)     2011  (A)     2010  (A)  

Operating Results

         

Sales

    $10,439        $10,180        $9,612        $9,674        $8,616   

Cost of sales

    7,635        7,472        7,052        7,098        6,289   

Selling and administrative

    1,059        1,066        947        942        887   

Research and development

    141        134        126        119        115   

Business restructuring and cost reduction actions

    13        232        327                 

Operating Income

    1,328        1,324        1,282        1,508        1,268   

Equity affiliates’ income

    151        168        154        154        127   

Income from continuing operations attributable to Air Products

    987        1,004        999        1,134        942   

Net income attributable to Air Products

    992        994        1,167        1,224        1,029   

Basic earnings per common share attributable to Air Products:

         

Income from continuing operations

    4.64        4.79        4.73        5.33        4.44   

Net income

    4.66        4.74        5.53        5.75        4.85   

Diluted earnings per common share attributable to Air Products:

         

Income from continuing operations

    4.59        4.73        4.66        5.22        4.34   

Net income

    4.61        4.68        5.44        5.63        4.74   

Year-End Financial Position

         

Plant and equipment, at cost

    $20,224        $19,530        $18,046        $16,859        $15,934   

Total assets

    17,779        17,850        16,942        14,291        13,506   

Working capital

    332        212        726        848        790   

Total debt (B)

    6,119        6,274        5,292        4,562        4,128   

Redeemable noncontrolling interest

    287        376        393                 

Air Products shareholders’ equity

    7,366        7,042        6,477        5,796        5,547   

Total equity

    7,521        7,199        6,623        5,939        5,698   

Financial Ratios

         

Return on average Air Products shareholders’ equity (C)

    13.4     15.3     16.1     19.4     18.2

Operating margin

    12.7     13.0     13.3     15.6     14.7

Selling and administrative as a percentage of sales

    10.1     10.5     9.9     9.7     10.3

Total debt to total capitalization  (B) (D)

    43.9     45.3     43.0     43.4     42.0

Other Data

         

Adjusted EBITDA on a non-GAAP basis (E)

    $2,765        $2,641        $2,528        $2,545        $2,317   

Depreciation and amortization

    957        907        841        834        827   

Capital expenditures on a GAAP basis (F)

    1,682        1,748        2,560        1,366        1,092   

Capital expenditures on a non-GAAP basis (F)

    1,885        1,997        2,778        1,539        1,256   

Cash provided by operating activities

    2,186        1,553        1,765        1,710        1,485   

Cash used for investing activities

    1,638        1,697        2,435        1,170        1,014   

Cash (used for) provided by financing activities

    (504     115        (78     (485     (580

Dividends declared per common share

    3.02        2.77        2.50        2.23        1.92   

Weighted average common shares outstanding (in millions)

    213        210        211        213        212   

Weighted average common shares outstanding assuming dilution (in millions)

    215        212        215        218        217   

Book value per common share at year-end

    $34.49        $33.35        $30.48        $27.57        $25.94   

Shareholders at year-end

    6,600        7,000        7,500        7,900        8,300   

Employees at year-end (G)

    21,200        21,600        21,300        18,900        18,300   

 

  (A)  

Unless otherwise stated, selected financial data is presented on a GAAP basis. Our operating results were impacted by certain items which management does not believe to be indicative of ongoing business trends and are excluded from the non-GAAP measure.

 

For 2014, these items include: (i) a charge of $310 ($275 after-tax, or $1.27 per share) related to goodwill and intangible asset impairment, (ii) a charge to operating income of $13 ($8 after-tax, or $.04 per share) related to business reorganization and cost reduction actions, (iii) a charge of $6 ($4 after-tax, or $.02 per share) related to pension settlement loss, (iv) a tax expense of $21 ($.10 per share) for a Chilean rate change, (v) a tax benefit of $52 ($.24 per share) related to a tax election.

For 2013, these items include: (i) a charge to operating income of $232 ($158 after-tax, or $.74 per share) related to business restructuring and cost reduction actions, (ii) expenses of $10 ($6 after-tax, or $.03 per share) related to advisory costs.

For 2012, these items include: (i) a charge to operating income of $327 ($222 after-tax, or $1.03 per share) related to business restructuring and cost reduction actions, (ii) a gain of $86 ($55 after-tax, or $.25 per share) related to the gain on our previously held equity interest in DA NanoMaterials, (iii) a charge of $10 ($6 after-tax, or $.03 per share) related to a customer bankruptcy, (iv) a tax expense of $44 ($.20 per share) for a Spanish tax settlement, (v) a tax benefit of $58 ($.27 per share) for a favorable Spanish tax ruling.

 

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For 2011 and 2010, these items include: expenses of $49 ($32 after-tax, or $.14 per share) and $96 ($60 after-tax, or $.28 per share), respectively, related to the Company’s attempt to acquire Airgas, Inc.

 

  (B)  

Total debt includes long-term debt, current portion of long-term debt, and short-term borrowings as of the end of the year.

 

 

  (C)  

Calculated using income from continuing operations attributable to Air Products and five-quarter average Air Products shareholders’ equity.

 

 

  (D)  

Total capitalization includes total debt plus total equity plus redeemable noncontrolling interest as of the end of the year.

 

 

  (E)  

A reconciliation of reported GAAP results to Adjusted EBITDA is presented on page 32.

 

 

  (F)  

Capital expenditures on a GAAP basis include additions to plant and equipment, investment in and advances to unconsolidated affiliates, and acquisitions. The Company utilizes a non-GAAP measure in the computation of capital expenditures and includes spending associated with facilities accounted for as capital leases and purchases of noncontrolling interests. Refer to page 34 for a reconciliation of the GAAP to non-GAAP measures for 2014, 2013, and 2012. For 2011, the GAAP measure was adjusted by $174 for spending associated with facilities accounted for as capital leases. For 2010, the GAAP measure was adjusted by $123 and $42 for spending associated with facilities accounted for as capital leases and purchases of noncontrolling interests, respectively.

 

 

  (G)  

Includes full- and part-time employees from continuing and discontinued operations.

 

 

  ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

 

Business Overview

     20   

2014 in Summary

     20   

2015 Outlook

     21   

Results of Operations

     22   

Reconciliation of Non-GAAP Financial Measures

     30   

Liquidity and Capital Resources

     33   

Contractual Obligations

     36   

Pension Benefits

     37   

Environmental Matters

     38   

Off-Balance Sheet Arrangements

     39   

Related Party Transactions

     39   

Inflation

     39   

Critical Accounting Policies and Estimates

     39   

New Accounting Guidance

     45   

Forward-Looking Statements

     45   

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

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

The discussion of results that follows includes comparisons to non-GAAP financial measures. For 2014, the non-GAAP measures exclude: business reorganization and cost reduction charges recorded in the fourth quarter, goodwill and intangible asset impairment charges, pension settlement losses, and impacts resulting from a tax election benefit and the Chilean tax rate change. For 2013, the non-GAAP measures exclude the business restructuring and cost reduction plan charges and advisory costs. For 2012, the non-GAAP measures exclude the business restructuring and cost reduction plan charges, the customer bankruptcy charge, the gain on the previously held equity interest in DuPont Air Products NanoMaterials LLC (DA NanoMaterials), the Spanish tax settlement, and the Spanish tax ruling. The presentation of non-GAAP measures is intended to enhance the usefulness of financial information by providing measures that our management uses internally to evaluate our performance. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 30–32. Descriptions of the excluded items appear on pages 23–25.

 

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BUSINESS OVERVIEW

Air Products and Chemicals, Inc. and its subsidiaries serve energy, electronics, chemicals, metals, and manufacturing customers globally with a unique portfolio of products, services, and solutions that include atmospheric, process and specialty gases; performance materials; equipment; and technology. Geographically diverse, with operations in over 50 countries, in 2014 we had sales of $10.4 billion, assets of $17.8 billion, and a worldwide workforce of approximately 21,200 employees.

We organized our operations into four reportable business segments: Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy through 30 September 2014. The financial statements and analysis that follow discuss our results based on those operations. On 18 September 2014, we announced a major company reorganization effective as of 1 October 2014. Refer to Note 25, Business Segment and Geographic Information, to the consolidated financial statements for additional details on our reportable business segments and segment reorganization beginning fiscal year 2015.

2014 IN SUMMARY

In 2014, we delivered sales and earnings growth driven by a strong second half of the year, particularly in the fourth quarter. Overall, sales increased by 3% including volume growth of 2% led by our Merchant Gases and Electronics and Performance Materials segments. Volume growth was leveraged along with recent cost reduction actions to improve operating income by 6% and operating margin by 50 basis points (bp). Tonnage Gases results decreased versus the prior year as we completed the exit of our polyurethane intermediates business (PUI) and experienced higher maintenance costs and customer outages.

In the third quarter, we announced Seifi Ghasemi as our new chairman, president and chief executive officer, effective as of 1 July 2014.

In the fourth quarter, we announced plans to reorganize the Company, including realignment of our businesses into new reporting segments and organizational changes effective as of 1 October 2014.

We recorded a goodwill and intangible asset impairment charge of $310.1 in our Merchant Gases Latin America business driven by lower economic growth and profitability in our Indura business and the impact of recent tax reform legislation in Chile. We also recorded charges of $5.5 for pension settlements and $12.7 for severance costs related to cost reduction actions.

Highlights for 2014

 

   

Sales of $10,439.0 increased 3%, or $258.6. Volume growth in the Merchant Gases and Electronics and Performance Materials segments and higher energy contractual cost pass-through to customers were partially offset by the exit from our PUI business.

 

 

   

Operating income of $1,328.2 increased $3.8. On a non-GAAP basis, operating income of $1,656.5 increased 6%, or $90.4, with higher volumes partially offset by higher energy and distribution costs and higher operating costs, including maintenance costs in the Tonnage Gases segment.

 

 

   

We increased focus on cash flow and introduced Adjusted EBITDA, a non-GAAP metric, in the fourth quarter. Adjusted EBITDA of $2,764.8 increased by $123.9, or 5%.

 

 

   

Income from continuing operations of $987.1 decreased 2%, or $17.1, and diluted earnings per share from continuing operations of $4.59 decreased 3%, or $.14. On a non-GAAP basis, income from continuing operations of $1,243.0 increased 6%, or $74.5, and diluted earnings per share from continuing operations of $5.78 increased 5%, or $.28. A summary table of changes in diluted earnings per share, including a non-GAAP reconciliation, is presented below.

 

 

   

We increased our quarterly dividend by 8% from $.71 to $.77 per share. This represents the 32 nd consecutive year that we have increased our dividend payment.

 

For a discussion of the challenges, risks, and opportunities on which management is focused, refer to our 2015 Outlook discussions provided on page 21 in the Management’s Discussion and Analysis that follows.

 

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Changes in Diluted Earnings per Share Attributable to Air Products

       2014        2013        Increase
(Decrease)
 

Diluted Earnings per Share

                              

Net income

     $4.61           $4.68           $(.07

Income (Loss) from discontinued operations

     .02           (.05        .07   

Income from Continuing Operations—GAAP Basis

     $4.59           $4.73           $(.14)   

Business restructuring and cost reduction actions

     .04           .74           (.70

Pension settlement loss

     .02                     .02   

Goodwill and intangible asset impairment charge

     1.27                     1.27   

Advisory costs

               .03           (.03

Chilean tax rate change

     .10                     .10   

Tax election benefit

     (.24                  (.24

Income from Continuing Operations—Non-GAAP Basis

     $5.78           $5.50           $.28   

Operating income (after-tax)

            

Underlying business

            

Volume

               .50   

Price/raw materials

               (.10

Costs/other

               (.06

Currency

                           (.01

Operating Income

               .33   

Other (after-tax)

            

Equity affiliates’ income

               (.05

Interest expense

               .05   

Income tax rate

               .01   

Noncontrolling interests

               .01   

Average shares outstanding

                           (.07

Other

                           (.05

Total Change in Diluted Earnings per Share from Continuing Operations—Non-GAAP Basis

                           $.28   

2015 OUTLOOK

For 2015, we are focused on actions that we can control to improve cash flow and drive earnings growth. We reorganized the Company into new business segments effective as of 1 October 2014. Our new organization should enable us to reduce costs and more effectively manage and utilize our existing assets. We also expect pricing actions to deliver improvement in our results. Effectively executing on this strategy will be critical to improved results as we expect global economic growth to be modest in the year ahead.

