Edgar Filing: AIR PRODUCTS & CHEMICALS INC /DE/

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended 30 June 2012

¨	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.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		23-1274455
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

7201 Hamilton Boulevard, Allentown, Pennsylvania		18195-1501
(Address of Principal Executive Offices)		(Zip Code)

610-481-4911

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 ü 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 ü No

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. (Check one):


Large accelerated filer ü	Accelerated filer	Non-accelerated filer	Smaller reporting company
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class				Outstanding at 30 June 2012
Common Stock, $1 par value				211,706,435

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

INDEX


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
Consolidated Balance Sheets – 30 June 2012 and 30 September 2011			3
Consolidated Income Statements – Three and Nine Months Ended 30 June 2012 and 2011			4
Consolidated Comprehensive Income Statements – Three and Nine Months Ended 30 June 2012 and 2011			5
Consolidated Statements of Cash Flows – Nine Months Ended 30 June 2012 and 2011			6
Notes to Consolidated Financial Statements			7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		45

PART II. OTHER INFORMATION

Item 6.	Exhibits		46
Signatures			47
Exhibit Index			48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(Millions of dollars, except for share data)	30 June 2012				30 September 2011
Assets
Current Assets
Cash and cash items		$	361.2			$	421.4
Trade receivables, net			1,418.5				1,361.6
Inventories			699.5				670.2
Contracts in progress, less progress billings			162.7				146.7
Prepaid expenses			75.0				77.5
Other receivables and current assets			300.3				269.2
Current assets of discontinued operations			15.9				243.2
Total Current Assets			3,033.1				3,189.8
Investment in net assets of and advances to equity affiliates			1,135.0				1,011.6
Plant and equipment, at cost			17,592.4				16,858.8
Less: accumulated depreciation			9,884.3				9,636.1
Plant and equipment, net			7,708.1				7,222.7
Goodwill			927.9				796.2
Intangible assets, net			356.8				260.5
Noncurrent capital lease receivables			1,250.1				1,042.8
Other noncurrent assets			444.2				478.2
Noncurrent assets of discontinued operations			25.7				288.9
Total Noncurrent Assets			11,847.8				11,100.9
Total Assets		$	14,880.9			$	14,290.7

Liabilities and Equity
Current Liabilities
Payables and accrued liabilities		$	1,621.4			$	1,599.7
Accrued income taxes			86.5				65.0
Short-term borrowings			370.7				561.8
Current portion of long-term debt			50.7				72.2
Current liabilities of discontinued operations			6.1				43.3
Total Current Liabilities			2,135.4				2,342.0
Long-term debt			3,795.5				3,927.5
Other noncurrent liabilities			1,627.2				1,500.0
Deferred income taxes			675.1				558.2
Noncurrent liabilities of discontinued operations			.3				24.3
Total Noncurrent Liabilities			6,098.1				6,010.0
Total Liabilities			8,233.5				8,352.0
Commitments and Contingencies – See Note 12
Air Products Shareholders’ Equity
Common stock (par value $1 per share; issued 2012 and 2011– 249,455,584 shares)			249.4				249.4
Capital in excess of par value			807.4				805.6
Retained earnings			9,232.6				8,599.5
Accumulated other comprehensive loss			(1,253.8	)			(1,253.4	)
Treasury stock, at cost (2012 – 37,749,149 shares; 2011 – 39,270,328 shares)			(2,522.0	)			(2,605.3	)
Total Air Products Shareholders’ Equity			6,513.6				5,795.8
Noncontrolling Interests			133.8				142.9
Total Equity			6,647.4				5,938.7
Total Liabilities and Equity		$	14,880.9			$	14,290.7

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED INCOME STATEMENTS

(Unaudited)


	Three Months Ended 30 June						Nine Months Ended 30 June
(Millions of dollars, except for share data)	2012			2011			2012			2011
Sales		$	2,340.1		$	2,472.0		$	7,005.9		$	7,167.5
Cost of sales			1,690.8			1,825.7			5,128.9			5,243.5
Selling and administrative			230.4			234.5			698.8			703.0
Research and development			32.5			29.3			90.3			86.4
Cost reduction plan			—			—			86.8			—
Gain on previously held equity interest			85.9			—			85.9			—
Net loss on Airgas transaction			—			—			—			48.5
Other income, net			10.5			5.2			37.5			26.6
Operating Income			482.8			387.7			1,124.5			1,112.7
Equity affiliates’ income			41.7			39.7			114.3			99.2
Interest expense			26.0			26.5			84.8			86.9
Income from Continuing Operations before Taxes			498.5			400.9			1,154.0			1,125.0
Income tax provision			133.3			95.4			269.5			271.9
Income from Continuing Operations			365.2			305.5			884.5			853.1
Income from Discontinued Operations, net of tax			127.3			29.5			166.5			69.3
Net Income			492.5			335.0			1,051.0			922.4
Less: Net Income Attributable to Noncontrolling Interests			8.0			8.5			22.4			23.0
Net Income Attributable to Air Products		$	484.5		$	326.5		$	1,028.6		$	899.4

Net Income Attributable to Air Products
Income from continuing operations		$	357.2		$	297.0		$	862.1		$	830.1
Income from discontinued operations			127.3			29.5			166.5			69.3
Net Income Attributable to Air Products		$	484.5		$	326.5		$	1,028.6		$	899.4

Basic Earnings Per Common Share Attributable to Air Products
Income from continuing operations		$	1.69		$	1.40		$	4.08		$	3.89
Income from discontinued operations			.60			.14			.79			.32
Net Income Attributable to Air Products		$	2.29		$	1.54		$	4.87		$	4.21

Diluted Earnings Per Common Share Attributable to Air Products
Income from continuing operations		$	1.66		$	1.37		$	4.02		$	3.80
Income from discontinued operations			.60			.13			.77			.32
Net Income Attributable to Air Products		$	2.26		$	1.50		$	4.79		$	4.12

Weighted Average of Common Shares Outstanding (in millions)			211.5			212.5			211.0			213.5
Weighted Average of Common Shares Outstanding Assuming Dilution (in millions)			214.7			217.3			214.6			218.4
Dividends Declared Per Common Share – Cash		$	.64		$	.58		$	1.86		$	1.65

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Unaudited)


	Three Months Ended 30 June
(Millions of dollars)	2012				2011
Net Income		$	492.5			$	335.0
Other Comprehensive Income (Loss), net of tax:
Translation adjustments, net of tax of $22.8 and ($11.5)			(150.6	)			103.0
Net gain (loss) on derivatives, net of tax of ($4.6) and $3.9			(3.7	)			5.3
Reclassification adjustments:
Currency translation adjustment			13.3				—
Derivatives, net of tax of ($0.2) and ($3.3)			(2.2	)			(4.9	)
Pension and postretirement benefits, net of tax of $8.8 and $8.7			16.1				16.8
Total Other Comprehensive Income (Loss)			(127.1	)			120.2
Comprehensive Income			365.4				455.2
Comprehensive Income Attributable to Noncontrolling Interests			6.6				11.9
Comprehensive Income Attributable to Air Products		$	358.8			$	443.3


	Nine Months Ended 30 June
(Millions of dollars)	2012				2011
Net Income		$	1,051.0			$	922.4
Other Comprehensive Income (Loss), net of tax:
Translation adjustments, net of tax of $18.8 and ($31.6)			(54.9	)			267.4
Net gain (loss) on derivatives, net of tax of ($6.9) and $5.3			(14.1	)			7.7
Unrealized holding loss on available-for-sale securities, net of tax of ($3.3)			—				(4.6	)
Reclassification adjustments:
Currency translation adjustment			13.3				—
Derivatives, net of tax of $4.2 and ($0.3)			9.8				.5
Available-for-sale securities, net of tax of ($9.3)			—				(16.1	)
Pension and postretirement benefits, net of tax of $26.6 and $26.1			48.2				50.4
Total Other Comprehensive Income			2.3				305.3
Comprehensive Income			1,053.3				1,227.7
Comprehensive Income Attributable to Noncontrolling Interests			25.1				34.3
Comprehensive Income Attributable to Air Products		$	1,028.2			$	1,193.4