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

 

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RESULTS OF OPERATIONS

Discussion of Consolidated Results

       2014     2013     2012  

Sales

     $10,439.0        $10,180.4        $9,611.7   

Operating income—GAAP Basis

     1,328.2        1,324.4        1,282.4   

Operating margin—GAAP Basis

     12.7     13.0     13.3

Equity affiliates’ income

     151.4        167.8        153.8   

Non-GAAP Basis

      

Adjusted EBITDA

     2,764.8        2,640.9        2,528.3   

Operating income

     1,656.5        1,566.1        1,533.7   

Operating margin

     15.9     15.4     16.0

Sales

 

         % Change from Prior Year  
               2014     2013  

Underlying business

      

Volume (including PUI exit impact)

       2     (1 )% 

Price

          

Acquisitions

           5

Energy and raw material cost pass-through

             1     2

Total Consolidated Change

             3     6

2014 vs. 2013

Sales of $10,439.0 increased 3%, or $258.6. Underlying business increased 2%, as higher volumes in the Merchant Gases and Electronics and Performance Materials segments were partially offset by lower volumes in our Tonnage Gases segment, including the exit from our PUI business which reduced sales by 1%. Higher energy and raw material contractual cost pass-through to customers increased sales by 1%. Currency was flat as the impacts from a stronger Euro were offset by a weaker Chilean Peso.

2013 vs. 2012

Sales of $10,180.4 increased 6%, or $568.7. Underlying business decreased 1%, primarily due to lower volumes resulting from our previous decision to exit the PUI business and lower Electronics demand, partially offset by higher volumes in the Tonnage Gases, Performance Materials, and Equipment businesses. The acquisitions of Indura S.A. and DA NanoMaterials increased sales by 5%. Higher energy and raw material contractual cost pass-through to customers increased sales by 2%.

Operating Income

2014 vs. 2013

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

2013 vs. 2012

On a GAAP basis, operating income of $1,324.4 increased 3%, or $42.0. Operating income in 2013 included a charge of $231.6 for a business restructuring and cost reduction plan and $10.1 for advisory costs. Operating income in 2012 included a charge of $327.4 for business restructuring and cost reduction plans, a $9.8 charge for a customer bankruptcy, and the gain on the previously held equity interest in DA NanoMaterials of $85.9. On a non-GAAP basis, operating income of $1,566.1 increased 2%, or $32.4. The increase was primarily due to acquisitions of $54, higher volumes of $24, and favorable currency translation and foreign exchange impacts of $2, partially offset by $40 from unfavorable higher energy and distribution costs net of pricing, and higher operating costs of $20,

 

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including the impact from pensions. Operating income increased by $12 from higher gains on the sale of assets and investments.

Adjusted EBITDA

We define Adjusted EBITDA as income from continuing operations excluding certain disclosed items, which the Company does not believe to be indicative of ongoing business trends, before interest expense, income tax provision, and depreciation and amortization expense. We believe Adjusted EBITDA provides a useful operational metric for the measurement of our cash flow.

2014 vs. 2013

Adjusted EBITDA of $2,764.8 increased $123.9, or 5%, primarily due to the increase in volumes in the Merchant Gases and Electronics and Performance Materials segments.

2013 vs. 2012

Adjusted EBITDA of $2,640.9 increased $112.6, or 4%, primarily due to acquisitions and higher volumes, partially offset by higher energy, distribution, and operating costs.

Equity Affiliates’ Income

2014 vs. 2013

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

2013 vs. 2012

Income from equity affiliates of $167.8 increased $14.0, primarily due to better performance in our Mexican equity affiliate.

Selling and Administrative Expense

2014 vs. 2013

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

2013 vs. 2012

Selling and administrative expense of $1,066.3 increased $119.5, or 13%, primarily due to the acquisition of Indura S.A. Selling and administrative expense as a percent of sales increased to 10.5% from 9.9%, also due to Indura S.A.

Research and Development

2014 vs. 2013

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

2013 vs. 2012

Research and development expense of $133.7 increased 6%, or $7.3, including the acquisition of DA NanoMaterials. Research and development expense as a percent of sales was 1.3% in 2013 and 2012.

Business Restructuring and Cost Reduction Actions

We recorded charges in 2014, 2013, and 2012 for business restructuring and cost reduction actions. The charges for these actions are reflected on the consolidated income statements as “Business restructuring and cost reduction actions.” The charges for these actions are excluded from segment operating income.

2014 Charge

On 18 September 2014, we announced plans to reorganize the Company, including realignment of our businesses into new reporting segments and organizational changes, effective as of 1 October 2014. As a result of this initiative, we will incur ongoing severance and other charges. 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. In 2015 and beyond, we expect the actions taken to date will provide approximately $10 in annual savings. Additional charges will be recorded in future periods as the Company commits to specific actions. These actions could materially impact future operating profit for the period in which the charges are recorded.

 

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2013 Plan

During the fourth quarter of 2013, we recorded an expense of $231.6 ($157.9 after-tax, or $.74 per share) reflecting actions to better align our cost structure with current market conditions. These charges included $100.4 for asset actions and $58.5 for the final settlement of a long-term take-or-pay silane contract primarily impacting the Electronics business due to continued weakness in the PV and light-emitting diode (LED) markets. In addition, $71.9 was recorded for severance, benefits, and other contractual obligations associated with the elimination of approximately 700 positions and executive changes. These reductions primarily impact our Merchant Gases businesses and corporate functions. The actions were in response to weaker than expected business conditions in Europe and Asia, reorganization of our operations and functional areas, and previously announced senior executive changes. The remaining planned actions associated with severance were completed in the first quarter of 2015 and provided approximately $45 in savings in 2014. Beyond 2014, we expect these actions to provide approximately $75 in annual savings.

2012 Plans

In 2012, we recorded an expense of $327.4 ($222.4 after-tax, or $1.03 per share) for business restructuring and cost reduction plans in our PUI, Electronics, and European Merchant businesses.

During the second quarter of 2012, we recorded an expense of $86.8 ($60.6 after-tax, or $.28 per share) for actions to remove stranded costs resulting from our decision to exit the Homecare business, the reorganization of the Merchant business, and actions taken to right size our European cost structure in light of the challenging economic outlook. The planned actions are complete and provided approximately $60 in annual savings in 2013.

During the fourth quarter of 2012, we took actions in the PUI business to improve costs, resulting in a net expense of $54.6 ($34.8 after-tax, or $.16 per share), and ultimately exit the business. We completed our exit from the business in the first quarter of 2014.

During the fourth quarter of 2012, we completed an assessment of our position in the PV market, resulting in $186.0 of expense ($127.0 after-tax, or $.59 per share) primarily related to the Electronics and Performance Materials business segment. Included in the charge was an accrual of $93.5 for an offer that we made to terminate a long-term take-or-pay supply contract to purchase silane. As noted above, a final settlement was reached with the supplier in the fourth quarter of 2013.

Refer to Note 4, Business Restructuring and Cost Reduction Actions, to the consolidated financial statements for additional details on these actions.

Pension Settlement Loss

Our U.S. supplemental pension plan provides 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. The participant’s vested benefit is considered fully settled upon cash payment of the lump sum. We recognized $5.5 ($3.6 after-tax, or $.02 per share) and $12.4 ($7.8 after-tax, or $.04 per share) of settlement charges in 2014 and 2013, respectively.

Goodwill and Intangible Asset Impairment Charge

In July 2012, we acquired a controlling interest in the outstanding shares of Indura S.A., a Latin American industrial gases company. In connection with this acquisition, we recorded $626.2 of goodwill, which was incorporated into the Latin American reporting unit of our Merchant Gases segment. During the fourth quarter of 2014, we concluded that the goodwill and indefinite-lived intangible assets (primarily acquired trade names) associated with this reporting unit were impaired. The Indura business continues to be profitable; however, recent economic conditions in Latin America, including the impact of tax legislation in Chile, have been less favorable due to increasing inflation, a decline in Chilean manufacturing growth, and weaker export demand for many commodities. As a result, we concluded in the fourth quarter that this business will not grow at the rate we anticipated, and we lowered our growth projections. We recorded a noncash impairment charge of $310.1 ($275.1 attributable to Air Products, after-tax or $1.27 per share) for the Latin America reporting unit. Refer to the Critical Accounting Policies and Estimates section below and Note 9, Goodwill, and Note 10, Intangible Assets, to the consolidated financial statements for additional details.

 

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Business Combinations

2013 Business Combinations

We completed three acquisitions in 2013. The acquisitions were accounted for as business combinations, and their results of operations were consolidated within their respective segments after the acquisition dates. The aggregate purchase price, net of cash acquired, for these acquisitions was $233.

2012 Business Combinations

Indura S.A.

In July 2012, we acquired a 64.8% controlling equity interest in the outstanding shares of Indura S.A. Following the acquisition date, 100% of the Indura S.A. results are consolidated in our financial statements within the Merchant Gases business segment. The portion of the business that is not owned by the Company is recorded as noncontrolling interests. We paid cash consideration in Chilean pesos (CLP) of 345.5 billion ($690) and assumed debt of CLP113.8 billion ($227) for these interests. As of 30 September 2014, we hold a 67.3% interest.

DA NanoMaterials LLC

On 2 April 2012, we closed on the acquisition agreement with E.I. DuPont de Nemours and Co., Inc. to acquire their 50% interest in our joint venture, DA NanoMaterials. Beginning in the third quarter of 2012, the results of DA NanoMaterials were consolidated within our Electronics and Performance Materials business segment.

Prior to the acquisition date, we accounted for our 50% interest in DA NanoMaterials as an equity-method investment. The year ended 30 September 2012 included a gain of $85.9 ($54.6 after-tax, or $.25 per share) as a result of revaluing our previously held equity interest to fair market value as of the acquisition date.

Refer to Note 5, Business Combinations, to the consolidated financial statements for additional details on these transactions.

Customer Bankruptcy

As a result of events which occurred during the fourth quarter of 2012, we recognized a charge of $9.8 ($6.1 after-tax, or $.03 per share) primarily related to the write-off of on-site assets due to a customer bankruptcy and mill shutdown. The customer, which primarily received products from the Tonnage Gases segment, filed for bankruptcy in May 2012 and announced the mill shutdown in August 2012.

Advisory Costs

During the fourth quarter of 2013, we incurred legal and other advisory fees of $10.1 ($6.4 after-tax, or $.03 per share) in connection with our response to the rapid acquisition of a large position in shares of our common stock by Pershing Square Capital Management LLC and its affiliates (Pershing Square). These fees, which are reflected on the consolidated income statements as “Advisory costs,” include costs incurred before and after Pershing Square’s disclosure of its holdings and cover advisory services related to the adoption of the Shareholders Rights Plan, preparation for a potential proxy solicitation campaign, and entering into an agreement with Pershing Square.

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 23, Supplemental Information, to the consolidated financial statements.

2014 vs. 2013

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

2013 vs. 2012

Other income (expense), net of $70.2 increased $23.1, primarily due to higher gains from the sale of a number of small assets and investments and a favorable commercial contract settlement, partially offset by lower government grants. Otherwise, no individual items were significant in comparison to the prior year.

 

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Interest Expense

 

       2014     2013     2012  

Interest incurred

     $158.1        $167.6        $153.9   

Less: Capitalized interest

     33.0        25.8        30.2   

Interest Expense

     $125.1        $141.8        $123.7   

2014 vs. 2013

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

2013 vs. 2012

Interest incurred increased $13.7. The increase was driven primarily by a higher average debt balance for $41, partially offset by a lower average interest rate on the debt portfolio of $24. The change in capitalized interest was driven by a decrease in project spending and a lower average interest rate.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. Refer to Note 22, Income Taxes, to the consolidated financial statements for details on factors affecting the effective tax rate.

2014 vs. 2013

On a GAAP basis, the effective tax rate was 27.0% and 22.8% in 2014 and 2013, respectively. The effective tax rate was higher in the current year primarily due to the goodwill impairment charge of $305.2, which was not deductible for tax purposes, and the Chilean tax reform enacted in September 2014 which increased income tax expense by $20.6. These impacts were partially offset by an income tax benefit of $51.6 associated with losses from transactions and a tax election in a non-U.S. subsidiary. The prior year rate included income tax benefits of $73.7 related to the business restructuring and cost reduction plans and $3.7 for the advisory costs. Refer to Note 4, Business Restructuring and Cost Reduction Actions; Note 9, Goodwill; Note 22, Income Taxes; and Note 23, Supplemental Information, to the consolidated financial statements for details on these transactions. On a non-GAAP basis, the effective tax rate was 24.0% and 24.2% in 2014 and 2013, respectively.

2013 vs. 2012

On a GAAP basis, the effective tax rate was 22.8% and 21.9% in 2013 and 2012, respectively. The effective rate in 2013 includes income tax benefits of $73.7 related to the business restructuring and cost reduction plans and $3.7 for the advisory costs. The effective rate in 2012 includes income tax benefits of $105.0 related to the business restructuring and cost reduction plans, $58.3 related to the second quarter Spanish tax ruling, and $3.7 related to the customer bankruptcy charge, offset by income tax expense of $43.8 related to the first quarter Spanish tax settlement and $31.3 related to the gain on the previously held equity interest in DA NanoMaterials. Refer to Note 4, Business Restructuring and Cost Reduction Actions; Note 5, Business Combinations; Note 22, Income Taxes; and Note 23, Supplemental Information, to the consolidated financial statements for details on these transactions. On a non-GAAP basis, the effective tax rate was 24.2% in both 2013 and 2012.

Discontinued Operations

During the second quarter of 2012, the Board of Directors authorized the sale of our Homecare business, which had previously been reported as part of the Merchant Gases operating segment.

In 2012, we sold the majority of our Homecare business to The Linde Group for sale proceeds of 590 million ($777) and recognized a gain of $207.4 ($150.3 after-tax, or $.70 per share). In addition, an impairment charge of $33.5 ($29.5 after-tax, or $.14 per share) was recorded to write down the remaining business, which was primarily in the United Kingdom and Ireland, to its estimated net realizable value. In 2013, we recorded an additional charge of $18.7 ($13.6 after-tax, or $.06 per share) to update our estimate of the net realizable value. In 2014, a gain of $3.9 was recognized for the sale of the remaining Homecare business and settlement of contingencies on the sale to The Linde Group.

Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional details on this business.

 

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Segment Analysis

Merchant Gases

       2014     2013     2012  

Sales

     $4,250.7        $4,098.6        $3,662.4   

Operating income

     671.6        680.5        644.0   

Operating margin

     15.8     16.6     17.6

Equity affiliates’ income

     140.1        145.0        137.1   

Merchant Gases Sales

 

         % Change from Prior Year  
               2014     2013  

Underlying business

      

Volume

       3    

Price

       1     1

Acquisition

           11

Currency

                

Total Merchant Gases Sales Change

             4     12

2014 vs. 2013

Underlying sales increased 4% due to higher volumes of 3% and higher pricing of 1%.

In the U.S. and Canada, sales increased 7%, with volumes up 3% and price up 4%. Volumes increased as higher liquid oxygen, nitrogen, and argon volumes were partially offset by lower helium volumes due to supply limitations. Volumes also increased as a result of our EPCO Carbondioxide Products, Inc. acquisition. Pricing was higher due to improved pricing in liquid oxygen, liquid nitrogen, and helium.

In Europe, sales increased 4%, with favorable currency impacts of 4%, primarily from the Euro and the Pound Sterling. Volumes were flat as higher volumes in liquid oxygen, nitrogen, and argon were offset by lower helium volumes and lower cylinder volumes as construction remains weak.

In Asia, sales increased 4% due to higher volumes of 5%, partially offset by lower pricing of 1%. Volumes increased with higher liquid oxygen, nitrogen, and argon volumes across the region, partially offset by lower helium volumes. Pricing decreased as higher helium pricing was more than offset by lower pricing in liquid oxygen, nitrogen, and argon, particularly in China, driven in part by a higher mix of wholesale customers.

In Latin America, sales decreased 8%, as higher volumes of 1%, and higher pricing of 2% was more than offset by unfavorable currency impacts of 11% from the Brazilian Real and Chilean Peso. Volumes increased in Brazil and were only modestly higher in Chile as the economy slowed.

Operating income decreased 1%, primarily due to higher operating costs of $25, prior year gains from sales of assets and investments of $10, and lower price recovery of power and fuel costs of $3, partially offset by higher volumes of $31. Operating margin decreased 80 basis points (bp) from prior year, primarily due to higher power and fuel costs.

Merchant Gases equity affiliates’ income of $140.1 decreased $4.9, primarily from unfavorable currency impacts in Mexico, South Africa, and India and lower oilfield services volume in Mexico.

2013 vs. 2012

Underlying sales increased 1% due to higher pricing of 1%. The acquisition of Indura S.A. had a favorable impact on sales of 11%.

In the U.S. and Canada, sales increased 5%, with volumes up 2% and price up 3%. Volumes increased primarily due to higher liquid oxygen and liquid nitrogen, partially offset by helium supply limitations. In Europe, sales decreased 3%, with volumes down 3% primarily due to overall economic weakness in the region. In Asia, sales increased 3% due to higher volumes of 2% and favorable currency of 2%, partially offset by lower pricing of 1%. Volumes increased primarily due to higher liquid oxygen and liquid nitrogen volumes.

Operating income increased 6%, primarily due to higher acquisitions of $48 and lower operating costs of $13, partially offset by lower price recovery of power and fuel costs of $25 and lower volumes of $10. The lower operating costs included the impact from the prior year cost reduction plan in Europe, partially offset by higher pension costs.

 

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Operating income in 2013 also included $10 for gains from sales of assets and investments. Operating margin decreased 100 bp, primarily due to the impact of the Indura S.A. acquisition and higher power and fuel costs.

Merchant Gases equity affiliates’ income of $145.0 increased $7.9, primarily as a result of improved performance in our Mexican equity affiliate.

Tonnage Gases

       2014     2013     2012  

Sales

     $3,288.9        $3,387.3        $3,206.7   

Operating income

     484.9        515.9        512.0   

Operating margin

     14.7     15.2     16.0

Tonnage Gases Sales

 

         % Change from Prior Year  
               2014     2013  

Underlying business

      

Volume

       (7 )%      (1 )% 

Energy and raw material cost pass-through

       3     6

Currency

             1     1

Total Tonnage Gases Sales Change

             (3 )%      6

2014 vs. 2013

Volumes decreased 7%, as strong demand in the United States Gulf Coast hydrogen system was more than offset by lower volumes in Latin America and the exit from our PUI business. The lower PUI volumes decreased sales by 4%. As of the end of the first quarter of 2014, our exit from the PUI business was complete. Higher energy contractual cost pass-through to customers increased sales by 3%. Currency favorably impacted sales by 1%.

Operating income decreased primarily due to higher costs of $22, including maintenance, and lower volumes of $9. Operating margin decreased 50 bp from prior year, primarily due to the higher maintenance costs and higher pass-through of energy costs.

2013 vs. 2012

Volumes decreased 1%, as the impact from implementation of our previous decision to exit the PUI business was partially offset by the impact of new plants. Higher energy and raw material contractual cost pass-through to customers increased sales by 6%. Currency favorably impacted sales by 1%.

Operating income increased as higher volumes of $22 and favorable currency of $3 were partially offset by higher costs of $21, including higher maintenance and pension costs. Operating margin decreased 80 bp, primarily due to the higher energy cost pass-through and higher costs, partially offset by the higher volumes from new plants.

Electronics and Performance Materials

       2014     2013     2012  

Sales

     $2,449.0        $2,243.4        $2,322.5   

Operating income—GAAP basis

     425.3        321.3        425.6   

Operating margin—GAAP basis

     17.4     14.3     18.3

Operating income—Non-GAAP basis

     425.3        321.3        339.7   

Operating margin—Non-GAAP basis

     17.4     14.3     14.6

Electronics and Performance Materials Sales

 

         % Change from Prior Year  
               2014     2013  

Underlying business

      

Volume

       9     (4 )% 

Price

       (1 )%      (1 )% 

Acquisitions

           2

Currency

             1    

Total Electronics and Performance Materials Sales Change

             9     (3 )% 

 

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2014 vs. 2013

Sales increased 9%, as higher volumes of 9% and favorable currency of 1% were partially offset by lower pricing of 1%. Electronics sales increased 8%, as higher delivery systems equipment sales and materials volumes of 8% and favorable currency of 1% were partially offset by lower pricing of 1%. Performance Materials sales increased 10%, as higher volumes of 11% were partially offset by lower pricing of 1%. The higher volumes were across all product lines and major regions. The lower pricing was primarily due to unfavorable mix impacts.

Operating income of $425.3 increased 32%, or $104.0, primarily from higher volumes of $93, lower operating costs of $31, and favorable currency impacts of $5, partially offset by unfavorable price and mix impacts of $26. Operating margin of 17.4% increased 310 bp, primarily due to improved loading and leverage from the higher volumes and improved cost performance, partially offset by the unfavorable pricing impacts.

2013 vs. 2012

Sales decreased 3%, as lower volumes of 4% and lower pricing of 1% were partially offset by acquisitions of 2%. Electronics sales decreased 8%, as weaker materials volumes and equipment sales were partially offset by the acquisition of DA NanoMaterials. Performance Materials sales increased 2%, as higher volumes of 4% were partially offset by lower pricing of 2%. The increase in volumes was primarily due to strength in the automobile and U.S. housing markets partially offset by weaker volumes to certain construction markets and marine coatings. The lower pricing was primarily due to unfavorable mix impacts.

Operating income of $321.3 decreased 25%, or $104.3, and operating margin of 14.3% decreased 400 bp, as 2012 included a gain on the previously held equity interest in DA NanoMaterials of $85.9. On a non-GAAP basis, operating income of $321.3 decreased 5%, or $18.4, primarily from unfavorable price and mix impacts of $15, lower volumes of $9, and higher operating costs of $4 partially offset by higher acquisitions of $6 and favorable currency of $4. Operating margin decreased 30 bp, primarily due to lower volumes and unfavorable price mix.

Equipment and Energy

       2014     2013     2012  

Sales

     $450.4        $451.1        $420.1   

Operating income

     88.2        65.5        44.6   

2014 vs. 2013

Sales of $450.4 were relatively flat as higher liquefied natural gas (LNG) project activity was offset by lower air separation (ASU) project activity. Operating income of $88.2 increased from the higher LNG project activity.

The sales backlog for the Equipment business at 30 September 2014 was $520, compared to $402 at 30 September 2013. The increase was primarily due to new LNG orders as global project development activity remains high. It is expected that approximately $320 of the backlog will be completed during 2015.

2013 vs. 2012

Sales of $451.1 increased primarily from higher LNG project activity. Operating income of $65.5 increased from the higher LNG project activity.

The sales backlog for the Equipment business at 30 September 2013 was $402, compared to $450 at 30 September 2012.

Other

Other operating income (loss) primarily includes other expense and income that cannot be directly associated with the business segments, including foreign exchange gains and losses. Also included are LIFO inventory valuation adjustments, as the business segments use FIFO, and the LIFO pool valuation adjustments are not allocated to the business segments. Other also included stranded costs resulting from discontinued operations, as these costs were not reallocated to the businesses in 2012.

2014 vs. 2013

Other operating loss was $13.5, compared to $4.7 in the prior year. The decrease was primarily due to unfavorable foreign exchange losses of $5 and LIFO adjustments of $4.

2013 vs. 2012

Other operating loss was $4.7, compared to $6.6 in the prior year. The other operating loss in 2013 includes an unfavorable LIFO adjustment versus the prior year of $11. The other operating loss in 2012 included stranded costs from discontinued operations of $10.

 

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

Definitions of non-GAAP measures may not be comparable to similar definitions used by other companies and are not a substitute for similar GAAP measures. In 2013, we had pension settlement losses of $12.4 ($7.8 after-tax, or $.04 per share). In 2012, our income tax provision was unfavorably impacted by $14.1 ($.07 per share) due to changes in the Chilean tax rate. These impacts were included in non-GAAP operating performance measures in their respective years.

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

CONSOLIDATED RESULTS

     Continuing Operations  
       Operating
Income
    Operating
Margin
(B)
    Income     Diluted
EPS
 

2014 GAAP

     $1,328.2        12.7     $987.1        $4.59   

2013 GAAP

     1,324.4        13.0     1,004.2        4.73   

Change GAAP

     $3.8        (30bp     $(17.1     $(.14

% Change GAAP

                 (2 )%      (3 )% 

2014 GAAP

     $1,328.2        12.7     $987.1        $4.59   

Business restructuring and cost reduction actions (tax impact $4.5)

     12.7        .1     8.2        .04   

Pension settlement loss (tax impact $1.9)

     5.5        .1     3.6        .02   

Goodwill and intangible asset impairment charge (A)

     310.1        3.0     275.1        1.27   

Chilean tax rate change

                   20.6        .10   

Tax election benefit

                   (51.6     (.24

2014 Non-GAAP Measure

     $1,656.5        15.9     $1,243.0        $5.78   

2013 GAAP

     $1,324.4        13.0     $1,004.2        $4.73   

Business restructuring and cost reduction actions (tax impact $73.7)

     231.6        2.3     157.9        .74   

Advisory costs (tax impact $3.7)

     10.1        .1     6.4        .03   

2013 Non-GAAP Measure

     $1,566.1        15.4     $1,168.5        $5.50   
                                  

Change Non-GAAP Measure

     $90.4        50bp        $74.5        $.28   

% Change Non-GAAP Measure

     6             6     5

 

  (A)  

Noncontrolling interests impact of $33.7 and tax impact of $1.3.