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended 30 June
(Millions of dollars)	2012				2011
Operating Activities
Net Income		$	1,051.0			$	922.4
Less: Net income attributable to noncontrolling interests			22.4				23.0
Net income attributable to Air Products			1,028.6				899.4
Income from discontinued operations			(166.5	)			(69.3	)
Income from continuing operations attributable to Air Products			862.1				830.1
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization			620.5				627.6
Deferred income taxes			113.1				75.4
Benefit from Spanish tax ruling			(58.3	)			—
Gain on previously held equity interest			(85.9	)			—
Undistributed earnings of unconsolidated affiliates			(42.8	)			(18.4	)
Gain on sale of assets and investments			(5.8	)			(7.7	)
Share-based compensation			36.2				33.1
Noncurrent capital lease receivables			(204.1	)			(155.7	)
Net loss on Airgas transaction			—				48.5
Payment of Airgas acquisition-related costs			—				(156.2	)
Other adjustments			48.6				66.3
Working capital changes that provided (used) cash, excluding effects of acquisitions and divestitures:
Trade receivables			(71.9	)			(79.7	)
Inventories			(18.8	)			(48.2	)
Contracts in progress, less progress billings			(16.7	)			20.9
Other receivables			8.6				(5.8	)
Payables and accrued liabilities			30.0				(161.4	)
Other working capital			29.8				28.3
Cash Provided by Operating Activities			1,244.6				1,097.1
Investing Activities
Additions to plant and equipment			(1,166.5	)			(933.5	)
Acquisitions, less cash acquired			(173.8	)			(9.9	)
Investment in and advances to unconsolidated affiliates			(175.4	)			(46.0	)
Proceeds from sale of Airgas stock			—				94.7
Proceeds from sale of assets and investments			13.5				62.3
Change in restricted cash			60.9				13.0
Cash Used for Investing Activities			(1,441.3	)			(819.4	)
Financing Activities
Long-term debt proceeds			409.6				59.2
Payments on long-term debt			(477.6	)			(182.4	)
Net (decrease) increase in commercial paper and short-term borrowings			(171.5	)			410.6
Dividends paid to shareholders			(379.4	)			(333.0	)
Purchase of treasury shares			(53.1	)			(350.0	)
Proceeds from stock option exercises			88.7				124.4
Excess tax benefit from share-based compensation			20.2				40.3
Payment for subsidiary shares from noncontrolling interests			(58.4	)			—
Other financing activities			(16.1	)			(2.8	)
Cash Used for Financing Activities			(637.6	)			(233.7	)
Discontinued Operations
Cash provided by operating activities			32.1				31.6
Cash provided by (used for) investing activities			766.4				(31.8	)
Cash provided by financing activities			—				1.3
Cash Provided by Discontinued Operations			798.5				1.1
Effect of Exchange Rate Changes on Cash			(25.5	)			10.7
(Decrease) Increase in Cash and Cash Items			(61.3	)			55.8
Cash and Cash Items – Beginning of Year			422.5				374.3
Cash and Cash Items – End of Period			361.2				430.1
Less: Cash and Cash Items – Discontinued Operations			—				1.9
Cash and Cash Items – Continuing Operations		$	361.2			$	428.2

The accompanying notes are an integral part of these statements.

AIR PRODUCTS AND CHEMICALS, INC. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1.	BASIS OF PRESENTATION AND MAJOR ACCOUNTING POLICIES

Refer to our 2011 Form 10-K for a description of major accounting policies. There have been no material changes to these accounting policies during the first nine months of 2012.

The consolidated financial statements of Air Products and Chemicals, Inc. and its subsidiaries (“we”, “our”, “us”, the “Company”, “Air Products”, or “registrant”) included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In our opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the Notes. The interim results for the periods indicated herein, however, do not reflect certain adjustments, such as the valuation of inventories on the LIFO cost basis, which are only finally determined on an annual basis. The consolidated financial statements and related Notes included herein should be read in conjunction with the financial statements and Notes thereto included in our latest Form 10-K in order to fully understand the basis of presentation. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

2.	NEW ACCOUNTING GUIDANCE

Accounting Guidance Implemented

Fair Value Measurements

In May 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance that amends previous guidance for fair value measurement and disclosure requirements. The revised guidance changes certain fair value measurement principles, clarifies the application of existing fair value measurements and expands the disclosure requirements, particularly for Level 3 fair value measurements which utilize inputs that are based on our own internal assumptions. This standard was effective for us beginning in the second quarter of fiscal year 2012. The adoption of this guidance did not have a material impact on our consolidated financial statements.

New Accounting Guidance to be Implemented

Goodwill Impairment

In September 2011, the FASB issued authoritative guidance that amends previous guidance related to the manner in which entities test goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test is optional. This guidance will be effective for us for annual and interim goodwill impairment tests performed after 30 September 2012. The implementation of this guidance does not impact our consolidated financial statements.

Multiemployer Pension

In September 2011, the FASB issued authoritative guidance that amends previous guidance related to the disclosure requirements for employers participating in multiemployer pension plans. The purpose of the new disclosures is to provide financial statement users with information about an employer’s level of participation in and the financial health of significant plans. Current recognition and measurement guidance for an employer’s participation in a multiemployer plan is not affected. This guidance will be effective for our fiscal year 2012 annual disclosures. Based on our level of participation in multiemployer plans, the impact of adopting this guidance will not be material to our consolidated financial statements.

Statement of Comprehensive Income

In June 2011, the FASB issued authoritative guidance that amends previous guidance for the presentation of comprehensive income. It eliminates the current option to present other comprehensive income in the statement of changes in equity. Under this revised guidance, an entity will have the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive financial

statements. In December 2011, the FASB approved a deferral of the effective date of certain requirements related to the presentation and disclosure of reclassification adjustments from other comprehensive income to net income. The retained guidance is effective for us beginning in the first quarter of fiscal year 2013. We are currently evaluating the presentation alternatives for adopting the guidance, but we do not anticipate a material impact on our consolidated financial statements upon adoption.

3.	DISCONTINUED OPERATIONS

In January 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.

On 8 January 2012, we reached an agreement for The Linde Group to purchase our Homecare business in Belgium, Germany, France, Portugal and Spain. This business represented approximately 80% of our total Homecare business revenues.

The transaction with Linde closed on 30 April 2012. Total sale proceeds of €590 million ($777) were received in cash at closing. This amount included contingent proceeds of €110 million ($144) related to the outcome of certain retender arrangements. The gain related to the contingent proceeds is deferred in other noncurrent liabilities and will be recognized in the results of discontinued operations when the contingencies are resolved and the final proceeds are realized per the terms of the agreement. We will also be entitled to receive up to €32 million ($42) of additional cash proceeds based upon collection of accounts receivable. A gain of $207.4 ($150.3 after-tax, or $.70 per share) was recognized on the sale of this business in the third quarter of fiscal year 2012.

We are actively marketing the remaining portion of the Homecare business, which is primarily in the United Kingdom. We expect to close on the sale of this business before the end of calendar 2012. In the third quarter of 2012, we recorded an impairment charge of $33.5 ($29.5 after-tax, or $.14 per share) to write down the remaining business to its estimated net realizable value. For additional information, see Note 10, Fair Value Measurements. Additional charges may be recorded in future periods dependent upon the timing and method of ultimate disposition.

The Homecare business is being accounted for as a discontinued operation. The results of operations and cash flows of this business have been removed from the results of continuing operations for all periods presented. The assets and liabilities of discontinued operations have been reclassified and are segregated in the consolidated balance sheets.

The results of discontinued operations are summarized below:


	Three Months Ended 30 June							Nine Months Ended 30 June
	2012			2011				2012			2011
Sales		$	45.0		$	105.8			$	242.0		$	303.3

Income before taxes		$	10.2		$	29.1			$	66.3		$	84.2
Income tax provision			3.7			(.4	)			20.6			14.9
Income from operations of discontinued operations			6.5			29.5				45.7			69.3
Gain on sale of business and impairment/write-down, net of tax			120.8			—				120.8			—
Income from Discontinued Operations, net of tax		$	127.3		$	29.5			$	166.5		$	69.3

For the three and nine months ended 30 June 2011, the income tax provision includes a tax benefit of $8.9, or $.04 per share, resulting from the completion of an audit of tax years 2007 and 2008 by the U.S. Internal Revenue Service related to our previously divested U.S. Healthcare business. For additional details on this tax benefit, refer to Note 21, Income Taxes, in our 2011 Form 10-K.

Assets and liabilities of discontinued operations consist of the following:


	30 June			30 September
	2012			2011
Cash and cash items		$	—		$	1.1
Trade receivables, net			14.9			213.4
Inventories			.8			11.2
Other current assets			.2			17.5
Total Current Assets		$	15.9		$	243.2

Plant and equipment, net		$	25.7		$	189.3
Goodwill			—			96.2
Other noncurrent assets			—			3.4
Total Noncurrent Assets		$	25.7		$	288.9

Payables and accrued liabilities		$	6.1		$	42.1
Accrued income taxes			—			.5
Short-term borrowings			—			.7
Total Current Liabilities		$	6.1		$	43.3

Other noncurrent liabilities		$	.3		$	12.4
Deferred income taxes			—			11.9
Total Noncurrent Liabilities		$	.3		$	24.3

4.	COST REDUCTION PLAN

During the second quarter ended 31 March 2012, we initiated a cost reduction plan. The results from continuing operations for the nine months ended 30 June 2012 include a charge of $86.8 ($60.6 after-tax, or $.28 per share) for this plan. This charge represents the ongoing actions we are taking to improve our cost structure, particularly in Europe. The plan includes removing the stranded costs resulting from our decision to exit the Homecare business, the reorganization of the Merchant business and the actions we are taking to right-size our European business cost structure in light of the challenging economic outlook.

This charge includes $80.8 for severance and other costs associated with the elimination of approximately 600 positions from our workforce. The remainder of the charge, $6.0, is related to the write-down of certain assets. For additional information regarding these assets, see Note 10, Fair Value Measurements. The planned actions are expected to be completed by the end of the second quarter of fiscal year 2013.