 

 

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Table of Contents
     Continuing Operations  
       Operating
Income
    Operating
Margin
(B)
    Income     Diluted
EPS
 

2013 GAAP

     $1,324.4        13.0     $1,004.2        $4.73   

2012 GAAP

     1,282.4        13.3     999.2        4.66   

Change GAAP

     $42.0        (30bp     $5.0        $.07   

% Change GAAP

     3             1     2

2013 GAAP

     $1,324.4        13.0     $1,004.2        $4.73   

Business restructuring and cost reduction actions (tax impact $73.7)

     231.6        2.3     157.9        .74   

Advisory costs (tax impact $3.7)

     10.1        .1     6.4        .03   

2013 Non-GAAP Measure

     $1,566.1        15.4     $1,168.5        $5.50   

2012 GAAP

     $1,282.4        13.3     $999.2        $4.66   

Business restructuring and cost reduction actions (tax impact $105.0)

     327.4        3.5     222.4        1.03   

Customer bankruptcy (tax impact $3.7)

     9.8        .1     6.1        .03   

Gain on previously held equity interest (tax impact $31.3)

     (85.9     (.9 )%      (54.6     (.25

Q1 Spanish tax settlement

                   43.8        .20   

Q2 Spanish tax ruling

                   (58.3     (.27

2012 Non-GAAP Measure

     $1,533.7        16.0     $1,158.6        $5.40   
                                  

Change Non-GAAP Measure

     $32.4        (60bp     $9.9        $.10   

% Change Non-GAAP Measure

     2             1     2

 

  (B)  

Operating margin is calculated by dividing operating income by sales.

 

ELECTRONICS AND PERFORMANCE MATERIALS

       Operating
Income
    Operating
Margin
 

2013 GAAP

     $ 321.3        14.3

2012 GAAP

     425.6        18.3

Change GAAP

     $(104.3     (400bp

% Change GAAP

     (25 )%         

2013 GAAP

     $321.3        14.3

2013 Non-GAAP Measure

     $321.3        14.3

2012 GAAP

     $425.6        18.3

Gain on previously held equity interest

     (85.9     (3.7 )% 

2012 Non-GAAP Measure

     $339.7        14.6
                  

Change Non-GAAP Measure

     $(18.4     (30bp

% Change Non-GAAP Measure

     (5 )%         

 

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ADJUSTED EBITDA

We define Adjusted EBITDA as income from continuing operations excluding certain disclosed items, which the Company does not believe to be indicative of ongoing business trends, before interest expense, income tax provision, and depreciation and amortization expense. We believe Adjusted EBITDA provides a useful operational metric for the measurement of our cash flow.

Below is a reconciliation from Income from Continuing Operations to Adjusted EBITDA.

 

       2014     2013     2012     2011     2010  

Income from Continuing Operations (A)

     $988.5        $1,042.5        $1,025.2        $1,171.6        $967.0   

Add: Interest expense

     125.1        141.8        123.7        115.5        121.9   

Add: Income tax provision

     366.0        307.9        287.3        375.3        305.7   

Add: Depreciation and amortization

     956.9        907.0        840.8        834.3        826.8   

Add: Business restructuring and cost reduction actions

     12.7        231.6        327.4                 

Add: Pension settlement loss

     5.5                               

Add: Goodwill and intangible asset impairment charge

     310.1                               

Less: Gain on previously held equity interest

                   85.9                 

Add: Customer bankruptcy

                   9.8                 

Add: Advisory costs

            10.1                        

Add: Net loss on Airgas transaction

                          48.5        96.0   

Adjusted EBITDA

     $2,764.8        $2,640.9        $2,528.3        $2,545.2        $2,317.4   

Change from prior year

     123.9        112.6        (16.9     227.8     

% change from prior year

     5     4     (1 )%      10        

 

  (A)  

Includes net income attributable to noncontrolling interests.

 

INCOME TAXES

     Effective Tax Rate  
       2014     2013     2012  

Income Tax Provision—GAAP

     $366.0        $307.9        $287.3   

Income from continuing operations before taxes—GAAP

     $1,354.5        $1,350.4        $1,312.5   

Effective Tax Rate—GAAP

     27.0     22.8     21.9

Income Tax Provision—GAAP

     $366.0        $307.9        $287.3   

Business restructuring and cost reduction actions tax impact

     4.5        73.7        105.0   

Pension settlement loss tax impact

     1.9                 

Goodwill and intangible asset impairment charge tax impact

     1.3                 

Customer bankruptcy tax impact

                   3.7   

Gain on previously held equity interest tax impact

                   (31.3

Advisory costs tax impact

            3.7          

Chilean tax rate change

     (20.6              

Tax election benefit

     51.6                 

Q1 Spanish tax settlement

                   (43.8

Q2 Spanish tax ruling

                   58.3   

Income Tax Provision—Non-GAAP Measure

     $404.7        $385.3        $379.2   

Income from continuing operations before taxes—GAAP

     $1,354.5        $1,350.4        $1,312.5   

Business restructuring and cost reduction actions

     12.7        231.6        327.4   

Pension settlement loss

     5.5                 

Goodwill and intangible asset impairment charge

     310.1                 

Customer bankruptcy

                   9.8   

Gain on previously held equity interest

                   (85.9

Advisory costs

            10.1          

Income from Continuing Operations Before Taxes—Non-GAAP Measure

     $1,682.8        $1,592.1        $1,563.8   

Effective Tax Rate—Non-GAAP Measure

     24.0     24.2     24.2

 

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LIQUIDITY AND CAPITAL RESOURCES

We maintained a strong financial position throughout 2014. We continue to have consistent access to commercial paper markets, and cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future.

As of 30 September 2014, we had $330.3 of foreign cash and cash items compared to a total amount of cash and cash items of $336.6. If the foreign cash and cash items are needed for operations in the U.S. or we otherwise elect to repatriate the funds, we may be required to accrue and pay U.S. taxes on a significant portion of these amounts. However, since we have significant current investment plans outside the U.S., it is our intent to permanently reinvest the majority of our foreign cash and cash items outside the U.S. Current financing alternatives do not require the repatriation of foreign funds.

Our cash flows from operating, investing, and financing activities of continuing operations, as reflected in the consolidated statements of cash flows, are summarized in the following table:

 

       2014     2013     2012  

Cash provided by (used for)

      

Operating activities

     $2,186.4        $1,553.1        $1,765.1   

Investing activities

     (1,638.0     (1,697.0     (2,435.2

Financing activities

     (504.3     115.4        (78.4

Operating Activities

For the year ended 2014, cash provided by operating activities was $2,186.4. Income from continuing operations of $987.1 reflected the goodwill and intangible asset impairment charge of $310.1. Income from continuing operations is adjusted for other noncash items that include depreciation and amortization, undistributed earnings of equity affiliates, share-based compensation expense, and noncurrent capital lease receivables. Other adjustments included a source of cash of $143.2 for pension and other postretirement expense, partially offset by a use of cash of $78.2 for pension contributions. The working capital accounts were a use of cash of $246.5. Inventory was a use of cash of $23.5 primarily due to the timing of helium purchases from the U.S. Bureau of Land Management. The reduction of payables and accrued liabilities of $234.8 includes $148.5 for payments associated with projects accounted for as capital leases and $52.5 of payments related to the 2013 business restructuring and cost reduction plan.

For the year ended 2013, cash provided by operating activities was $1,553.1. Income from continuing operations of $1,004.2 reflected the write-down of long-lived assets associated with business restructuring of $100.4. The other adjustments included a use of cash of $300.8 for pension contributions, partially offset by $178.2 of pension and other postretirement expense. The working capital accounts were a use of cash of $207.8. The reduction of accrued liabilities of $130.3 includes $185.8 for payments made in relation to the 2012 business restructuring and cost reduction plans, including the settlement of a long-term take-or-pay silane contract. These payments were partially offset by a $69.7 net increase to accrued liabilities for the 2013 business restructuring and cost reduction plan.

For the year ended 2012, cash provided by operating activities was $1,765.1. Income from continuing operations of $999.2 reflected the noncash gain on the previously held equity interest in DA NanoMaterials of $85.9, the write-down of long-lived assets associated with restructuring and a customer bankruptcy of $80.2, and a noncash tax benefit of $58.3 recognized as a result of the second quarter Spanish tax ruling. The working capital accounts were a source of cash of $100.1. The provision for the business restructuring and cost reduction plans resulted in an increase to accrued liabilities of $223.9, partially offset by a use of cash of $32.9 for payments made in relation to these plans.

 

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Investing Activities

For the year ended 30 September 2014, cash used for investing activities was $1,638.0, primarily capital expenditures for plant and equipment. For the year ended 30 September 2013, cash used for investing activities was $1,697.0, primarily capital expenditures for plant and equipment and acquisitions. For the year ended 30 September 2012, cash used for investing activities was $2,435.2, primarily capital expenditures for plant and equipment, acquisitions, and investments in unconsolidated affiliates. Refer to the Capital Expenditures section below for additional detail.

Capital Expenditures

Capital expenditures are detailed in the following table:

 

       2014     2013     2012  

Additions to plant and equipment

     $1,684.2        $1,524.2        $1,521.0   

Acquisitions, less cash acquired

            224.9        863.4   

Investments in and advances to unconsolidated affiliates

     (2.0     (1.3     175.4   

Capital Expenditures on a GAAP Basis

     $1,682.2        $1,747.8        $2,559.8   

Capital lease expenditures (A)

     202.4        234.9        212.2   

Purchase of noncontrolling interests in a subsidiary  (A)

     .5        14.0        6.3   

Capital Expenditures on a Non-GAAP Basis

     $1,885.1        $1,996.7        $2,778.3   

 

  (A)  

We utilize a non-GAAP measure in the computation of capital expenditures and include spending associated with facilities accounted for as capital leases and purchases of noncontrolling interests. Certain contracts associated with facilities that are built to provide product to a specific customer are required to be accounted for as leases, and such spending is reflected as a use of cash within cash provided by operating activities, if the arrangement qualifies as a capital lease. Additionally, the payment for subsidiary shares from noncontrolling interests in a subsidiary is accounted for as an equity transaction and will be reflected as a financing activity in the statement of cash flows. The presentation of this non-GAAP measure is intended to enhance the usefulness of information by providing a measure that our management uses internally to evaluate and manage our expenditures.

 

Capital expenditures on a GAAP basis in 2014 totaled $1,682.2, compared to $1,747.8 in 2013. The decrease of $65.6 was primarily due to the acquisitions in 2013. Additions to plant and equipment are largely in support of the Merchant Gases and Tonnage Gases businesses. Additions to plant and equipment also included support capital of a routine, ongoing nature, including expenditures for distribution equipment and facility improvements. Spending in 2014 and 2013 included plant and equipment constructed to provide oxygen for coal gasification in China, hydrogen to the global market, and renewable energy in the U.K.

In 2013, we completed three acquisitions with an aggregate cash use, net of cash acquired, of $224.9. In the fourth quarter, we acquired an air separation unit and integrated gases liquefier in Guiyang, China. During the third quarter, we acquired EPCO, the largest independent U.S. producer of liquid carbon dioxide (CO 2 ), and WCG.

In 2012, we acquired a controlling stake in Indura S.A. for $690 and E.I. DuPont de Nemours and Co., Inc.’s 50% interest in our joint venture, DA NanoMaterials for $147. We also purchased a 25% equity interest in Abdullah Hashim Industrial Gases & Equipment Co. Ltd. (AHG), an unconsolidated affiliate, for $155.

Refer to Note 5, Business Combinations, and Note 7, Summarized Financial Information of Equity Affiliates, to the consolidated financial statements for additional details regarding the acquisitions and the investments.

Capital expenditures on a non-GAAP basis in 2014 totaled $1,885.1 compared to $1,996.7 in 2013. Capital lease expenditures of $202.4 decreased by $32.5, reflecting lower project spending.

2015 Outlook

Excluding acquisitions, capital expenditures for new plant and equipment in 2015 on a GAAP basis are expected to be between $1,650 and $1,800, and on a non-GAAP basis are expected to be between $1,700 and $1,900. The non-GAAP capital expenditures include spending associated with facilities accounted for as capital leases, which are expected to be between $50 and $100. A majority of the total capital expenditures is expected to be for new plants. It is anticipated that capital expenditures will be funded principally with cash from continuing operations. In addition, we intend to continue to evaluate acquisition opportunities and investments in equity affiliates.