The charge for the cost reduction plan is excluded from segment operating profit. The table below displays how this charge relates to the businesses at the segment level:


	Severance and Other Benefits			Asset Impairments			Total
Merchant Gases		$	71.3		$	6.0		$	77.3
Tonnage Gases			3.8			—			3.8
Electronics and Performance Materials			5.7			—			5.7
Total 2012 Charge		$	80.8		$	6.0		$	86.8

The following table summarizes the carrying amount of the accrual for the cost reduction plan at 30 June 2012:


	Severance and Other Benefits				Asset Impairments				Total
2012 Charge		$	80.8			$	6.0			$	86.8
Noncash expenses			(.4	)			(6.0	)			(6.4	)
Amount reflected in pension liability			(6.8	)			—				(6.8	)
Cash expenditures			(21.2	)			—				(21.2	)
Currency translation adjustment			(2.1	)			—				(2.1	)
Accrued Balance		$	50.3			$	—			$	50.3

5.	BUSINESS COMBINATIONS

DuPont Air Products NanoMaterials LLC

On 29 February 2012, we entered into a definitive agreement with E.I. DuPont de Nemours and Co., Inc. to acquire their 50% interest in our joint venture, DuPont Air Products NanoMaterials LLC (DA NanoMaterials). DA NanoMaterials’ revenues for calendar year 2011 were approximately $90.

The acquisition closed on 2 April 2012 for $158 ($147 net of cash acquired of $11), subject to working capital adjustments, and was accounted for as a business combination. Beginning in the third quarter of 2012, the results of DA NanoMaterials were consolidated within our Electronics and Performance Materials business segment. The preliminary allocation of the purchase price to the assets acquired was based on their fair values as of the acquisition date, with the amounts exceeding the fair value recorded as goodwill. The allocation included plant and equipment of $26, identified intangibles of $100, goodwill of $125 (of which $50 is deductible for tax purposes), and other net assets of $27.

Goodwill, which is assigned to the Electronics and Performance Materials business segment, largely resulted from expected revenue and cost synergies resulting from the business combination. Management expects that revenue synergies will result primarily from the sale of differentiated offerings and cost synergies from combining supply chains and optimization of combined logistics.

The fair value of plant and equipment was quantified primarily using a cost approach, by estimating reproduction/ replacement cost consistent with assumptions market participants would use. The identified intangibles primarily relate to customer relationships and will be amortized over 22 years. The fair value of intangibles was determined primarily using the excess earnings method under the income approach.

Prior to the acquisition date, we accounted for our 50% interest in DA NanoMaterials as an equity-method investment. The acquisition-date fair value of the previously held equity interest was valued at $120 and was determined using a discounted cash flow analysis under the income approach. The income approach required estimating a number of factors including projected revenue growth, customer attrition rates, profit margin, and discount rate. The three and nine months ended 30 June 2012 include 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. This gain is reflected on the consolidated income statements as “Gain on previously held equity interest.”

SUBSEQUENT EVENT- Indura S.A.

On 1 July 2012, (“the acquisition date”), we acquired a 51.8% controlling equity interest in the outstanding shares of Indura S.A., from the majority shareholder. On 3 July 2012, we acquired an additional 13.0% equity interest from other shareholders. We paid cash consideration in Chilean pesos (CLP) of 345.9 billion ($699) and assumed debt of CLP97.0 billion ($196) for these interests. This preliminary purchase price is subject to certain working capital and debt adjustments. Under the purchase agreement, we have a commitment to purchase up to an additional 2.0% equity interest within the next twelve months. The agreement also provides the largest minority shareholder a right to exercise a put option to require Air Products to purchase up to a 30.5% equity interest during the two-year period beginning on 1 July 2015, at a redemption value equal to fair market value (subject to a minimum price linked to the original acquisition date value escalated by an inflation factor).

Founded in 1948, Indura S.A. is the largest independent industrial gas company in South America. Indura S.A.’s integrated gas and retail business comprises packaged gases and hardgoods, liquid bulk, healthcare and on-sites. Indura S.A.’s revenues for calendar year 2011 were approximately $480.

As the acquisition occurred subsequent to the reporting date, our consolidated financial statements as of and for the three and nine months ended 30 June 2012 exclude the financial results of Indura S.A.

The acquisition of Indura S.A. will be accounted for as a business combination. As such, Indura S.A.’s results of operations will be included in our consolidated results of operations within the Merchant Gases Segment following the acquisition date. Due to the limited time since the acquisition date, the information needed to provide a detailed business combination disclosure, including the purchase price allocation and proforma information, is not yet available.

6.	AIRGAS TRANSACTION

In February 2010, we commenced a tender offer to acquire all the outstanding common stock of Airgas, Inc. (Airgas), including the associated preferred stock purchase rights. Based on a decision by the Delaware Chancery Court to uphold the decision of Airgas’ Board of Directors to retain the preferred stock purchase rights, we withdrew our offer on 15 February 2011.

The nine months ended 30 June 2011 included a net loss of $48.5 ($31.6 after-tax, or $.14 per share) which was reflected separately on the consolidated income statements as “Net loss on Airgas transaction.” This net loss included amortization of the fees related to the term loan credit facility, the gain on the sale of Airgas stock, and other acquisition-related costs. The nine months ended 30 June 2011 included cash payments for acquisition-related costs of $156.2, which was classified as an operating activity on the consolidated statements of cash flows. For additional details on this transaction, refer to Note 3, Airgas Transaction, in our 2011 Form 10-K.

7.	INVENTORIES

The components of inventories are as follows:


	30 June 2012				30 September 2011
Inventories at FIFO Cost
Finished goods		$	522.6			$	477.3
Work in process			30.8				29.9
Raw materials, supplies and other			245.5				258.8
			798.9				766.0
Less: Excess of FIFO cost over LIFO cost			(99.4	)			(95.8	)
		$	699.5			$	670.2

FIFO cost approximates replacement cost. Our inventories have a high turnover, and as a result, there is little difference between the original cost of an item and its current replacement cost.

8.	GOODWILL

Changes to the carrying amount of consolidated goodwill by segment for the nine months ended 30 June 2012 are as follows:


	30 September 2011			Acquisitions and Adjustments			Currency Translation				30 June 2012
Merchant Gases		$	479.2		$	9.2		$	(14.7	)		$	473.7
Tonnage Gases			14.1			—			—				14.1
Electronics and Performance Materials			302.9			135.6			1.6				440.1
		$	796.2		$	144.8		$	(13.1	)		$	927.9

The increase in goodwill in the Electronics and Performance Materials segment was primarily due to the DA NanoMaterials acquisition which occurred during the third quarter of 2012. Refer to Note 5, Business Combinations, for further details on this acquisition.

Goodwill is subject to impairment testing at least annually. In addition, goodwill is tested more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists.

9.	FINANCIAL INSTRUMENTS

Currency Price Risk Management

Our earnings, cash flows, and financial position are exposed to foreign currency risk from foreign currency denominated transactions and net investments in foreign operations. It is our policy to minimize our cash flow volatility from changes in currency exchange rates. This is accomplished by identifying and evaluating the risk that our cash flows will change in value due to changes in exchange rates and by executing the appropriate strategies necessary to manage such exposures. Our objective is to maintain economically balanced currency risk management strategies that provide adequate downside protection.

Forward Exchange Contracts

We enter into forward exchange contracts to reduce the cash flow exposure to foreign currency fluctuations associated with highly anticipated cash flows and certain firm commitments such as the purchase of plant and equipment. The maximum remaining term of any forward exchange contract currently outstanding and designated as a cash flow hedge at 30 June 2012 is 2.2 years. Forward exchange contracts are also used to hedge the value of investments in certain foreign subsidiaries and affiliates by creating a liability in a currency in which we have a net equity position. The primary currency pair in this portfolio of forward exchange contracts is the Euro/U.S. dollar.

In addition to the forward exchange contracts that are designated as hedges, we utilize forward exchange contracts that are not designated as hedges. These contracts are used to economically hedge foreign currency-denominated monetary assets and liabilities, primarily working capital. The primary objective of these forward exchange contracts is to protect the value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement. This portfolio of forward exchange contracts comprises many different foreign currency pairs, with a profile that changes from time to time depending on business activity and sourcing decisions.

The table below summarizes our outstanding currency price risk management instruments:


	30 June 2012					30 September 2011
	US$ Notional			Years Average Maturity		US$ Notional			Years Average Maturity
Forward exchange contracts:
Cash flow hedges		$	1,337.8		.5		$	1,512.1		.4
Net investment hedges			721.7		2.8			635.8		2.0
Not designated			321.4		.1			226.3		.1
Total Forward Exchange Contracts		$	2,380.9		1.1		$	2,374.2		.8

In addition to the above, we use foreign currency-denominated debt and qualifying intercompany loans that are related to an outstanding borrowing from a third party to hedge the foreign currency exposures of our net investment in certain foreign subsidiaries. The designated foreign currency denominated debt at 30 June 2012 included €852.6 million and 30 September 2011 included €742.1 million. The designated intercompany loans were €0 million and €437.0 million at 30 June 2012 and 30 September 2011, respectively.

Debt Portfolio Management

It is our policy to identify on a continuing basis the need for debt capital and evaluate the financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the debt portfolio and hedging program are managed with the objectives and intent to (1) reduce funding risk with respect to borrowings made by us to preserve our access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) manage the aggregate interest rate risk and the debt portfolio in accordance with certain debt management parameters.

Interest Rate Management Contracts

We enter into interest rate swaps to change the fixed/variable interest rate mix of our debt portfolio in order to maintain the percentage of fixed- and variable-rate debt within the parameters set by management. In accordance with these parameters, the agreements are used to manage interest rate risks and costs inherent in our debt portfolio. Our interest rate management portfolio generally consists of fixed to floating interest rate swaps which are designated as fair value hedges and pre-issuance interest rate swaps and treasury locks which hedge the interest rate risk associated with anticipated fixed-rate debt issuances and are designated as cash flow hedges. At 30 June 2012, outstanding interest rate swaps and treasury locks were denominated in U.S. dollars. The maximum remaining hedged term of any pre-issuance interest rate swap or pre-issuance treasury lock designated as a cash flow hedge is .6 years. The notional amount of the interest rate swap agreements are equal to or less than the designated debt being hedged. When interest rate swaps are used to hedge variable-rate debt, the indices of the swaps and the debt to which they are designated are the same. It is our policy not to enter into any interest rate management contracts which lever a move in interest rates on a greater than one-to-one basis.

Cross Currency Interest Rate Swap Contracts

We enter into cross currency interest rate swap contracts when our risk management function deems necessary. These contracts may entail both the exchange of fixed- and floating-rate interest payments periodically over the life of the agreement and the exchange of one currency for another currency at inception and at a specified future date. These contracts effectively convert the currency denomination of a debt instrument into another currency in which we have a net equity position while changing the interest rate characteristics of the instrument. The contracts are used to hedge certain net investments in foreign operations. The current cross currency interest rate swap portfolio consists of a single fixed-to-fixed swap between U.S. dollars and British Pound Sterling.

The following table summarizes our outstanding interest rate management contracts and cross currency interest rate swaps:


	30 June 2012											30 September 2011
	US$ Notional			Pay %			Average Receive %			Years Average Maturity		US$ Notional			Pay %			Average Receive %			Years Average Maturity
Interest rate swaps (fair value hedge)		$	450.0		LIBOR			3.23	%		5.0		$	583.9		LIBOR			3.38	%		4.5
Cross currency interest rate swaps (net investment hedge)		$	32.2		5.54	%		5.48	%		1.7		$	32.2		5.54	%		5.48	%		2.5
Interest rate swaps (cash flow hedge)		$	400.0		2.22	%		LIBOR			.6		$	300.0		2.33	%		LIBOR			.4
Treasury locks (cash flow hedge)		$	300.0		.87	%		—			.5		$	—		—			—			—

The table below summarizes the fair value and balance sheet location of our outstanding derivatives:


	Balance Sheet Location	30 June 2012			30 September 2011			Balance Sheet Location	30 June 2012			30 September 2011
Derivatives Designated as Hedging Instruments:

Forward exchange contracts	Other receivables		$	13.2		$	22.0	Accrued liabilities		$	20.3		$	33.0
Interest rate management contracts	Other receivables			7.3			5.8	Accrued liabilities			11.8			3.8
Forward exchange contracts	Other noncurrent assets			79.2			45.0	Other noncurrent liabilities			1.9			1.0
Interest rate management contracts	Other noncurrent assets			45.7			42.4	Other noncurrent liabilities			2.3			2.2
Total Derivatives Designated as Hedging Instruments			$	145.4		$	115.2			$	36.3		$	40.0
Derivatives Not Designated as Hedging Instruments:
Forward exchange contracts	Other receivables		$	.7		$	3.0	Accrued liabilities		$	1.3		$	3.8
Total Derivatives			$	146.1		$	118.2			$	37.6		$	43.8

Refer to Note 10, Fair Value Measurements, which defines fair value, describes the method for measuring fair value, and provides additional disclosures regarding fair value measurements.

The table below summarizes the gain or loss related to our cash flow hedges, fair value hedges, net investment hedges, and derivatives not designated as hedging instruments:


	Three Months Ended 30 June
	Forward Exchange Contracts								Foreign Currency Debt							Other ^(A)								Total
	2012				2011				2012			2011				2012				2011				2012				2011
Cash Flow Hedges, net of tax:

Net gain (loss) recognized in OCI (effective portion)		$	4.7			$	6.1			$	—		$	—			$	(8.4	)		$	(.8	)		$	(3.7	)		$	5.3
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)			.2				1.1				—			—				—				—				.2				1.1
Net (gain) loss reclassified from OCI to other income, net (effective portion)			(2.8	)			(6.7	)			—			—				—				—				(2.8	)			(6.7	)
Net (gain) loss reclassified from OCI to interest expense (effective portion)			—				—				—			—				.4				.2				.4				.2
Net (gain) loss reclassified from OCI to other income, net (ineffective portion)			—				.5				—			—				—				—				—				.5
Fair Value Hedges:

Net gain (loss) recognized in interest expense^(B)		$	—			$	—			$	—		$	—			$	8.2			$	8.4			$	8.2			$	8.4
Net Investment Hedges, net of tax:

Net gain (loss) recognized in OCI		$	29.4			$	(8.0	)		$	29.3		$	(30.5	)		$	.4			$	(.2	)		$	59.1			$	(38.7	)
Derivatives Not Designated as Hedging Instruments:

Net gain (loss) recognized in other income, net^(C)		$	(1.8	)		$	(1.4	)		$	—		$	—			$	—			$	—			$	(1.8	)		$	(1.4	)


	Nine Months Ended 30 June
	Forward Exchange Contracts				Foreign Currency Debt				Other ^(A)				Total
	2012		2011		2012		2011		2012		2011		2012		2011
Cash Flow Hedges, net of tax:

Net gain (loss) recognized in OCI (effective portion)		$(10.6)		$ 8.5		$ —		$ —		$(3.5)		$ (.8)		$(14.1)		$7.7
Net (gain) loss reclassified from OCI to sales/cost of sales (effective portion)		.7		6.6		—		—		—		—		.7		6.6
Net (gain) loss reclassified from OCI to other income, net (effective portion)		7.5		(7.5)		—		—		—		—		7.5		(7.5)
Net (gain) loss reclassified from OCI to interest expense (effective portion)		.4		—		—		—		1.0		.8		1.4		.8
Net (gain) loss reclassified from OCI to other income, net (ineffective portion)		.2		.6		—		—		—		—		.2		.6
Fair Value Hedges:

Net gain (loss) recognized in interest expense^(B)		$ —		$ —		$ —		$ —		$ 3.3		$(12.8)		$ 3.3		$ (12.8)
Net Investment Hedges, net of tax:

Net gain (loss) recognized in OCI		$ 22.4		$(22.3)		$32.3		$(84.6)		$ (.1)		$ (.5)		$ 54.6		$(107.4)
Derivatives Not Designated as Hedging Instruments:

Net gain (loss) recognized in other income, net^(C)		$ (3.0)		$ (2.1)		$ —		$ —		$ —		$ —		$ (3.0)		$ (2.1)

^(A)	Other includes the impact on other comprehensive income (OCI) and earnings primarily related to interest rate hedges.

^(B)	The impact of fair value hedges noted above was largely offset by gains and losses resulting from the impact of changes in related interest rates on recognized outstanding debt.

^(C)	The impact of the non-designated hedges noted above was largely offset by gains and losses, respectively, resulting from the impact of changes in exchange rates on recognized assets and liabilities denominated in nonfunctional currencies.

The amount of cash flow hedges’ unrealized gains and losses at 30 June 2012 that are expected to be reclassified to earnings in the next twelve months are not material.

The cash flows related to all derivative contracts are reported in the operating activities section of the consolidated statements of cash flows.

Credit Risk-Related Contingent Features

Certain derivative instruments are executed under agreements that require us to maintain a minimum credit rating with both Standard & Poor’s and Moody’s. If our credit rating falls below this threshold, the counterparty to the derivative instruments has the right to request full collateralization on the derivatives’ net liability position. The net liability position of derivatives with credit risk-related contingent features was $12.1 as of 30 June 2012 and $10.5 as of 30 September 2011. Because our current credit rating is above the various pre-established thresholds, no collateral has been posted on these liability positions.

Counterparty Credit Risk Management

We execute all financial derivative transactions with counterparties that are highly rated financial institutions, all of which are investment grade at this time. Some of our underlying derivative agreements give us the right to require the institution to post collateral if its credit rating falls below the pre-established thresholds with Standard & Poor’s or Moody’s. These are the same agreements referenced in Credit Risk-Related Contingent Features above. The collateral that the counterparties would be required to post was $104.8 as of 30 June 2012 and $66.1 as of 30 September 2011. No financial institution is required to post collateral at this time, as all have credit ratings at or above the threshold.

10.

FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The methods and assumptions used to measure the fair value of financial instruments are as follows:

Derivatives

The fair value of our interest rate management contracts and forward exchange contracts are quantified using the income approach and are based on estimates using standard pricing models. These models take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. The computation of the fair values of these instruments is generally performed by the Company. These standard pricing models utilize inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. In addition, on an ongoing basis, we randomly test a subset of our valuations against valuations received from the transaction’s counterparty to validate the accuracy of our standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions.

Refer to Note 9, Financial Instruments, for a description of derivative instruments, including details on the balance sheet line classifications.

Long-term Debt

The fair value of our debt is based on estimates using standard pricing models that take into account the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard valuation models utilize observable market data such as interest rate yield curves and currency spot rates. Therefore, the fair value of our debt is classified as a level 2 measurement. We generally perform the computation of the fair value of these instruments.

Other Liabilities

As of 30 September 2011, other liabilities included the obligation to purchase 25% of the remaining shares of CryoService Limited (CSL). CSL is not publicly traded and therefore, no observable market existed for the shares. The fair value of the outstanding liability was determined using an internally developed valuation model that was based on a multiple of earnings formula. On 30 November 2011, payment was remitted for this obligation and 100% of the shares are now owned. Refer to Note 15, Noncontrolling Interests, for additional information.