Financing Activities

For the year ended 2014, cash used by financing activities was $504.3 primarily attributable to cash used to pay dividends of $627.7, which was partially offset by proceeds from stock option exercises of $141.6. Our borrowings (short- and long-term proceeds, net of repayments) were a net source of cash (issuance) of $1.1 and included $148.7 of net commercial paper and other short-term debt issuances, debt proceeds from the issuance of a

 

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$400 senior fixed-rate 3.35% note on 31 July 2014 and $61.0 of other, primarily international, debt issuances and debt repayments of a 3.75% Eurobond of 300 million ($401.0) in November 2013 and $207.6 of other, primarily international, debt.

For the year ended 2013, cash provided by financing activities was $115.4. Our borrowings (short- and long-term proceeds, net of repayments) were a net source of cash (issuance) of $927.4 and included $437.7 of net commercial paper and other short-term debt issuances and the issuances of a 300 million ($397) 2.0% Eurobond on 7 August 2013, and a $400.0 senior fixed-rate 2.75% note on 4 February 2013, which were partially offset by the repayment of a $300.0 senior fixed-rate 4.15% note on 1 February 2013. Proceeds from stock option exercises provided cash of $226.4. The primary uses of cash were to purchase 5.7 million shares of treasury stock for $461.6 and to pay dividends of $565.6.

For the year ended 2012, cash used for financing activities was $78.4. Our borrowings (short- and long-term proceeds, net of repayments) were a net source of cash (issuance) of $419.6 and included the issuances of a $400.0 senior fixed-rate 3.0% note on 3 November 2011 and a $400.0 senior fixed-rate 1.2% note on 13 September 2012, which were partially offset by the repayment of a 4.25% Eurobond of $400.3 on 10 April 2012. Proceeds from stock option exercises provided an additional $124.3 source of funds. Dividends paid to shareholders were a use of cash of $514.9.

Discontinued Operations

For the year ended 2014, cash used by discontinued operations was $146.6 and primarily included a payment made to The Linde Group for contingent proceeds we were obligated to return from the sale of our Homecare business. For the year ended 2013, cash provided by discontinued operations was $13.1. For the year ended 2012, the sale of our European Homecare business to The Linde Group generated proceeds of $776.6 and included the contingent proceeds that we returned in 2014. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional information.

Financing and Capital Structure

Capital needs in 2014 were satisfied primarily with cash from operations. At the end of 2014, total debt outstanding was $6,118.5 compared to $6,273.6 at the end of 2013, and cash and cash items were $336.6 compared to $450.4 at the end of 2013. Total debt at 30 September 2014 and 2013, expressed as a percentage of total capitalization (total debt plus total equity plus redeemable noncontrolling interest), was 43.9% and 45.3%, respectively.

Proceeds from long-term debt were $461.0. This included the issuance of a $400.0 senior fixed-rate 3.35% note on 31 July 2014 that matures on 31 July 2024, which was issued for general corporate purposes. Refer to Note 14, Debt, to the consolidated financial statements for additional information.

During fiscal 2013, we entered into a five-year $2,500.0 revolving credit agreement maturing 30 April 2018 with a syndicate of banks (the “2013 Credit Agreement”), under which senior unsecured debt is available to both the Company and certain of its subsidiaries. Effective 30 June 2014, the 2013 Credit Agreement was amended to increase the facility to $2,595.0. The 2013 Credit Agreement provides a source of liquidity for the Company and supports its commercial paper program. This credit facility includes a financial covenant for a maximum ratio of total debt to total capitalization (total debt plus total equity plus redeemable noncontrolling interest) no greater than 70%. No borrowings were outstanding under the 2013 Credit Agreement as of 30 September 2014.

Effective 11 June 2012, we entered into an offshore Chinese Renminbi (RMB) syndicated credit facility of RMB1,000.0 million ($160.9) that was to mature in June 2015. On 20 March 2014, we repaid the outstanding balance of RMB250.0 million ($40.2) and terminated the credit facility. Additional commitments totaling $189.7 are maintained by our foreign subsidiaries, of which $180.6 was borrowed and outstanding at 30 September 2014.

As of 30 September 2014, we are in compliance with all of the financial and other covenants under our debt agreements.

As of 30 September 2014, we classified our 3.875% Eurobond of 300 million ($378.9) maturing in March 2015 as long-term debt because we have the ability to refinance the debt under the 2013 Credit Agreement. Our current intent is to refinance this debt via the U.S. or European public or private placement markets.

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. During fiscal year 2013, 5.7 million of our outstanding shares were purchased at a cost of $461.6. We did not purchase any of our outstanding shares during fiscal year 2014. At 30 September 2014, $485.3 in share repurchase authorization remains.

 

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2015 Outlook

Cash flows from operations and financing activities are expected to meet liquidity needs for the foreseeable future. We project a modest need to access the long-term debt markets in 2015, primarily to refinance maturing long-term debt. We expect that we will continue to be in compliance with all of our financial covenants. Also, we anticipate that we will continue to be able to access the commercial paper and other short-term debt markets.

Dividends

Dividends are declared by the Board of Directors and are usually paid during the sixth week after the close of the fiscal quarter. During 2014, the Board of Directors increased the quarterly dividend from $.71 per share to $.77 per share. On 17 July 2014, the Board of Directors declared the fourth quarter dividend which is payable on 10 November 2014 to shareholders of record at the close of business on 1 October 2014.

CONTRACTUAL OBLIGATIONS

We are obligated to make future payments under various contracts, such as debt agreements, lease agreements, unconditional purchase obligations, and other long-term obligations. The following table summarizes our obligations as of 30 September 2014:

 

     Payments Due by Period  
       Total      2015      2016      2017      2018      2019      Thereafter  

Long-term debt obligations

                    

Debt maturities

     $4,890         $444         $411         $425         $449         $423         $2,738   

Contractual interest

     689         124         114         94         78         77         202   

Capital leases

     4         1         1         1                         1   

Operating leases

     315         70         48         34         27         19         117   

Pension obligations

     624         130         90         100         100         100         104   

Unconditional purchase obligations

     1,548         929         154         81         65         63         256   

Total Contractual Obligations

     $8,070         $1,698         $818         $735         $719         $682         $3,418   

Long-Term Debt Obligations

The long-term debt obligations include the maturity payments of long-term debt, including current portion, and the related contractual interest obligations. Refer to Note 14, Debt, to the consolidated financial statements for additional information on long-term debt.

Contractual interest is the interest we are contracted to pay on the long-term debt obligations without taking into account the interest impact of interest rate swaps related to any of this debt, which at current interest rates would slightly decrease contractual interest. We had $1,168 of long-term debt subject to variable interest rates at 30 September 2014, excluding fixed-rate debt that has been swapped to variable-rate debt. The rate assumed for the variable interest component of the contractual interest obligation was the rate in effect at 30 September 2014. Variable interest rates are primarily determined by interbank offer rates and by U.S. short-term tax-exempt interest rates.

Leases

Refer to Note 11, Leases, to the consolidated financial statements for additional information on capital and operating leases.

Pension Obligations

The amounts in the table above represent the current estimated cash payments to be made by us that in total equal the recognized pension liabilities. Refer to Note 15, Retirement Benefits, to the consolidated financial statements. These payments are based upon the current valuation assumptions and regulatory environment.

The total accrued liability for pension benefits is impacted by interest rates, plan demographics, actual return on plan assets, continuation or modification of benefits, and other factors. Such factors can significantly impact the amount of the liability and related contributions.

Unconditional Purchase Obligations

Approximately $650 of our long-term unconditional purchase obligations relate to feedstock supply for numerous HyCO (hydrogen, carbon monoxide, and syngas) facilities. The price of feedstock supply is principally related to the price of natural gas. However, long-term take-or-pay sales contracts to HyCO customers are generally matched to the term of the feedstock supply obligations and provide recovery of price increases in the feedstock supply. Due to the matching of most long-term feedstock supply obligations to customer sales contracts, we do not believe these

 

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purchase obligations would have a material effect on our financial condition or results of operations. Refer to Note 16, Commitments and Contingencies, to the consolidated financial statements for additional information on our unconditional purchase obligations.

The unconditional purchase obligations also include other product supply and purchase commitments and electric power and natural gas supply purchase obligations, which are primarily pass-through contracts with our customers. In addition, purchase commitments to spend approximately $700 for additional plant and equipment are included in the unconditional purchase obligations in 2015.

We also purchase materials, energy, capital equipment, supplies, and services as part of the ordinary course of business under arrangements that are not unconditional purchase obligations. The majority of such purchases are for raw materials and energy, which are obtained under requirements-type contracts at market prices.

Income Tax Liabilities

Noncurrent deferred income tax liabilities as of 30 September 2014 were $995.5. Tax liabilities related to unrecognized tax benefits as of 30 September 2014 were $108.7. These tax liabilities were excluded from the Contractual Obligations table, as it is impractical to determine a cash impact by year given that payments will vary according to changes in tax laws, tax rates, and our operating results. In addition, there are uncertainties in timing of the effective settlement of our uncertain tax positions with respective taxing authorities. Refer to Note 22, Income Taxes, to the consolidated financial statements for additional information.

Put Options

We have an outstanding put option agreement with the largest minority shareholder of our Indura S.A. subsidiary. The put option gives the shareholder the ability to require us to purchase up to a 30.5% equity interest during the two-year period beginning on 1 July 2015 based on pricing terms in the agreement. Refer to Note 16, Commitments and Contingencies, to the consolidated financial statements for additional information. We anticipate that this option will be exercised sometime during the two-year period; however given the uncertainty in timing of exercise; we have excluded the payment from the Contractual Obligations table. As of 30 September 2014, the value of the redeemable noncontrolling interest is $287.2.

PENSION BENEFITS

We sponsor defined benefit pension plans that cover a substantial portion of our worldwide employees. The principal defined benefit pension plans—the U.S. salaried pension plan and the U.K. pension plan—were closed to new participants in 2005 and were replaced with defined contribution plans. Over the long run, the shift to defined contribution plans is expected to reduce volatility of both plan expense and contributions.

For 2014, the fair market value of pension plan assets for our defined benefit plans as of the measurement date increased to $4,114.6 from $3,800.8 in 2013. The projected benefit obligation for these plans as of the measurement date was $4,738.6 and $4,394.0 in 2014 and 2013, respectively. Refer to Note 15, Retirement Benefits, to the consolidated financial statements for comprehensive and detailed disclosures on our postretirement benefits.

Pension Expense

 

       2014     2013     2012  

Pension expense

     $135.9        $169.7        $120.4   

Special terminations and settlements (included above)

     5.8        19.8        8.2   

Weighted average discount rate

     4.6     4.0     5.0

Weighted average expected rate of return on plan assets

     7.7     7.7     8.0

Weighted average expected rate of compensation increase

     3.9     3.8     3.9

2014 vs. 2013

The decrease in pension expense, excluding special items, was primarily attributable to the 60 bp increase in weighted average discount rate, resulting in lower amortization of actuarial losses. The decrease was partially offset by unfavorable impacts associated with changes in mortality assumptions. Special items of $5.8 primarily included $5.5 for pension settlement losses and $.3 for special termination benefits, a portion of which relates to the 2013 business restructuring and cost reduction plan.

2013 vs. 2012

The increase in pension expense, excluding special items, was primarily attributable to the 100 bp decrease in weighted average discount rate, resulting in higher amortization of actuarial losses. The increase was partially offset

 

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by a higher than expected return on plan assets and contributions in 2013. Special items of $19.8 primarily included $12.4 for pension settlement losses and $6.9 for special termination benefits relating to the 2013 business restructuring and cost reduction plan.

2015 Outlook

Pension expense is estimated to be approximately $110 to $115, excluding special items, in 2015, a decrease of $15 to $20 from 2014, resulting primarily from favorable asset experience, partially offset by a decrease in discount rates. Pension settlement losses of $25 to $35 are expected, dependent on the timing of retirements. In 2015, we expect pension expense to include approximately $123 for amortization of actuarial losses compared to $114 in 2014. Net actuarial losses of $104 were recognized in 2014, resulting primarily from an approximately 60 bp decrease in the weighted average discount rate, partially offset by actual asset returns above expected returns. Actuarial gains/losses are amortized into pension expense over prospective periods to the extent they are not offset by future gains or losses. Future changes in the discount rate and actual returns on plan assets, different from expected returns, would impact the actuarial gains/losses and resulting amortization in years beyond 2015.

Pension Funding

Pension funding includes both contributions to funded plans and benefit payments for unfunded plans, which are primarily non-qualified plans. With respect to funded plans, our funding policy is that contributions, combined with appreciation and earnings, will be sufficient to pay benefits without creating unnecessary surpluses.