The carrying values and fair values of financial instruments were as follows:


	30 June 2012						30 September 2011
	Carrying Value			Fair Value			Carrying Value			Fair Value
Assets
Derivatives
Forward exchange contracts		$	93.1		$	93.1		$	70.0		$	70.0
Interest rate management contracts			53.0			53.0			48.2			48.2
Liabilities
Derivatives
Forward exchange contracts		$	23.5		$	23.5		$	37.8		$	37.8
Interest rate management contracts			14.1			14.1			6.0			6.0
Long-term debt, including current portion			3,846.2			4,164.1			3,999.7			4,284.5
Other liabilities			—			—			51.0			51.0

The carrying amounts reported in the balance sheet for cash and cash items, trade receivables, payables and accrued liabilities, accrued income taxes, and short-term borrowings approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the above table.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:


Level 1	—	Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2	—	Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.


Level 3		—		Inputs that are unobservable for the asset or liability based on our own assumptions (about the assumptions market participants would use in pricing the asset or liability).

The following table summarizes assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:


	30 June 2012												30 September 2011
	Total			Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3
Assets at Fair Value
Derivatives
Forward exchange contracts		$	93.1		$	—		$	93.1		$	—		$	70.0		$	—		$	70.0		$	—
Interest rate management contracts			53.0			—			53.0			—			48.2			—			48.2			—
Total Assets at Fair Value		$	146.1		$	—		$	146.1		$	—		$	118.2		$	—		$	118.2		$	—

Liabilities at Fair Value
Derivatives
Forward exchange contracts		$	23.5		$	—		$	23.5		$	—		$	37.8		$	—		$	37.8		$	—
Interest rate management contracts			14.1			—			14.1			—			6.0			—			6.0			—
Other liabilities			—			—			—			—			51.0			—			—			51.0
Total Liabilities at Fair Value		$	37.6		$	—		$	37.6		$	—		$	94.8		$	—		$	43.8		$	51.0

Refer to Note 1, Major Accounting Policies, in our 2011 Form 10-K and Note 9, Financial Instruments, in this quarterly filing for additional information on our accounting and reporting of the fair value of financial instruments.

Changes in the fair value of other liabilities, valued using significant unobservable inputs (Level 3), are presented below:



Balance at 30 September 2011	$	51.0
Expense included in interest expense		.8
Payment to settle liability		(52.1	)
Currency translation adjustment		.3
Balance at 30 June 2012	$	—

The following is a tabular presentation of nonrecurring fair value measurements along with the level within the fair value hierarchy in which the fair value measurement in its entirety falls:


	30 June 2012												Total 2012 Loss
	Total			Level 1			Level 2			Level 3			Total 2012 Loss
Long-lived assets – Cost reduction plan ^(A)		$	2.2		$	—		$	—		$	2.2		$	6.0
Long-lived assets – Discontinued operations ^(B)			25.7			—			—			25.7			33.5

(A)

During the second quarter ended 31 March 2012, long-lived assets held for sale were written down to fair value and the loss was included in the cost reduction plan charge. For additional information, see Note 4, Cost Reduction Plan. We quantified the fair value of assets held for sale using a market approach, based on prices for other market transactions involving comparable assets and our assessment of value considering our knowledge of the markets.

(B)

During the third quarter ended 30 June 2012, the remaining assets of the Homecare business were written down to estimated net realizable value. For additional information, see Note 3, Discontinued Operations. We utilized a market approach to determine the fair value based on our current assessment of the markets for these assets.

11.

RETIREMENT BENEFITS

The components of net pension cost for the defined benefit pension plans and other postretirement benefit cost for the three and nine months ended 30 June 2012 and 2011 were as follows:



	Pension Benefits										Other Benefits
	2012					2011					2012		2011
Three Months Ended 30 June	U.S.			International		U.S.			International
Service cost	$	11.3			$ 6.0	$	10.9			$ 7.5	$	1.1	$	1.4
Interest cost		31.1			15.6		30.7			16.3		1.0		.8
Expected return on plan assets		(44.6	)		(16.7)		(44.9	)		(17.3)		—		—
Prior service cost amortization		.6			.1		.6			.2		—		—
Actuarial loss amortization		19.7			3.8		16.0			7.7		.7		1.0
Special termination benefits		—			—		—			.3		—		—
Other		—			.6		—			.8		—		—
Net periodic benefit cost	$	18.1			$ 9.4	$	13.3			$ 15.5	$	2.8	$	3.2

	Pension Benefits										Other Benefits
	2012					2011					2012		2011
Nine Months Ended 30 June	U.S.			International		U.S.			International
Service cost	$	33.8			$ 18.1	$	32.7			$ 22.0	$	3.3	$	4.2
Interest cost		93.2			46.8		92.2			48.0		3.0		2.4
Expected return on plan assets		(133.6	)		(50.0)		(134.7	)		(50.9)		—		—
Prior service cost amortization		1.9			.3		1.8			.6		—		—
Actuarial loss amortization		59.0			11.5		48.0			23.3		2.1		3.0
Special termination benefits		4.6			2.2		—			.3		—		—
Other		—			1.9		—			1.7		—		—
Net periodic benefit cost	$	58.9			$ 30.8	$	40.0			$ 45.0	$	8.4	$	9.6

Special termination benefits for the nine months ended 30 June 2012 are related to the cost reduction plan initiated in the second quarter. For additional information regarding this plan, see Note 4, Cost Reduction Plan.

For the nine months ended 30 June 2012 and 2011, our cash contributions to funded plans and benefit payments under unfunded plans were $31.6 and $229.5, respectively. Total contributions for fiscal 2012 are expected to be approximately $50 to $60. During fiscal 2011, total contributions were $241.

12.

COMMITMENTS AND CONTINGENCIES

Litigation

We are involved in various legal proceedings, including competition, environmental, health, safety, product liability, and insurance matters. 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 $89 at 30 June 2012) 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 our total revenue in Brazil in 2003.

We have denied the allegations made by the authorities and filed an appeal in October 2010 with the Brazilian courts. Certain of our defenses, if successful, could result in the matter being dismissed with no fine against us. We, with advice of our outside legal counsel, have assessed the status of this matter and have concluded that, although an adverse final judgment after exhausting all appeals is reasonably possible, such a judgment is not probable. As a result, no provision has been made in the consolidated financial statements. We estimate the maximum possible loss to be the full amount of the fine of R$179.2 million (approximately $89 at 30 June 2012) plus interest accrued thereon until final disposition of the proceedings.

We are required to provide security for the payment of the fine (and interest) in order to suspend execution of the judgment during the appeal process, during which time interest will accrue on the fine. The security is only collectible by the court in the event we are not successful in our appeal and do not timely pay the fine. The security could be in the form of a bank guarantee or in other forms which the courts deem acceptable. The form of security to be provided by us has not been finally determined.

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

Environmental

In the normal course of business, we are involved in legal proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act (the federal Superfund law), similar state environmental laws, and the Resource Conservation and Recovery Act (RCRA) relating to the designation of certain sites for investigation or remediation. Presently, there are approximately 33 sites on which a final settlement has not been reached where we, along with others, have been designated a potentially responsible party by the Environmental Protection Agency or are otherwise engaged in investigation or remediation, including cleanup activity at certain of our current and former manufacturing sites. We continually monitor these sites for which we have environmental exposure.

Accruals for environmental loss contingencies are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated consistent with the policy set forth in Note 1, Major Accounting Policies, to the consolidated financial statements in our 2011 Form 10-K. The consolidated balance sheets at 30 June 2012 and 30 September 2011 included an accrual of $79.2 and $82.3, respectively, primarily as part of other noncurrent liabilities. The environmental liabilities will be paid over a period of up to 30 years. We estimate the exposure for environmental loss contingencies to range from $79 to a reasonably possible upper exposure of $93 as of 30 June 2012.

Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Using reasonably possible alternative assumptions of the exposure level could result in an increase to the environmental accrual. Due to the inherent uncertainties related to environmental exposures, a significant increase to the reasonably possible upper exposure level could occur if a new site is designated, the scope of remediation is increased, a different remediation alternative is identified, or a significant increase in our proportionate share occurs. 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.

PACE

At 30 June 2012, $34.4 of the environmental accrual was related to the Pace facility.

In 2006, we sold our Amines business, which included operations at Pace, Florida and recognized a liability for retained environmental obligations associated with remediation activities at Pace. We are required by the Florida Department of Environmental Protection (FDEP) and the United States Environmental Protection Agency (USEPA) to continue our remediation efforts. We estimated that it would take about 20 years to complete the groundwater remediation, and the costs through completion were estimated to range from $42 to $52. As no amount within the range was a better estimate than another, we recognized a pretax expense in fiscal 2006 of $42.0 as a component of income from discontinued operations and recorded an environmental accrual of $42.0 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure range related to the Pace facility.

We have implemented many of the remedial corrective measures at the Pace, Florida facility required under 1995 Consent Orders issued by the FDEP and the USEPA. Contaminated soils have been bioremediated, and the treated soils have been secured in a lined on-site disposal cell. Several groundwater recovery systems have been installed to contain and remove contamination from groundwater. We completed an extensive assessment of the site to determine how well existing measures are working, what additional corrective measures may be needed, and whether newer remediation technologies that were not available in the 1990s might be suitable to more quickly and effectively remove groundwater contaminants. Based on assessment results, we completed a focused feasibility study that appears to have identified new and alternative approaches which should more effectively remove contaminants and achieve the targeted remediation goals. We continue to review the new approaches with the FDEP.

PIEDMONT

At 30 June 2012, $20.5 of the environmental accrual was related to the Piedmont site.

On 30 June 2008, we sold our Elkton, Maryland and Piedmont, South Carolina production facilities and the related North American atmospheric emulsions and global pressure sensitive adhesives businesses. In connection with the sale, we recognized a liability for retained environmental obligations associated with remediation activities at the Piedmont site. This site is under active remediation for contamination caused by an insolvent prior owner. The sale of the site triggered expense recognition. Prior to the sale, remediation costs had been capitalized since they improved the property as compared to its condition when originally acquired. We are required by the South Carolina Department of Health and Environmental Control to address both contaminated soil and groundwater. Numerous areas of soil contamination have been addressed, and contaminated groundwater is being recovered and treated. We estimated that it would take until 2015 to complete source area remediation and another 15 years thereafter to complete groundwater recovery, with costs through completion estimated to be $24. We recognized a pretax expense in 2008 of $24.0 as a component of income from discontinued operations and recorded an environmental liability of $24.0 in continuing operations on the consolidated balance sheets. There has been no change to the estimated exposure.

PAULSBORO

At 30 June 2012, $7.9 of the environmental accrual was related to the Paulsboro site.

During the first quarter of 2009, management committed to a plan to sell the production facility in Paulsboro, New Jersey and recognized a $16.0 environmental liability associated with this site. The change in the liability balance since it was established is a result of spending and changes in the estimated exposure. In December 2009, we completed the sale of this facility. We are required by the New Jersey state law to investigate and, if contaminated, remediate a site upon its sale. We estimate that it will take several years to complete the investigation/remediation efforts at this site.

13.

SHARE-BASED COMPENSATION

We have various share-based compensation programs, which include stock options, deferred stock units, and restricted shares. During the nine months ended 30 June 2012, we granted 1,079,860 stock options at a weighted-average exercise price of $82.64 and an estimated fair value of $21.43 per option. The fair value of these options was estimated using a Black Scholes option valuation model that used the following assumptions: expected volatility of 29.0%-30.4%; expected dividend yield of 2.3%; expected life in years of 7.3-9.0; and a risk-free interest rate of 1.7%-2.1%. In addition, we granted 252,723 deferred stock units at a weighted-average grant-date fair value of $83.15 and 34,595 restricted shares at a weighted-average grant-date fair value of $82.64. Refer to Note 18, Share-Based Compensation, in our 2011 Form 10-K for information on the valuation and accounting for these programs.

Share-based compensation cost charged against income in the three and nine months ended 30 June 2012 was $8.8 ($5.7 after-tax) and $36.2 ($23.2 after-tax), respectively. Of the share-based compensation cost recognized for the nine months ended 30 June 2012, $30.8 was a component of selling and administrative expense, $3.9 a component of cost of sales, $1.1 a component of research and development, and $.4 a component of the cost reduction plan. Share-based compensation cost charged against income in the three and nine months ended 30 June 2011 was $11.2 ($7.0 after-tax) and $33.1 ($20.4 after-tax), respectively. The amount of share-based compensation cost capitalized in 2012 and 2011 was not material.

14.

EQUITY

The following is a summary of the changes in total equity for the three and nine months ended 30 June:


	Three Months Ended 30 June
	2012												2011
	Air Products				Non- controlling Interests				Total Equity				Air Products				Non- controlling Interests				Total Equity
Balance at 31 March		$	6,262.7			$	144.7			$	6,407.4			$	5,825.2			$	174.0			$	5,999.2
Net Income			484.5				8.0				492.5				326.5				8.5				335.0
Components of Other Comprehensive Income, (Loss), net of tax
Translation adjustments			(149.0	)			(1.6	)			(150.6	)			99.3				3.7				103.0
Net gain (loss) on derivatives			(3.9	)			.2				(3.7	)			5.6				(.3	)			5.3
Reclassification adjustments:
Currency translation adjustments			13.3				—				13.3				—				—				—
Derivatives			(2.2	)			—				(2.2	)			(4.9	)			—				(4.9	)
Pension and postretirement benefits			16.1				—				16.1				16.8				—				16.8
Total Other Comprehensive Income (Loss)			(125.7	)			(1.4	)			(127.1	)			116.8				3.4				120.2
Comprehensive Income			358.8				6.6				365.4				443.3				11.9				455.2
Dividends on common stock (per share $0.64, $0.58)			(135.5	)			—				(135.5	)			(123.5	)			—				(123.5	)
Dividends to noncontrolling interests			—				(3.1	)			(3.1	)			—				(2.2	)			(2.2	)
Share-based compensation expense			8.8				—				8.8				11.2				—				11.2
Issuance of treasury shares for stock option and award plans			15.1				—				15.1				52.1				—				52.1
Tax benefit of stock option and award plans			2.6				—				2.6				24.5				—				24.5
Other equity transactions			1.1				(14.4	)			(13.3	)			(.6	)			(18.9	)			(19.5	)
Balance at 30 June		$	6,513.6			$	133.8			$	6,647.4			$	6,232.2			$	164.8			$	6,397.0


	Nine Months Ended 30 June
	2012												2011
	Air Products				Non- controlling Interests				Total Equity				Air Products				Non- controlling Interests				Total Equity
Balance at 30 September		$	5,795.8			$	142.9			$	5,938.7			$	5,546.9			$	150.7			$	5,697.6
Net Income			1,028.6				22.4				1,051.0				899.4				23.0				922.4
Components of Other Comprehensive Income, (Loss), net of tax
Translation adjustments			(57.6	)			2.7				(54.9	)			255.7				11.7				267.4
Net gain (loss) on derivatives			(14.1	)			—				(14.1	)			8.1				(.4	)			7.7
Unrealized holding loss on available-for-sale securities			—				—				—				(4.6	)			—				(4.6	)
Reclassification adjustments:
Currency translation adjustments			13.3				—				13.3				—				—				—
Derivatives			9.8				—				9.8				.5				—				.5
Available-for-sale securities			—				—				—				(16.1	)			—				(16.1	)
Pension and postretirement benefits			48.2				—				48.2				50.4				—				50.4
Total Other Comprehensive Income (Loss)			(.4	)			2.7				2.3				294.0				11.3				305.3
Comprehensive Income			1,028.2				25.1				1,053.3				1,193.4				34.3				1,227.7
Dividends on common stock (per share $1.86, $1.65)			(393.0	)			—				(393.0	)			(351.7	)			—				(351.7	)
Dividends to noncontrolling interests			—				(16.1	)			(16.1	)			—				(2.7	)			(2.7	)
Share-based compensation expense			35.8				—				35.8				33.1				—				33.1
Purchase of treasury shares			(53.1	)			—				(53.1	)			(350.0	)			—				(350.0	)
Issuance of treasury shares for stock option and award plans			76.9				—				76.9				117.1				—				117.1
Tax benefits of stock option and award plans			28.0				—				28.0				52.3				—				52.3
Purchase of noncontrolling interests			(4.4	)			(1.9	)			(6.3	)			(6.1	)			—				(6.1	)
Contribution from noncontrolling interests			—				—				—				—				1.4				1.4
Other equity transactions			(.6	)			(16.2	)			(16.8	)			(2.8	)			(18.9	)			(21.7	)
Balance at 30 June		$	6,513.6			$	133.8			$	6,647.4			$	6,232.2			$	164.8			$	6,397.0

15.

NONCONTROLLING INTERESTS

In June 2010, we entered into agreements to increase our ownership percentage from 72% to 97% of CryoService Limited (CSL), a cryogenic and specialty gases company in the U.K. At 30 September 2011, the liability to purchase the additional 25%, based on a multiple of earnings formula, was reported in payables and accrued liabilities on the consolidated balance sheet. On 30 November 2011, we remitted consideration of £33.2 million ($52.1) to fulfill this obligation. Refer to Note 10, Fair Value Measurements, for a rollforward of the liability balance. For additional information, refer to Note 19 in our 2011 Form 10-K.

In the first quarter of 2012, we entered into an agreement to purchase the remaining 3% of CSL, increasing our ownership percentage to 100%. On 30 November 2011, we remitted consideration of £4.0 million ($6.3) to purchase the remaining 3% of CSL.

The following table presents the effect of changes in ownership interests in subsidiaries on Air Products shareholders’ equity:


	Three Months Ended 30 June						Nine Months Ended 30 June
	2012			2011			2012				2011
Net Income Attributable to Air Products		$	484.5		$	326.5		$	1,028.6			$	899.4
Transfers to noncontrolling interests:
Decrease in Air Products capital in excess of par value for purchase of noncontrolling interests			—			—			(4.4	)			(6.1	)
Changes from net income attributable to Air Products and transfers to noncontrolling interests		$	484.5		$	326.5		$	1,024.2			$	893.3

16.