In addition, we make contributions to satisfy all legal funding requirements while managing our capacity to benefit from tax deductions attributable to plan contributions. With the assistance of third party actuaries, we analyze the liabilities and demographics of each plan, which help guide the level of contributions. During 2014 and 2013, our cash contributions to funded plans and benefit payments for unfunded plans were $78.2 and $300.8, respectively. Contributions for 2013 included voluntary contributions for U.S. plans of $220.0.

For 2015, cash contributions to defined benefit plans are estimated to be $130 to $150. The increase from prior year is driven primarily by benefit payments for unfunded plans, which are dependent upon the timing of retirements and actions to reorganize the business. Actual future contributions will depend on future funding legislation, discount rates, investment performance, plan design, and various other factors. Refer to the Contractual Obligations discussion on page 36 for a projection of future contributions.

ENVIRONMENTAL MATTERS

We are subject to various environmental laws and regulations in the countries in which we have operations. Compliance with these laws and regulations results in higher capital expenditures and costs. In the normal course of business, we are 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. Our accounting policy for environmental expenditures is discussed in Note 1, Major Accounting Policies, to the consolidated financial statements, and environmental loss contingencies are discussed in Note 16, Commitments and Contingencies, to the consolidated financial statements.

The amounts charged to income from continuing operations related to environmental matters totaled $35.1, $37.1, and $44.7 in 2014, 2013, and 2012, respectively. These amounts represent an estimate of expenses for compliance with environmental laws and activities undertaken to meet internal Company standards. Future costs are not expected to be materially different from these amounts. Refer to Note 16, Commitments and Contingencies, to the consolidated financial statements for additional information.

Although precise amounts are difficult to determine, we estimate that we spent $5 and $4 in 2014 and 2013, respectively, on capital projects to control pollution. Capital expenditures to control pollution in future years are estimated to be approximately $5 in both 2015 and 2016.

We accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The potential exposure for such costs is estimated to range from $86 to a reasonably possible upper exposure of $99 as of 30 September 2014. The consolidated balance sheets at 30 September 2014 and 2013 included an accrual of $86.2 and $86.7, respectively. The accrual for the environmental obligations relating to the Pace, Florida; Piedmont, South Carolina; Paulsboro, New Jersey; and Pasadena, Texas, locations is included in these amounts. Refer to Note 16, Commitments and Contingencies, to the consolidated financial statements for further details on these facilities.

 

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Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Subject to the imprecision in estimating future environmental costs, we do not expect that any sum we may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse impact on our financial position or results of operations in any one year.

Some of our operations are within jurisdictions that have or are developing regulations governing emissions of greenhouse gases (GHG). These include existing and expanding coverage under the European Union Emissions Trading Scheme and California’s cap and trade scheme; mandatory reporting and reductions at manufacturing facilities in Alberta, Canada; and mandatory reporting and anticipated constraints on GHG emissions in Ontario, Canada, and South Korea. In addition, the U.S. Environmental Protection Agency is regulating GHG emissions for new construction and major modifications to existing facilities. At the U.S. state level, California’s cap and trade program rules have been officially adopted, and our compliance obligation as a hydrogen producer began 1 January 2013. We have been able to mitigate some of the costs through our contractual terms.

Increased public awareness and 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 our costs related to consumption of electric power, hydrogen production, and fluorinated gases production. We believe we will be able to mitigate some of the potential costs through our contractual terms, but the lack of definitive legislation or regulatory requirements in some of the jurisdictions where we operate prevents accurate prediction of the long-term impact on us. Any legislation that limits or taxes GHG emissions from our facilities could impact our growth by increasing our operating costs or reducing demand for certain of our products.

Regulation of GHG may also produce new opportunities for us. We continue to develop technologies to help our facilities and our customers lower energy consumption, improve efficiency, and lower emissions. We are also developing a portfolio of technologies that capture carbon dioxide from power and chemical plants before it reaches the atmosphere, enable cleaner transportation fuels, and facilitate alternate fuel source development. In addition, the potential demand for clean coal and our carbon capture solutions could increase demand for oxygen, one of our main products, and our proprietary technology for delivering low-cost oxygen.

OFF-BALANCE SHEET ARRANGEMENTS

We have entered into certain guarantee agreements as discussed in Note 16, Commitments and Contingencies, to the consolidated financial statements. We are not a primary beneficiary in any material variable interest entity. Our off-balance sheet arrangements are not reasonably likely to have a material impact on financial condition, changes in financial condition, results of operations, or liquidity.

RELATED PARTY TRANSACTIONS

Our principal related parties are equity affiliates operating primarily in the industrial gas business. We did not engage in any material transactions involving related parties that included terms or other aspects that differ from those which would be negotiated at arm’s length with clearly independent parties.

INFLATION

We operate in many countries that experience volatility in inflation and foreign exchange rates. The ability to pass on inflationary cost increases is an uncertainty due to general economic conditions and competitive situations. It is estimated that the cost of replacing our plant and equipment today is greater than its historical cost. Accordingly, depreciation expense would be greater if the expense were stated on a current cost basis.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 1, Major Accounting Policies, to the consolidated financial statements describes our major accounting policies. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. However, application of the critical accounting policies discussed below requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. Our management has reviewed these critical accounting policies and estimates and related disclosures with our audit committee.

Depreciable Lives of Plant and Equipment

Net plant and equipment at 30 September 2014 totaled $9,532.1, and depreciation expense totaled $914.8 during 2014. Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of the cost of each asset from earnings every year over its estimated economic useful life.

 

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Economic useful life is the duration of time an asset is expected to be productively employed by us, which may be less than its physical life. Assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, market demand, competitive position, raw material availability, and geographic location.

The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, changes in technology, changes in the estimated future demand for products, or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In these cases, we would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.

We have numerous long-term customer supply contracts, particularly in the gases on-site business within the Tonnage Gases segment. These contracts principally have initial contract terms of 15 to 20 years. There are also long-term customer supply contracts associated with the tonnage gases business within the Electronics and Performance Materials segment. These contracts principally have initial terms of 10 to 15 years. Additionally, we have several customer supply contracts within the Equipment and Energy segment with contract terms that are primarily five to 10 years. The depreciable lives of assets within this segment can be extended to 20 years for certain redeployable assets. Depreciable lives of the production assets related to long-term contracts are matched to the contract lives. Extensions to the contract term of supply frequently occur prior to the expiration of the initial term. As contract terms are extended, the depreciable life of the remaining net book value of the production assets is adjusted to match the new contract term, as long as it does not exceed the physical life of the asset.

The depreciable lives of production facilities within the Merchant Gases segment are principally 15 years. Customer contracts associated with products produced at these types of facilities typically have a much shorter term. The depreciable lives of production facilities within the Electronics and Performance Materials segment, where there is not an associated long-term supply agreement, range from 10 to 15 years. These depreciable lives have been determined based on historical experience combined with judgment on future assumptions such as technological advances, potential obsolescence, competitors’ actions, etc. Management monitors its assumptions and may potentially need to adjust depreciable life as circumstances change.

A change in the depreciable life by one year for production facilities within the Merchant Gases and Electronics and Performance Materials segments for which there is not an associated long-term customer supply agreement would impact annual depreciation expense as summarized below:

 

       Decrease Life
By 1 Year
    Increase Life
By 1 Year
 

Merchant Gases

     $32        $(24

Electronics and Performance Materials

     $12        $(11

Impairment of Assets

Plant and Equipment

Plant and equipment held for use is grouped for impairment testing at the lowest level for which there is identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances would include a significant decrease in the market value of a long-lived asset grouping, a significant adverse change in the manner in which the asset grouping is being used or in its physical condition, a history of operating or cash flow losses associated with the use of the asset grouping, or changes in the expected useful life of the long-lived assets.

If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by that asset group is compared to the carrying value to determine whether impairment exists. If an asset group is determined to be impaired, the loss is measured based on the difference between the asset group’s fair value and its carrying value. An estimate of the asset group’s fair value is based on the discounted value of its estimated cash flows. Assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell.

The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review. Factors that management must estimate include industry and market conditions, sales volume and prices, costs to produce, inflation, etc. Changes in key assumptions or actual conditions that differ from estimates could result in an impairment charge. We use reasonable and supportable assumptions when performing

 

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impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

We tested the recoverability of Latin America long-lived assets and concluded that they were recoverable from expected future undiscounted cash flows.

Goodwill

The acquisition method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fair value of identifiable net assets of an acquired entity. Goodwill was $1,237.3 as of 30 September 2014. Disclosures related to goodwill are included in Note 9, Goodwill, to the consolidated financial statements.

We review goodwill for impairment annually in the fourth quarter of the fiscal year and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The tests are done at the reporting unit level, which is defined as one level below the operating segment for which discrete financial information is available and whose operating results are reviewed by segment managers regularly. As of 30 September 2014, we had four business segments and thirteen reporting units. Reporting units are primarily based on products and geographic locations within each business segment. The majority of our goodwill is assigned to reporting units within the Merchant Gases and Electronics and Performance Materials segments.

As part of the goodwill impairment testing, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we choose not to complete a qualitative assessment for a given reporting unit, or if the initial assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a two-step quantitative test is required. We chose to bypass the qualitative assessment and conduct quantitative testing, as further described below.

The first step of the quantitative test requires that we compare the fair value of our reporting units to their carrying value, including assigned goodwill. To determine the fair value of a reporting unit, we initially use an income approach valuation model, representing the present value of estimated future cash flows. Our valuation model uses a discrete growth period and an estimated exit trading multiple. The income approach is an appropriate valuation method due to our capital-intensive nature, the long-term contractual nature of our business, and the relatively consistent cash flows generated by our reporting units. The principal assumptions utilized in our income approach valuation model include revenue growth rates, operating profit margins, discount rate, and exit multiple. Projected revenue growth rates and operating profit assumptions are consistent with those utilized in our operating plan and long-term financial planning process. The discount rate assumption is calculated based on an estimated market-participant risk-adjusted weighted-average cost of capital, which includes factors such as the risk-free rate of return, cost of debt, and expected equity premiums. The exit multiple is determined from comparable industry transactions and where appropriate, reflects expected long-term growth rates. If our initial review under the income approach indicates there may be impairment, we incorporate results under the market approach to further evaluate the existence of impairment. When the market approach is utilized, fair value is estimated based on market multiples of revenue and earnings derived from comparable publicly-traded industrial gases companies engaged in the same or similar lines of business as the reporting unit, adjusted to reflect differences in size and growth prospects. When both the income and market approach are utilized, we review relevant facts and circumstances and make a qualitative assessment to determine the proper weighting. Management judgment is required in the determination of each assumption utilized in the valuation model, and actual results could differ from the estimates.

If the estimated fair value of the reporting unit is less than the carrying value, we perform the second step of the impairment test to measure the amount of impairment loss, if any. In the second step, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in an analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss.

We conducted our annual goodwill impairment testing in the fourth quarter. Other than our Latin America reporting unit within the Merchant Gases segment, we determined that the fair value of each of our reporting units substantially exceeded its carrying value, and therefore there were no indications of impairment. The Latin America reporting unit is composed predominately of our Indura business, with assets and goodwill associated with operations in Chile and other Latin American countries. Recently, economic conditions in Latin America, including

 

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the impact of tax legislation in Chile, have been less favorable due to increasing inflation, a decline in Chilean manufacturing growth, and weaker export demand for many commodities. As a result, we lowered growth projections for our Latin America reporting unit and determined that the associated goodwill was impaired. In the fourth quarter, we recorded a noncash impairment charge of $305.2. Refer to Note 9, Goodwill, to the consolidated financial statements for additional information.

Other than Latin America, the excess of fair value over carrying value for our reporting units ranged from approximately 35% to approximately 175%. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of these reporting units. In this scenario, the fair value of our reporting units continued to exceed their carrying value by a range of approximately 20% to 150%.

Due to the reorganization of our business effective as of 1 October 2014, we conducted an additional impairment test on our existing reporting units as of 30 September 2014. The fair value of all of our reporting units except Latin America substantially exceeded their carrying value at 30 September 2014. The fair value of the Latin America reporting unit at 30 September was estimated based on a similar outlook and assumptions as those used for the 1 July 2014 testing, and the fair value of the reporting unit exceeded its carrying value due primarily to depreciation and amortization and the impact of the Chilean tax rate change. As of 30 September 2014, the carrying value of Latin America goodwill was $232.7. If economic conditions in the Latin America operating environment deteriorate further or the business fails to perform as expected, an additional review of goodwill recoverability may be warranted.

Future events that could have a negative impact on the level of excess fair value over carrying value of the reporting units include, but are not limited to: decline in market share, pricing pressures, inability to successfully implement cost improvement measures, increases to our cost of capital, and changes to the structure of our business as a result of future reorganizations or divestitures of assets or businesses. Negative changes in one or more of these factors, among others, could result in additional impairment charges.

We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth fiscal quarter and whenever there are indicators of potential impairment, such as significant adverse changes in business climate or operating results or changes in management’s business outlook or strategy. We will conduct goodwill impairment testing in the first quarter of 2015 under our new reporting structure.

Intangible Assets

Intangible assets with determinable lives at 30 September 2014 totaled $541.2 and consisted primarily of customer relationships, purchased patents and technology, and land use rights. These intangible assets are tested for impairment as part of the long-lived asset grouping impairment tests. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. See the impairment discussion above under Plant and Equipment for a description of how impairment losses are determined.

Indefinite-lived intangible assets at 30 September 2014 totaled $74.6 and consisted of trade names and trademarks. Indefinite-lived intangibles are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. The impairment test for indefinite-lived intangible assets encompasses calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. To determine fair value, we utilize the royalty savings method, a form of the income approach. This method values an intangible asset by estimating the royalties avoided through ownership of the asset.

In the fourth quarter of 2014, we conducted our annual impairment test and determined that our indefinite-lived intangible assets were impaired. Refer to Note 10, Intangible Assets, to the consolidated financial statements for additional information.

Equity Investments

Investments in and advances to equity affiliates totaled $1,257.9 at 30 September 2014. The majority of our investments are non-publicly traded ventures with other companies in the industrial gas business. Summarized financial information of equity affiliates is included in Note 7, Summarized Financial Information of Equity Affiliates, to the consolidated financial statements. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.

In the event that a decline in fair value of an investment occurs, and the decline in value is considered to be other than temporary, an impairment loss would be recognized. Management’s estimate of fair value of an investment is

 

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based on estimated discounted future cash flows expected to be generated by the investee. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.

Income Taxes

We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using the enacted tax rate. At 30 September 2014, accrued income taxes and net deferred tax liabilities amounted to $78.0 and $806.1, respectively. Tax liabilities related to uncertain tax positions as of 30 September 2014 were $108.7, excluding interest and penalties. Income tax expense for the year ended 30 September 2014 was $366.0. Disclosures related to income taxes are included in Note 22, Income Taxes, to the consolidated financial statements.

Management judgment is required concerning the ultimate outcome of tax contingencies and the realization of deferred tax assets.

Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our recorded tax liabilities adequately provide for these assessments.

Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when we do not expect sufficient sources of future taxable income to realize the benefit of the operating losses or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the income tax expense.

A 1% point increase/decrease in our effective tax rate would decrease/increase net income by approximately $14.

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements for pension and other postretirement benefits are determined on an actuarial basis utilizing numerous assumptions. The discussion that follows provides information on the significant assumptions and expense associated with the defined benefit plans.

Actuarial models are used in calculating the expense and liability related to the various defined benefit plans. These models have an underlying assumption that the employees render service over their service lives on a relatively consistent basis; therefore, the expense of benefits earned should follow a similar pattern.

Several assumptions and statistical variables are used in the models to calculate the expense and liability related to the plans. We determine assumptions about the discount rate, the expected rate of return on plan assets, and the rate of compensation increase. Note 15, Retirement Benefits, to the consolidated financial statements includes disclosure of these rates on a weighted-average basis for both the domestic and international plans. The actuarial models also use assumptions about demographic factors such as retirement age, mortality, and turnover rates. We believe the actuarial assumptions are reasonable. However, actual results could vary materially from these actuarial assumptions due to economic events and different rates of retirement, mortality, and turnover. Our mortality assumptions are currently aligned with the IRS mortality assumption used to determine funding valuations. In October 2014, the Society of Actuaries published new mortality tables. While the IRS is not expected to adopt the new tables until 2017, we have begun to evaluate the potential impact of these tables on future periods.

One of the assumptions used in the actuarial models is the discount rate. This rate reflects the prevailing market rate for high-quality, fixed-income debt instruments with maturities corresponding to the expected timing of benefit payments as of the annual measurement date for each of the various plans. The timing and amount of the expected benefit payments are matched against the returns of high-quality corporate bonds over the same time period to determine an overall effective discount rate. The rate is used to discount the future cash flows of benefit obligations back to the measurement date. This rate will change from year-to-year based on market conditions that affect corporate bond yields. A higher discount rate decreases the present value of the benefit obligations and results in lower pension expense. A 50 bp increase/decrease in the discount rate decreases/increases pension expense by approximately $21 per year.

 

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The expected rate of return on plan assets represents the average rate of return to be earned by plan assets over the period that the benefits included in the benefit obligation are to be paid. The expected return on plan assets assumption is based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as the interest rate environment. Asset allocation is determined based on long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Lower returns on the plan assets result in higher pension expense. A 50 bp increase/decrease in the estimated rate of return on plan assets decreases/increases pension expense by approximately $17 per year.

We use a market-related valuation method for recognizing certain investment gains or losses for our significant pension plans. Investment gains or losses are the difference between the expected and actual return based on plan assets. The expected return on plan assets is determined based on a market-related value of plan assets, which is a calculated value that recognizes investment gains and losses in fair value related to equities over a five-year period from the year in which they occur, which reduces year-to-year volatility. The market-related value for fixed income investments is the actual fair value. Expense in future periods will be impacted as gains or losses are recognized in the market-related value of assets.

The expected rate of compensation increase is another key assumption. We determine this rate based on review of the underlying long-term salary increase trend characteristic of labor markets and historical experience, as well as comparison to peer companies. A 50 bp increase/decrease in the expected rate of compensation increases/decreases pension expense by approximately $5 per year.

Loss Contingencies

In the normal course of business we encounter contingencies, i.e., situations involving varying degrees of uncertainty as to the outcome and effect on us. We accrue a liability for loss contingencies when it is considered probable that a liability has been incurred and the amount of loss can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued.

Contingencies include those associated with litigation and environmental matters, for which our accounting policy is discussed in Note 1, Major Accounting Policies, to the consolidated financial statements, and particulars are provided in Note 16, Commitments and Contingencies, to the consolidated financial statements. Significant judgment is required in both determining probability and whether the amount of loss associated with a contingency can be reasonably estimated. These determinations are made based on the best available information at the time. As additional information becomes available, we reassess probability and estimates of loss contingencies. Revisions in the estimates associated with loss contingencies could have a significant impact on our results of operations in the period in which an accrual for loss contingencies is recorded or adjusted. For example, due to the inherent uncertainties related to environmental exposures, a significant increase to environmental liabilities could occur if a new site is designated, the scope of remediation is increased, or our proportionate share is increased. Similarly, a future charge for regulatory fines or damage awards associated with litigation could have a significant impact on our net income in the period in which it is recorded.

 

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NEW ACCOUNTING GUIDANCE

See Note 2, New Accounting Guidance, to the consolidated financial statements for information concerning the implementation and impact of new accounting guidance.

FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis contains “forward-looking statements” within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about earnings guidance and business outlook. These forward-looking statements are based on management’s reasonable expectations and assumptions as of the date of this release. Actual performance and financial results may differ materially from projections and estimates expressed in the forward-looking statements because of many factors not anticipated by management, including, without limitation, weakening or reversal of global or regional economic recovery; future financial and operating performance of major customers; unanticipated contract terminations or customer cancellations or postponement of projects and sales; the impact of competitive products and pricing; unexpected changes in raw material supply and markets; unanticipated asset impairments or losses; the impact of price fluctuations in natural gas; the ability to recover unanticipated increased energy and raw material costs from customers; costs and outcomes of litigation or regulatory investigations; the impact of management and organizational changes, including pension settlement and other associated costs; the success of cost reduction efforts; the timing, impact, and other uncertainties of future acquisitions or divestitures; significant fluctuations in interest rates and foreign currencies from that currently anticipated; political risks, including the risks of unanticipated government actions that may result in project delays, cancellations or expropriations; the impact of changes in environmental, tax or other legislation and regulations in jurisdictions in which the Company and its affiliates operate; the impact on the effective tax rate of changes in the mix of earnings among our U.S. and international operations; and other risk factors described in Section 1A, Risk Factors. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this document to reflect any change in the Company’s assumptions, beliefs or expectations or any change in events, conditions, or circumstances upon which any such forward-looking statements are based.

 

  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

Our earnings, cash flows, and financial position are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. It is our policy to minimize our cash flow exposure to adverse changes in currency exchange rates and to manage the financial risks inherent in funding with debt capital.

We address these financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. Counterparties to all derivative contracts are major financial institutions, thereby minimizing the risk of credit loss. All instruments are entered into for other than trading purposes. For details on the types and use of these derivative instruments and the major accounting policies, see Note 1, Major Accounting Policies, and Note 12, Financial Instruments, to the consolidated financial statements, for additional information. Additionally, we mitigate adverse energy price impacts through our cost pass-through contracts with customers and price increases.

Our derivative and other financial instruments consist of long-term debt (including current portion), interest rate swaps, cross currency interest rate swaps, and foreign exchange-forward contracts. The net market value of these financial instruments combined is referred to below as the net financial instrument position and is disclosed in Note 13, Fair Value Measurements, to the consolidated financial statements.

At 30 September 2014 and 2013, the net financial instrument position was a liability of $5,044.9 and $5,719.5, respectively. The decrease in the net financial instrument position was due primarily to repayment of a 3.75% Eurobond of 300 million ($401.0) in November 2013 and a stronger U.S. dollar which reduced the translated value of foreign currency debt.

The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates and prices. Market values are the present value of projected future cash flows based on the market rates and prices chosen. The market values for interest rate risk and foreign currency risk are calculated by us using a third-party software model that utilizes standard pricing models to determine the present value of the instruments based on market conditions (interest rates, spot and forward exchange rates, and implied volatilities) as of the valuation date.

 

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Interest Rate Risk

Our debt portfolio as of 30 September 2014, including the effect of currency swap agreements, primarily comprised debt denominated in U.S. dollars (54%) and Euros (22%). This debt portfolio is composed of 50% fixed-rate debt and 50% variable-rate debt. Changes in interest rates have different impacts on the fixed- and variable-rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position.

The sensitivity analysis related to the interest rate risk on the fixed portion of our debt portfolio assumes an instantaneous 100 bp move in interest rates from the level at 30 September 2014, with all other variables held constant. A 100 bp increase in market interest rates would result in a decrease of $173 and $143 in the net liability position of financial instruments at 30 September 2014 and 2013, respectively. A 100 bp decrease in market interest rates would result in an increase of $188 and $154 in the net liability position of financial instruments at 30 September 2014 and 2013, respectively.

Based on the variable-rate debt included in our debt portfolio, including the interest rate swap agreements, a 100 bp increase in interest rates would result in an additional $31 and $29 of interest incurred per year at the end of 30 September 2014 and 2013, respectively. A 100 bp decline in interest rates would lower interest incurred by $31 and $29 per year at 30 September 2014 and 2013, respectively.

Foreign Currency Exchange Rate Risk

The sensitivity analysis related to foreign currency exchange rates assumes an instantaneous 10% change in the foreign currency exchange rates from their levels at 30 September 2014 and 2013, with all other variables held constant. A 10% strengthening or weakening of the functional currency of an entity versus all other currencies would result in a decrease or increase, respectively, of $419 and $295 in the net liability position of financial instruments at 30 September 2014 and 2013, respectively. The change in the sensitivity analysis from September 2013 to September 2014 is driven primarily by an increase in the notional amount of intercompany loan currency hedges.

The primary currencies for which we have exchange rate exposure are the U.S. dollar versus the Euro and the Euro versus the Pound Sterling. Foreign currency debt, cross currency interest rate swaps, and foreign exchange-forward contracts are used in countries where we do business, thereby reducing our net asset exposure. Foreign exchange-forward contracts and cross currency interest rate swaps are also used to hedge our firm and highly anticipated foreign currency cash flows. Thus, there is either an asset/liability or cash flow exposure related to all of the financial instruments in the above sensitivity analysis for which the impact of a movement in exchange rates would be in the opposite direction and materially equal to the impact on the instruments in the analysis.

The majority of the Company’s sales are derived from outside of the United States and denominated in foreign currencies. Financial results therefore will be affected by changes in foreign currency rates. The Euro represents the largest exposure in terms of our foreign earnings. We estimate that a 10% reduction in the Euro versus the U.S. dollar would lower our annual operating income by approximately $20.

 

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  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Air Products’ management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting, which is defined in the following sentences, is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

 

  (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;  
  (ii) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and  
  (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.  

Because of inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of our internal control over financial reporting may vary over time. Our processes contain self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

Management has evaluated the effectiveness of its internal control over financial reporting based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that, as of 30 September 2014, the Company’s internal control over financial reporting was effective.