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (EPS):


	Three Months Ended 30 June						Nine Months Ended 30 June
	2012			2011			2012			2011
NUMERATOR
Income from continuing operations		$	357.2		$	297.0		$	862.1		$	830.1
Income from discontinued operations			127.3			29.5			166.5			69.3
Net Income Attributable to Air Products		$	484.5		$	326.5		$	1,028.6		$	899.4
DENOMINATOR (in millions)
Weighted average number of common shares outstanding			211.5			212.5			211.0			213.5
Effect of dilutive securities
Employee stock options			2.3			3.8			2.7			4.0
Other award plans			.9			1.0			.9			.9
			3.2			4.8			3.6			4.9
Weighted average number of common shares outstanding assuming dilution			214.7			217.3			214.6			218.4
BASIC EPS ATTRIBUTABLE TO AIR PRODUCTS
Income from continuing operations		$	1.69		$	1.40		$	4.08		$	3.89
Income from discontinued operations			.60			.14			.79			.32
Net Income Attributable to Air Products		$	2.29		$	1.54		$	4.87		$	4.21
DILUTED EPS ATTRIBUTABLE TO AIR PRODUCTS
Income from continuing operations		$	1.66		$	1.37		$	4.02		$	3.80
Income from discontinued operations			.60			.13			.77			.32
Net Income Attributable to Air Products		$	2.26		$	1.50		$	4.79		$	4.12

Options on 4.0 million and 3.5 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three and nine months ended 30 June 2012, respectively. Options on 2.1 million shares were antidilutive and therefore excluded from the computation of diluted earnings per share for the three and nine months ended 30 June 2011.

17.

INCOME TAXES

Q1 Spanish Tax Settlement

We were challenged by the Spanish tax authorities over income tax deductions taken by certain of our Spanish subsidiaries during fiscal years 2005-2011. Although we continue to believe that all positions taken were compliant with applicable laws, in November 2011 we reached a settlement with the Spanish tax authorities for €41.3 million ($56) in resolution of all tax issues under examination. Of this settlement, $43.8 ($.20 per share) increased our income tax expense and had a 3.8% impact on our effective tax rate for the nine months ended 30 June 2012. The cash payment for the settlement was principally paid in January 2012.

Q2 Spanish Tax Ruling

As of 30 September 2011, our unrecognized tax benefits included an amount related to certain transactions of a Spanish subsidiary for years 1991 and 1992, a period before we controlled this subsidiary. In March 2009, the Spanish appeals court (Audiencia Nacional) ruled in favor of our Spanish subsidiary. The Spanish government appealed this court decision to the Spanish Supreme Court, and as a result, we did not reverse the liability accrued for these unrecognized tax benefits. On 25 January 2012, the Spanish Supreme Court released its decision affirming the decision of the Audiencia Nacional in favor of our Spanish subsidiary. As a result, in the second quarter of 2012, we recorded a reduction in income tax expense of $58.3 ($.27 per share), including interest and penalties, and a reduction in unrecognized tax benefits. The reduction in income tax expense had a 5.1% impact on our effective tax rate for the nine months ended 30 June 2012.

Q3 Discontinued Operations Tax Positions

During the three months ended 30 June 2012, our unrecognized tax benefits increased $33.3 as a result of certain tax positions taken in conjunction with the disposition of our Homecare business. For additional information, see Note 3, Discontinued Operations.

18.

SUPPLEMENTAL INFORMATION

Debt Issuance

On 3 November 2011, we issued a $400.0 senior fixed-rate 3.0% note that matures 3 November 2021.

Share Repurchase Program

On 15 September 2011, the Board of Directors authorized the repurchase of up to $1,000 of our outstanding common stock. 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. During the first nine months of fiscal year 2012, we purchased .6 million of our outstanding shares at a cost of $53.1. At 30 June 2012, $946.9 in share repurchase authorization remains.

Purchase of Interest in Equity Affiliate

On 29 May 2012, we acquired 25% of the outstanding shares of Abdullah Hashim Industrial Gases & Equipment Co. Ltd. (AHG) for SAR581.3 ($155). AHG is a company of the privately-owned Abdullah Hashim Group, based in the Kingdom of Saudi Arabia. AHG is the largest private industrial gases company in Saudi Arabia. It is comprised of three businesses, including industrial gases, equipment and consumables and refrigerants. The transaction was recorded as an investment in net assets of and advances to equity affiliates in the Merchant Gases segment.

19.

BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

Our segments are organized based on differences in product and/or type of customer. We have four business segments consisting of Merchant Gases, Tonnage Gases, Electronics and Performance Materials, and Equipment and Energy.

Business Segment Information


	Three Months Ended 30 June								Nine Months Ended 30 June
	2012				2011				2012				2011
Sales to External Customers
Merchant Gases		$	874.1			$	921.4			$	2,645.4			$	2,724.5
Tonnage Gases			767.4				868.7				2,360.7				2,433.9
Electronics and Performance Materials			603.8				602.4				1,706.0				1,704.3
Equipment and Energy			94.8				79.5				293.8				304.8
Segment and Consolidated Totals		$	2,340.1			$	2,472.0			$	7,005.9			$	7,167.5

Operating Income
Merchant Gases		$	164.6			$	158.7			$	483.4			$	500.1
Tonnage Gases			134.3				114.8				371.1				351.4
Electronics and Performance Materials ^(A)			176.7				109.0				340.3				269.5
Equipment and Energy			9.8				8.6				26.9				51.3
Segment Total		$	485.4			$	391.1			$	1,221.7			$	1,172.3
Cost reduction plan ^(B)			—				—				(86.8	)			—
Net loss on Airgas transaction			—				—				—				(48.5	)
Other ^(C)			(2.6	)			(3.4	)			(10.4	)			(11.1	)
Consolidated Total		$	482.8			$	387.7			$	1,124.5			$	1,112.7

^(A)	Includes the gain on remeasuring our previously held equity interest in DA NanoMaterials. For additional information, see Note 5, Business Combinations.

^(B)	Information about how this charge related to the businesses at the segment level is discussed in Note 4, Cost Reduction Plan.

^(C)	Includes stranded costs resulting from discontinued operations.


	30 June 2012			30 September 2011
Identifiable Assets ^(D)
Merchant Gases		$	4,591.9		$	4,579.6
Tonnage Gases			4,969.2			4,464.3
Electronics and Performance Materials			2,940.2			2,488.9
Equipment and Energy			324.9			335.6
Segment total		$	12,826.2		$	11,868.4
Other			878.1			878.6
Discontinued operations			41.6			532.1
Consolidated Total		$	13,745.9		$	13,279.1

^(D)	Identifiable assets are equal to total assets less investment in net assets of and advances to equity affiliates.

Geographic Information


	Three Months Ended 30 June						Nine Months Ended 30 June
	2012			2011			2012			2011
Sales to External Customers
U.S./Canada		$	1,115.6		$	1,179.3		$	3,331.4		$	3,499.3
Europe			602.5			670.0			1,832.5			1,947.6
Asia			576.9			566.7			1,697.6			1,546.4
Latin America/Other			45.1			56.0			144.4			174.2
Consolidated Total		$	2,340.1		$	2,472.0		$	7,005.9		$	7,167.5

Geographic information is based on country of origin. The Europe region operates principally in Belgium, France, Germany, the Netherlands, Poland, the U.K. and Spain. The Asia region operates principally in China, Korea, and Taiwan.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Millions of dollars, except for share data)

The disclosures in this quarterly report are complementary to those made in our 2011 Form 10-K. An analysis of results for the third quarter and first nine months of 2012 is provided in the Management’s Discussion and Analysis to follow.

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.

Captions 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 third quarter and year to date results that follows includes comparisons to non-GAAP financial measures. These non-GAAP measures exclude the gain on the previously held equity interest in DuPont Air Products NanoMaterials LLC (DA NanoMaterials), the cost reduction plan charge, the Spanish tax settlement, and the Spanish tax ruling in 2012. For 2011, the non-GAAP measures exclude the net loss on Airgas transaction. 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 baseline performance on a comparable basis. The reconciliation of reported GAAP results to non-GAAP measures is presented on pages 40-41.

THIRD QUARTER 2012 VS. THIRD QUARTER 2011

THIRD QUARTER 2012 IN SUMMARY

—

Sales of $2,340.1 decreased 5%, or $131.9. Underlying sales increased 1%, primarily due to higher pricing in our Merchant Gases businesses. Volumes were flat, as higher Tonnage Gases volumes and higher Equipment sales were offset by lower volumes in both Merchant Gases and Electronics. The acquisition of DA NanoMaterials increased sales by 1%. Lower natural gas prices resulted in lower energy and raw material contractual cost pass-through to customers, reducing sales by 4%. Currency unfavorably impacted sales by 3%.

—

Operating income of $482.8 increased 25%, or $95.1, and operating margin of 20.6% increased 490 basis points (bp). On a non-GAAP basis, operating income increased 2%, or $9.2, and operating margin increased 130 bp, primarily from favorable cost performance due to improved plant operations, fewer turnarounds reducing maintenance spending, and the positive impact of our cost reduction plan in Europe.

—

Income from continuing operations of $357.2 increased 20%, or $60.2, and diluted earnings per share from continuing operations of $1.66 increased 21%, or $.29. On a non-GAAP basis, income from continuing operations increased 2%, or $5.6, and diluted earnings per share from continuing operations increased 3%, or $.04. A summary table of changes in diluted earnings per share is presented below.

—

In 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. The three months ended 30 June 2012 includes 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.