KPMG LLP, an independent registered public accounting firm, has issued their opinion on the Company’s internal control over financial reporting as of 30 September 2014 as stated in their report which appears herein.

 

/s/ Seifi Ghasemi

   

/s/ M. Scott Crocco

    

Seifi Ghasemi

   

M. Scott Crocco

    

Chairman, President, and

   

Senior Vice President and

    

Chief Executive Officer

   

Chief Financial Officer

    

24 November 2014

   

24 November 2014

    

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Air Products and Chemicals, Inc.:

We have audited the accompanying consolidated balance sheets of Air Products and Chemicals, Inc. and Subsidiaries (the Company) as of 30 September 2014 and 2013, and the related consolidated income statements, consolidated comprehensive income statements, consolidated statements of cash flows, and equity for each of the years in the three-year period ended 30 September 2014. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule referred to in Item 15(a)(2) in this Form 10-K. We have audited the Company’s internal control over financial reporting as of 30 September 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Air Products and Chemicals, Inc. and Subsidiaries as of 30 September 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended 30 September 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Air Products and Chemicals, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of 30 September 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Philadelphia, Pennsylvania

24 November 2014

 

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The Consolidated Financial Statements

Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

 

Year ended 30 September (Millions of dollars, except for share data)    2014     2013     2012  

Sales

     $10,439.0        $10,180.4        $9,611.7   

Cost of sales

     7,634.6        7,472.1        7,051.9   

Selling and administrative

     1,059.3        1,066.3        946.8   

Research and development

     141.4        133.7        126.4   

Business restructuring and cost reduction actions

     12.7        231.6        327.4   

Pension settlement loss

     5.5        12.4          

Goodwill and intangible asset impairment charge

     310.1                 

Gain on previously held equity interest

                   85.9   

Customer bankruptcy

                   9.8   

Advisory costs

            10.1          

Other income (expense), net

     52.8        70.2        47.1   

Operating Income

     1,328.2        1,324.4        1,282.4   

Equity affiliates’ income

     151.4        167.8        153.8   

Interest expense

     125.1        141.8        123.7   

Income from Continuing Operations before Taxes

     1,354.5        1,350.4        1,312.5   

Income tax provision

     366.0        307.9        287.3   

Income from Continuing Operations

     988.5        1,042.5        1,025.2   

Income (Loss) from Discontinued Operations, net of tax

     4.6        (10.0     168.1   

Net Income

     993.1        1,032.5        1,193.3   

Less: Net Income Attributable to Noncontrolling Interests

     1.4        38.3        26.0   

Net Income Attributable to Air Products

     $991.7        $994.2        $1,167.3   

Net Income Attributable to Air Products

      

Income from continuing operations

     $987.1        $1,004.2        $999.2   

Income (loss) from discontinued operations

     4.6        (10.0     168.1   

Net Income Attributable to Air Products

     $991.7        $994.2        $1,167.3   

Basic Earnings Per Common Share Attributable to Air Products

      

Income from continuing operations

     $4.64        $4.79        $4.73   

Income (loss) from discontinued operations

     .02        (.05     .80   

Net Income Attributable to Air Products

     $4.66        $4.74        $5.53   

Diluted Earnings Per Common Share Attributable to Air Products

      

Income from continuing operations

     $4.59        $4.73        $4.66   

Income (loss) from discontinued operations

     .02        (.05     .78   

Net Income Attributable to Air Products

     $4.61        $4.68        $5.44   

Weighted Average of Common Shares Outstanding (in millions)

     212.7        209.7        211.2   

Weighted Average of Common Shares Outstanding Assuming Dilution  (in millions)

     215.2        212.3        214.7   

The accompanying notes are an integral part of these statements.

 

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Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

 

Year ended 30 September (Millions of dollars)    2014     2013     2012  

Net Income

     $993.1        $1,032.5        $1,193.3   

Other Comprehensive Income (Loss), net of tax:

      

Translation adjustments, net of tax of $36.5, ($44.8), and $8.9

     (213.1     (25.0     84.6   

Net gain (loss) on derivatives, net of tax of ($13.6), $14.5, and ($9.8)

     (15.2     35.0        (21.8

Pension and postretirement benefits, net of tax of ($28.0), $154.8, and ($124.6)

     (74.2     231.9        (246.0

Reclassification adjustments:

      

Currency translation adjustment

            .6        13.3   

Derivatives, net of tax of ($1.9), ($5.5), and $5.0

     (9.1     (20.2     12.4   

Pension and postretirement benefits, net of tax of $40.0, $55.9, and $36.5

     84.7        104.9        67.0   

Total Other Comprehensive Income (Loss)

     (226.9     327.2        (90.5

Comprehensive Income

     766.2        1,359.7        1,102.8   

Net Income Attributable to Noncontrolling Interests

     1.4        38.3        26.0   

Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests

     (5.6     (1.0     4.9   

Comprehensive Income Attributable to Air Products

     $770.4        $1,322.4        $1,071.9   

The accompanying notes are an integral part of these statements.

 

 

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Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

 

30 September (Millions of dollars, except for share data)    2014     2013  

Assets

                

Current Assets

    

Cash and cash items

     $336.6        $450.4   

Trade receivables, net

     1,486.0        1,544.3   

Inventories

     706.0        706.1   

Contracts in progress, less progress billings

     155.4        182.3   

Prepaid expenses

     87.8        121.1   

Other receivables and current assets

     523.0        432.4   

Current assets of discontinued operations

            2.5   

Total Current Assets

     3,294.8        3,439.1   

Investment in net assets of and advances to equity affiliates

     1,257.9        1,195.5   

Plant and equipment, net

     9,532.1        8,974.0   

Goodwill, net

     1,237.3        1,653.8   

Intangible assets, net

     615.8        717.3   

Noncurrent capital lease receivables

     1,414.9        1,476.9   

Other noncurrent assets

     426.3        393.5   

Total Noncurrent Assets

     14,484.3        14,411.0   

Total Assets

     $17,779.1        $17,850.1   

Liabilities and Equity

                

Current Liabilities

    

Payables and accrued liabilities

     $1,591.0        $1,944.9   

Accrued income taxes

     78.0        63.0   

Short-term borrowings

     1,228.7        709.9   

Current portion of long-term debt

     65.3        507.4   

Current liabilities of discontinued operations

            2.4   

Total Current Liabilities

     2,963.0        3,227.6   

Long-term debt

     4,824.5        5,056.3   

Other noncurrent liabilities

     1,187.5        1,164.3   

Deferred income taxes

     995.5        827.2   

Total Noncurrent Liabilities

     7,007.5        7,047.8   

Total Liabilities

     9,970.5        10,275.4   

Commitments and Contingencies —See Note 16

    

Redeemable Noncontrolling Interest

     287.2        375.8   

Air Products Shareholders’ Equity

    

Common stock (par value $1 per share; issued 2014 and 2013–249,455,584 shares)

     249.4        249.4   

Capital in excess of par value

     842.0        799.2   

Retained earnings

     9,993.2        9,646.4   

Accumulated other comprehensive loss

     (1,241.9     (1,020.6

Treasury stock, at cost (2014–35,917,440 shares; 2013–38,276,327 shares)

     (2,476.9     (2,632.3

Total Air Products Shareholders’ Equity

     7,365.8        7,042.1   

Noncontrolling Interests

     155.6        156.8   

Total Equity

     7,521.4        7,198.9   

Total Liabilities and Equity

     $17,779.1        $17,850.1   

The accompanying notes are an integral part of these statements.

 

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Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Year ended 30 September (Millions of dollars)    2014     2013     2012  

Operating Activities

      

Net Income

     $993.1        $1,032.5        $1,193.3   

Less: Net income attributable to noncontrolling interests

     1.4        38.3        26.0   

Net income attributable to Air Products

     991.7        994.2        1,167.3   

(Income) Loss from discontinued operations

     (4.6     10.0        (168.1

Income from continuing operations attributable to Air Products

     987.1        1,004.2        999.2   

Adjustments to reconcile income to cash provided by operating activities:

      

Depreciation and amortization

     956.9        907.0        840.8   

Deferred income taxes

     125.5        12.8        65.2   

Benefit from Spanish tax ruling

                   (58.3

Gain on previously held equity interest

                   (85.9

Undistributed earnings of unconsolidated affiliates

     (76.0     (59.2     (53.6

Loss (Gain) on sale of assets and investments

     4.3        (20.0     (8.4

Share-based compensation

     44.0        43.5        43.8   

Noncurrent capital lease receivables

     20.0        (151.4     (282.5

Goodwill and intangible asset impairment charge

     310.1                 

Write-down of long-lived assets associated with restructuring / customer bankruptcy

            100.4        80.2   

Other adjustments

     61.0        (76.4     124.5   

Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:

      

Trade receivables

     (2.7     4.8        (55.1

Inventories

     (23.5     75.0        1.3   

Contracts in progress, less progress billings

     (5.4     (16.2     (42.9

Other receivables

     (33.0     (77.0     (18.3

Payables and accrued liabilities

     (234.8     (130.3     249.7   

Other working capital

     52.9        (64.1     (34.6

Cash Provided by Operating Activities

     2,186.4        1,553.1        1,765.1   

Investing Activities

      

Additions to plant and equipment

     (1,684.2     (1,524.2     (1,521.0

Acquisitions, less cash acquired

            (224.9     (863.4

Investment in and advances to unconsolidated affiliates

     2.0        1.3        (175.4

Proceeds from sale of assets and investments

     45.6        52.8        52.5   

Change in restricted cash

                   76.1   

Other investing activities

     (1.4     (2.0     (4.0

Cash Used for Investing Activities

     (1,638.0     (1,697.0     (2,435.2

Financing Activities

      

Long-term debt proceeds

     461.0        927.2        900.4   

Payments on long-term debt

     (608.6     (437.5     (490.6

Net increase in commercial paper and short-term borrowings

     148.7        437.7        9.8   

Dividends paid to shareholders

     (627.7     (565.6     (514.9

Purchase of treasury shares

            (461.6     (53.1

Proceeds from stock option exercises

     141.6        226.4        124.3   

Excess tax benefit from share-based compensation

     28.3        37.9        31.0   

Payment for subsidiary shares from noncontrolling interests

     (.5     (14.0     (58.4

Other financing activities

     (47.1     (35.1     (26.9

Cash (Used for) Provided by Financing Activities

     (504.3     115.4        (78.4

Discontinued Operations

      

Cash provided by operating activities

     .7        14.3        33.6   

Cash provided by (used for) investing activities

     9.8        (1.2     765.4   

Cash (used for) financing activities

     (157.1              

Cash (Used for) Provided by Discontinued Operations

     (146.6     13.1        799.0   

Effect of Exchange Rate Changes on Cash

     (11.3     11.4        (18.6

(Decrease) Increase in Cash and Cash Items

     (113.8     (4.0     31.9   

Cash and Cash Items—Beginning of Year

     450.4        454.4        422.5   

Cash and Cash Items—End of Period

     $336.6        $450.4        $454.4   

The accompanying notes are an integral part of these statements.

 

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Table of Contents

Air Products and Chemicals, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EQUITY

 

Year ended 30 September

(Millions of dollars)

  Common
Stock
    Capital
in
Excess
of Par
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Air Products
Shareholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 

Balance 30 September 2011

    $249.4        $805.6        $8,599.5        $(1,253.4     $(2,605.3     $5,795.8        $142.9        $5,938.7   

Net Income

        1,167.3            1,167.3        28.4        1,195.7   

Other comprehensive income (loss)

          (95.4       (95.4     4.9        (90.5

Cash dividends ($2.50 per share)

        (529.0         (529.0       (529.0

Share-based compensation expense

      43.4              43.4          43.4   

Purchase of treasury shares

            (53.1     (53.1       (53.1

Issuance of treasury shares for stock option and award plans

      (74.6         190.0        115.4          115.4   

Tax benefit of stock option and award plans

      38.6              38.6          38.6   

Indura business combination

                14.8        14.8   

Dividends to noncontrolling interests

                (26.7     (26.7

Purchase of noncontrolling interests

      (4.4           (4.4     (1.9     (6.3

Other

            1.9        (3.3                     (1.4     (16.3     (17.7

Balance 30 September 2012

    $249.4        $810.5        $9,234.5        $(1,348.8     $(2,468.4     $6,477.2        $146.1        $6,623.3   

Net Income

        994.2            994.2        30.2        1,024.4   

Other comprehensive income (loss)

          328.2          328.2        (1.0     327.2   

Cash dividends ($2.77 per share)

        (579.6         (579.6       (579.6

Share-based compensation expense

      43.5              43.5          43.5   

Purchase of treasury shares

        <