Changes in Diluted Earnings per Share Attributable to Air Products


	Three Months Ended 30 June							Increase (Decrease)
	2012				2011			Increase (Decrease)
Diluted Earnings per Share
Net Income		$	2.26			$	1.50		$	.76
Income from Discontinued Operations			.60				.13			.47
Income from Continuing Operations – GAAP Basis		$	1.66			$	1.37		$	.29
Gain on previously held equity interest			(.25	)			—			(.25	)
Income from Continuing Operations – Non-GAAP Basis		$	1.41			$	1.37		$	.04

Operating Income (after-tax)
Underlying business
Volume/Acquisitions									$	(.04	)
Price/raw materials										.02
Costs										.10
Currency										(.05	)
Operating Income										.03

Other (after-tax)
Income tax rate										(.02	)
Average shares outstanding										.02
Equity affiliates’ income										.01
Other										.01

Total Change in Diluted Earnings per Share from Continuing Operations – Non-GAAP Basis									$	.04

RESULTS OF OPERATIONS

Discussion of Consolidated Results


	Three Months Ended 30 June
	2012				2011				$ Change				Change
Sales		$	2,340.1			$	2,472.0			$	(131.9	)		(5)%
Operating income – GAAP Basis			482.8				387.7				95.1			25%
Operating income – Non-GAAP Basis			396.9				387.7				9.2			2%
Operating margin – GAAP Basis			20.6	%			15.7	%			—			490bp
Operating margin – Non-GAAP Basis			17.0	%			15.7	%			—			130bp
Equity affiliates’ income			41.7				39.7				2.0			5%

Sales


	% Change from Prior Year
Underlying business
Volume		—	%
Price		1	%
Acquisitions		1	%
Currency		(3	)%
Energy and raw material cost pass-through		(4	)%
Total Consolidated Change		(5	)%

Underlying sales increased 1% with pricing up 1% and volume flat. The increase in pricing was driven by our Merchant Gases segment. Volume increases in Tonnage Gases and higher Equipment sales were offset by lower volumes in our Merchant Gases and Electronics businesses. The DA NanoMaterials acquisition increased sales by 1%. Lower natural gas prices resulted in lower energy and raw material contractual cost pass-through to customers, reducing sales by 4%. Currency unfavorably impacted sales by 3%.

Operating Income

Operating income of $482.8 increased 25%, or $95.1. On a non-GAAP basis, operating income of $396.9 increased 2%, or $9.2. The increase was primarily due to lower costs of $28 and higher recovery of raw material costs in pricing of $3, partially offset by an unfavorable volume mix of $8. Unfavorable currency translation and foreign exchange impacts decreased operating income by $14. On a GAAP basis, current year operating income includes the gain on the previously held equity interest in DA NanoMaterials of $85.9.

Equity Affiliates’ Income

Income from equity affiliates of $41.7 increased $2.0, primarily due to higher volumes, partially offset by unfavorable currency.

Selling and Administrative Expense (S&A)

S&A expense of $230.4 decreased $4.1, primarily due to favorable currency, partially offset by inflation. S&A, as a percent of sales, increased from 9.5% to 9.8%.

Research and Development (R&D)

R&D expense of $32.5 increased $3.2. R&D, as a percent of sales, increased from 1.2% to 1.4%.

Gain on Previously Held Equity Interest in DA NanoMaterials

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 three months ended 30 June 2012 includes 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 this transaction.

Other Income, Net

Items recorded to other income arise from transactions and events not directly related to our principal income earning activities.

Other income of $10.5 increased $5.3, primarily due to asset write-offs in the prior year. Otherwise, no individual items were significant in comparison to the prior year.

Interest Expense


	Three Months Ended 30 June
	2012			2011
Interest incurred		$	33.0		$	32.1
Less: capitalized interest			7.0			5.6
Interest expense		$	26.0		$	26.5

Interest incurred increased $.9. The increase was driven primarily by a higher average debt balance, partially offset by the impact of a stronger dollar on the translation of foreign currency interest. The change in capitalized interest is driven by an increase in project spending which qualified for capitalization.

Effective Tax Rate

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. On a GAAP basis, the effective tax rate was 26.7% and 23.8% in the third quarter of 2012 and 2011, respectively. The current quarter effective tax rate includes an increase in income tax expense of $31.3 related to the gain on the previously held equity interest in DA NanoMaterials.

Refer to Note 5, Business Combinations, to the consolidated financial statements for details on this transaction. On a non-GAAP basis, the effective tax rate was 24.7% and 23.8% in the third quarter of 2012 and 2011, respectively. The increase in the effective tax rate was due to tax credits and adjustments having a lower relative impact on higher taxable income.

Discontinued Operations

In January 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.

On 8 January 2012, we reached an agreement for The Linde Group to purchase our Homecare business in Belgium, Germany, France, Portugal, and Spain. This business represented approximately 80% of our total Homecare business revenues.

The transaction with Linde closed on 30 April 2012. Total sale proceeds of €590 million ($777) were received in cash at closing. A gain of $207.4 ($150.3 after- tax, or $.70 per share) was recognized on the sale of this business in the third quarter of fiscal year 2012.

We are actively marketing the remaining portion of the Homecare business, which is primarily in the United Kingdom. We expect to close on the sale of this business before the end of calendar 2012. In the third quarter of 2012, we recorded an impairment charge of $33.5 ($29.5 after-tax, or $.14 per share) to write down the remaining business to its estimated net realizable value. Additional charges may be recorded in future periods dependent upon the timing and method of ultimate disposition.

The Homecare business is being accounted for as a discontinued operation. The results of operations and cash flows of this business have been removed from the results of continuing operations for all periods presented. Refer to Note 3, Discontinued Operations, to the consolidated financial statements for additional details on this transaction.

Net Income

Net income was $484.5 compared to $326.5 and diluted earnings per share was $2.26 compared to $1.50. On a non-GAAP basis, net income was $429.9 compared to $326.5 and diluted earnings per share was $2.01 compared to $1.50. A summary table of changes in earnings per share is presented on page 28.

Segment Analysis

Merchant Gases


	Three Months Ended 30 June
	2012				2011				$ Change				Change
Sales		$	874.1			$	921.4			$	(47.3	)		(5)%
Operating income			164.6				158.7				5.9			4%
Operating margin			18.8	%			17.2	%			—			160bp
Equity affiliates’ income			36.8				32.0				4.8			15%

Merchant Gases Sales


	% Change from Prior Year
Underlying business
Volume		(2	)%
Price		2	%
Currency		(5	)%
Total Merchant Gases Sales Change		(5	)%

Underlying sales were flat as the impact of higher pricing of 2% was offset by lower volumes of 2%. Currency unfavorably impacted sales by 5%.

In the U.S./Canada, sales increased 1%, with price up 1% and volumes flat. Volumes were flat as increases in liquid oxygen, liquid nitrogen, and liquid hydrogen volumes were offset by declines in argon and helium volumes due to limitations in supply. In Europe,

sales decreased 12%, with an unfavorable currency impact of 10% and volumes down 4%, partially offset by higher price of 2%. Volumes were down primarily due to weaker end market demand for both liquid bulk and packaged gases. Pricing increased due to strength broadly across the businesses. In Asia, sales increased 6%, with higher volumes of 4% and increased pricing of 3%, partially offset by an unfavorable currency impact of 1%. Volumes increased as packaged gases volumes continued to improve. Pricing increased due to strength in helium and packaged gases.

Merchant Gases Operating Income and Margin

Operating income was higher primarily due to lower costs of $12 and higher recovery of raw material costs in pricing of $9, partially offset by lower volumes of $8 and an unfavorable currency impact of $7. The improvement in cost was due to efficiencies in our production and distribution systems and the benefit of our restructuring program in Europe. Operating margin increased 160 bp from prior year, primarily due to higher pricing and improved cost performance.

Merchant Gases Equity Affiliates’ Income

Merchant Gases equity affiliates’ income of $36.8 increased $4.8, primarily as a result of improved performance in our Mexican equity affiliate.

Tonnage Gases


	Three Months Ended 30 June
	2012				2011				$ Change				Change
Sales		$	767.4			$	868.7			$	(101.3	)		(12)%
Operating income			134.3				114.8				19.5			17%
Operating margin			17.5	%			13.2	%			—			430bp

Tonnage Gases Sales


	% Change from Prior Year
Underlying business
Volume		2	%
Energy and raw material cost pass-through		(12	)%
Currency		(2	)%
Total Tonnage Gases Sales Change		(12	)%

Sales decreased 12%, or $101.3. Volumes increased 2% primarily from new projects. Lower energy and raw material contractual cost pass-through to customers decreased sales by 12% and currency unfavorably impacted sales by 2%.

Tonnage Gases Operating Income and Margin

Operating income was higher by 17% due to higher volumes of $11 and lower operating and maintenance costs of $10, partially offset by an unfavorable currency impact of $2. Operating margin increased 430 bp from prior year, primarily due to lower maintenance costs.

Electronics and Performance Materials


	Three Months Ended 30 June
	2012				2011				$ Change				Change
Sales		$	603.8			$	602.4			$	1.4			— %
Operating income – GAAP basis			176.7				109.0				67.7			62%
Operating income – Non-GAAP basis			90.8				109.0				(18.2	)		(17)%
Operating margin – GAAP basis			29.3	%			18.1	%			—			1,120bp
Operating margin – Non-GAAP basis			15.0	%			18.1	%			—			(310bp	)

Electronics and Performance Materials Sales


	% Change from Prior Year
Underlying business
Volume		(1	)%
Price		(1	)%
Acquisitions		4	%
Currency